Editors' pick: Originally published Sept. 23.
It's not going to be easy for Deutsche Bank (DB) to tear up the recent $14 billion civil charges levied by the Justice Department: Its role in the never-ending "Big Short" saga is not as minor as some of its banking peers.
The DoJ did not comment when asked by Real Money for details about the amount and did not yet put out a statement, so investors now have to rely what information is publicly available on the issue.
In repudiating the DoJ's hefty penalty, the struggling German bank said last week that it has "no intent" to pay "anywhere near" the proposed figure for its part in issuing, distributing and securitizing residential mortgage-backed securities between 2005 and 2007. But a history of similar settlements suggests forming a convincing counteroffer will be difficult.
Deutsche Bank insiders quoted by The Financial Times have said the bank hopes it will be treated like Goldman Sachs (GS) , which ended up paying only about $5 billion, a slap on the wrist compared to the $16.6 billion and $13 billion that Bank of America (BAC) and JPMorgan (JPM) were forced to shell out, respectively. (Citigroup (C) and Morgan Stanley (MS) also arrived at comparatively small settlements, of $7 billion and $3.2 billion, respectively.)
The $14 billion punch could sure be crippling for Deutsche Bank shareholders, who've already seen almost half of the struggling bank's market cap vanish so far in 2016. After all, Deutsche Bank has put aside for litigation reserves only about 5.5 billion euros, or $6.1 billion, analysts with Toronto-based rating agency DBRS recently estimated. And the bank's total market cap is currently around just about $18 billion.
Any attempt to get Goldman-like treatment could be tricky. In the pre-crisis housing market, Deutsche Bank appears to have been printing far more collateralized debt obligations. Deutsche created about $42.5 billion worth of the debt packages vs. about $25 billion by Goldman in 2007 alone, according to a 2010 Wall Street Journal report, which cited data compiled by Thomson Reuters. (Meanwhile, according to the report, Bank of America and JPMorgan issued about $65.5 billion and $44.3 billion in CDOs, respectively, over the period.)
CDOs are bundles of asset-backed securities, in this case by residential mortgages. Originally designed to spread and reduce risk, instead they contributed to the financial crisis because investors were unable to assess the underlying assets when the housing market turned downward. The fact that Deutsche Bank issued more of them than Goldman in the year when the credit crunch started seems to suggest a deeper role for the German bank. Deutsche Bank representatives contacted by Real Money did not comment.
