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Instant Analysis: Deutsche Bank Pledges to Fight DoJ Demand for $14 Billion Settlement

By Eric Volkman – Sep 20, 2016 at 2:22PM

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The German lender doesn't intend to pay "anywhere near" the offered amount.

What happened?

Deutsche Bank (DB 1.25%) has confirmed a hot media report that the Department of Justice is offering to settle a raft of civil claims over the company's conduct in the run-up to last decade's financial crisis. The previous day, The Wall Street Journal reported that the DoJ had offered $14 billion, an amount the company said was accurate.

In a statement addressing the matter, Deutsche Bank said emphatically that it has "no intent to settle these potential civil claims anywhere near the number cited."

Image source: Deutsche Bank via Flickr. 

It added that it and the DoJ were engaged in negotiations, which it characterized as "only just beginning."

The settlement would cover the company's alleged malfeasance in the issuance and underwriting of residential mortgage-backed securities -- plus associated securitization activities -- from 2005 to 2007. Such machinations by global banks provided much of the fuel that inflamed the crisis.

Does it matter?

Ultimately, the two sides are certain to hit a dollar amount that they can both live with, and get on with their lives.

Billion-dollar bullet biting occurred with each of the "big four" American banks -- Bank of America, JPMorgan Chase, Citigroup, and Wells Fargo -- when the regulatory hammer came down on their pre-crisis era shenanigans with mortgage-related securities. Some of these amounts were substantial, most notably JPMorgan Chase's $13 billion, and Bank of America's nearly $16.7 billion.

We can expect the same with Deutsche Bank; the problem is, the company is smaller in terms of assets, and much smaller in terms of market capitalization, as its American peers. For comparison, the latter figure for the German company is $18 billion, which is dwarfed by JPMorgan Chase's $237 billion and Bank of America's $158 billion. 

So it has a much smaller capital cushion to absorb a big DoJ settlement. Even if it were to talk that amount down to, say, $5 billion, that number would represent more than one-quarter of its current market value.

Shareholders should find it admirable that the company is strongly determined to talk down the huge figure offered. But regardless, that bullet is going to be a very tough one to bite for the bank. 

Eric Volkman has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Wells Fargo. The Motley Fool has the following options: short October 2016 $50 calls on Wells Fargo. The Motley Fool recommends Bank of America. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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