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The U.S. Department of Justice announced it's seeking a record $14 billion penalty against Deutsche Bank AG USA (NYSE: DB) in relation to mortgage securities fraud in the run up to the global financial crisis that's roiled markets since 2007.
Another naughty bank, another big fine. Regulators quietly charge banks and financial institutions with rules and policy violations all the time. Unbeknownst to most investors, the majority of infractions are quietly settled after a bunch of legal wrangling, without causing so much as a blip in the headlines.
So what's the big deal?
Deutsche Bank is facing a $14 billion fine at a time when the bank has "litigation reserves" of just €5.5 billion ($6.17 billion). It simply doesn't have the cash on hand to pay just the penalties sought by just U.S. regulators as it stands today.
The bank is actually fighting more than 7,000 ongoing legal cases, according to The Guardian.
As bad as those problems are, they pale in comparison to the problem no one's talking about…
The $42 Trillion Anvil Hanging Over the Markets
Even by Deutsche Bank's standards, this has been a bad week.
The company has lost one-fifth of its market capitalization in less than two weeks, and if my calculations are correct, roughly half its value since the beginning of 2016.
Again, you may ask, "So, what's the big deal? Stocks tank all the time – even banks."
Well, this isn't just a big deal, it's the big deal. I'll show you why.
It doesn't advertise it, but Deutsche Bank has more than $42 trillion-with-a-T in derivatives on its books. That's nearly 14 times the size of Germany's $3.3 trillion economy, and much more than twice the size of the European Union's $16.3 trillion GDP.
To put this in perspective, that's roughly 20 times the derivatives exposure that Lehman Brothers had… and we all know how that ended.
Put bluntly, Deutsche Bank doesn't have the cash to settle its own legal troubles, let alone any "surprises" that might come its way.
Surprises like the one that caught markets this week.
This weekend, speaking in response to the Justice Department's $14 billion fine and questions over the bank's ability to pay, German Chancellor Angela "Madame No" Merkel apparently said emphatically that there will be no bailouts when it comes to Deutsche Bank, according to Focus magazine.
If Merkel sticks to her guns and lets Deutsche Bank fail, her actions will make it virtually impossible for the world's central bankers and their political masters not to do the same with other big banks.
The way I see it, she’s singlehandedly put the world’s entire financial system at risk. Not only that, but she’s potentially burned the euro, too.
If Deutsche Bank goes, then Italian, Spanish, and French banks go next. Then EU and U.S. banks will go.
So now what?
I’m glad you asked.
About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.
If Merkel sticks to her guns and lets Deutsche Bank fail … you'll need to look out for flying pigs.
I read that Deutsche Bank's shortfall is larger than the combined worth of the entire nation of Germany, and there's no way the country can bail it out. So Ms. Merkel's decision was made for her, if this is true.
Its amazing what a day may bring forth.
Mrs Merkel has a habit of opening her mouth first, and then having to listen to better minds who try to engage with hers.
Fr. Merkel will ultimately have to bail out DB.Otherwise she is triggering a Tsunami and millions of jobs gone with it.
Angela and Germany don't have the funds to bail out
DB, it's putting of the inevitable if the funds came from elsewhere.
Hold on to your hats, and your gold.
Before she leaves office, she shd call for US to return all of G's gold. Then all DB players & shareholders should be made public.