I wrote just yesterday that neither Scott nor I are journalists (although Scott is 10x the writer I am). It hit me up early this morning that I should write down all my bullet points before I start writing a blog because, otherwise, I blab on and forget some important points.
I did just that four days ago highrockcapital.ca/pauls-blog/new-lows-for-deutsche-bank
when I wrote this blog.
I totally forgot to write about the main reason DBK (Deutsche Bank) is getting hit so hard; the US DoJ has asked for a U$14bln settlement for mortgage fraud relating to stuffing crappy mortgages into Fannie and Freddie Mac (Federal agencies, like our CMHC).
I was having a discussion last night on the way out of the office with one of my office mates (and an extremely successful investor that I share a fair bit of research with). His view was that the DoJ will settle for far less than $14bln. DBK has only provisioned for $5bln in a settlement. I sort of agreed with Robert at the time but then when I got home I re-thought that position after a bit more reading. Here is a list of what some US Banks settled on for the same issues:
So, as you can see, two former Investment Dealers (pre-crisis), being Goldman and Morgan Stanley (they are both now banks), settled for about $2.5bln each but the big banks all settled for either side of $15bln. So is it unrealistic to think DBK will not be hung on this $15bln number? Why would they get to settle at $5bln? I don't know the specifics of their transgressions and the extent of their fraud vs JPM, Citi or BofA, but they were.there and they are a big bank. Precedent has been set.
I will need to highlight that precedent to Robert.
So the concern over DBK builds that this settlement holds, they bust their regulatory capital ratios, they need to raise equity capital, that the new bail-in regime (that I have written about before) takes hold and completely dilutes shareholders, and they start losing access to capital, which is integral for every financial company out there. Yikes, sounds draconian.
I do think there may be some systemic risk and contagion but I do not think there will be a "Lehman Event" and a decent-size sell off should be bought.