Editors' pick: Originally published Sept. 23.
It's not going to be easy for Deutsche Bank (DB) - Get Deutsche Bank AG Report 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) - Get Goldman Sachs Group Inc. (The) Report , 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) - Get Bank of America Corporation Report and JPMorgan (JPM) - Get JP Morgan Chase & Co. Report were forced to shell out, respectively. (Citigroup (C) - Get Citigroup Inc. Report and Morgan Stanley (MS) - Get Morgan Stanley Report 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.
One of the striking similarities between the two banks is that they appear to have both allowed hedge fund billionaire John Paulson to bet against the housing market while promoting the market to clients. However, the Journal noted "a key difference" in their report: "Goldman told investors that the assets were picked by an independent third party; Deutsche didn't use a third party or give its investors any assurances."
Both Goldman and Deutsche Bank were also market-makers for traders interested in shorting the housing market more broadly, as they acted in that capacity through the ABX credit-default index that was dramatized in both Michael Lewis's book The Big Short as well as the eponymous 2015 film, in which Ryan Gosling starred as a character based on the Deutsche Bank banker Greg Lippman, who helped establish the index. Other major investment banks that helped create the ABX index included Bank of America, Barclays (BCS) - Get Barclays PLC Reportand Credit Suisse (CS) - Get Credit Suisse Group American Depositary Shares Report , among others.
Another hurdle could be that Deutsche Bank is already under U.S. scrutiny, after having failed Federal Reserve stress tests, along with Santander (SAN) - Get Banco Santander S.A. Sponsored ADR (Spain) Report , in June, in which the central bank objected to "capital plans" because of "broad and substantial weaknesses across their capital planning processes, and insufficient progress these firms have made toward correcting those weaknesses."
One way in which Deutsche Bank could end up paying less is if politics trumps business in this case. As Real Money's Antonia Oprita noted in a recent report, the fine could result in a U.S.-European Union political standoff that could ultimately result in a lesser DoJ penalty for Deutsche Bank.
Editor's Note: This article was originally published at 3:07 p.m. EDT on Real Money on Sept. 22.
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