On September 15, the US Justice Department concluded its probe into Deutsche Bank by announcing a $14 billion penalty as a result of irresponsible actions leading up to the 2008 financial crisis. The bank allegedly defrauded investors by concealing the nature of its Mortgage Backed Securities, an act that ultimately helped expand the housing market bubble and intensified the fallout following the collapse.
The German bank is adamant that it will pay much less than this initial amount, and will make its counteroffer in the near future. As of June 30 2016, Deutsche Bank had $6.2 billion in its litigation reserves, and the bank has stated that it plans on paying anywhere between $2-3 billion when the case is finally settled. Recently, analysts from JP Morgan Chase predicted that a settlement around $2.4 billion would be a great settlement with a negligible effect on the bank’s outlook, but that any settlement exceeding $4 billion would likely force it to raise capital and cost Deutsche Bank market share.
If the case is settled this year, Deutsche Bank will be the third high-profile bank to settle with the Justice Department in 2016. In January of this year, Goldman Sachs reached a $5 billion deal with investigators, while Wells Fargo paid a $1.2 billion sum roughly one month later. The amount proposed for Deutsche Bank would be the second largest amount paid in relation to the events leading up to the 2008 crash, following the $16.65 billion Bank of America paid back in 2014.
Investors were clearly troubled by the size of the initial offer, as DB stock dropped 7.7% the day following the announcement of the penalties. On September 20, the bank’s stock hit its 52-week low, dropping to $12.43 per share.
The Justice Department is also currently investigating several other large European lenders, such as UBS, Credit Suisse, RBS, and The Barclays Group, for their role in the lead up to the crisis. Although no credible sources have revealed the expected payouts from each of these probes, it is certain that the Deutsche Bank negotiations will set the tone for the treatment of these institutions moving forward. Therefore, investors will be sure to keep a close eye on the Deutsche Bank case as it unfolds in the coming months.