Deutsche Bank has been the latest bank to have settlement talks with the U.S. Department of Justice over pre-crisis mortgage-related probes.
Following the announcement of the DOJ’s $14 billion settlement offer, the bank’s shares tumbled to a record low, as investors worried that Germany’s largest lender will barely make do with its thin capital position. If Deutsche Bank fails to reach a negotiation with the DOJ, the bank could possibly end up paying for a settlement value worth nearly as much as its entire market capitalization.
In response to its meltdown, the bank reported that it had “no intention to settle these potential civil claims anywhere near the opening position of $14 billion.” News of the DOJ’s proposal comes as a major blow to the bank, which has been struggling to resolve its mounting legal issues over the past few years. In a recent case, two of the firm’s ex-traders faced allegations for manipulating the London Interbank Offered Rate. The probe mostly looked into traders, who made “false and fraudulent LIBOR contributions” that tipped the rates in the bank’s favor.
LIBOR is the benchmark interest rate that many of the world’s leading banks charge for short-term loans to one another. As part of the settlement, Deutsche Bank paid fines up to $1 billion in 2013 and $2.5 billion in 2015.
German Chancellor Angela Merkel weighed in on the issue, saying that the government will not bailout Deutsche Bank with taxpayer money in fears of a public outcry.
Europe’s ongoing banking crisis has been worsening as low and negative interest rates continue to chip away profits from its major banks. Merkel, who has been bashed for her recent refugee policy, has been struggling to maintain the people’s confidence as she heads into a crucial re-election next year.
In the case of a higher-than-expected settlement, Deutsche Bank, which only has $5 billion set aside for litigation costs, will need to urgently raise capital. The bank has cut unprofitable operations and eliminated thousands of jobs to conserve capital. On Sept. 28, the German lender agreed to sell its insurance business Abbey Life Assurance Co., to Phoenix Group for 935 million pounds, or $1.2 billion. Deutsche Bank will book a pre-tax loss of 800 million euros from the sale.
Over the past couple of weeks, derivatives traders were busy filling orders from investors seeking to protect their holdings in the bank. Credit default swaps totaling $850 million of the German bank’s debt changed hands in the week that ended Sept. 23. According to data compiled by Bloomberg, Deutsche Bank holds $3.9 billion of CDS outstanding, the most for any bank.
While some have compared the current Deutsche Bank situation to the Lehman Brothers crisis in 2008, it is important to note that, unlike Lehman Brothers, the German bank does have the option to resolve its crisis on its own. Shares of the German bank surged 14 percent amid reports of a lower DOJ settlement in the week that ended Sept. 30.