There is no way Deutsche Bank AG (USA) (NYSE:DB) is going to pay a $14 billion settlement to the U.S. Department of Justice. But investors still should run from DB stock like it was on fire.
If you’re just tuning in, the DoJ demanded that Deutsche Bank pay that massive sum to put various probes into its packaging of mortgage-backed securities to bed. If DB agreed, it would rank as one of the largest settlements to come out of the financial crisis.
Fortunately, this is just an opening gambit. The DoJ doesn’t want to cripple, much less destroy, Germany’s biggest lender. Heck, the entire bank has a market cap of less than $20 billion. DB stock is already widely considered to be a huge threat to the stability of the global financial system.
As the firm said in a statement:
“Deutsche Bank has no intent to settle these potential civil claims anywhere near the number cited. The negotiations are only just beginning. The bank expects that they will lead to an outcome similar to those of peer banks which have settled at materially lower amounts.”
So why did DB stock plummet at the opening bell? Because the market is shell-shocked at how aggressive the Justice Department is being as it kicks off negotiations.
To offer some perspective, Citigroup Inc (NYSE:C) and Deutsche Bank have roughly the same amount of assets. Citi coughed up a total of $18 billion in various settlements, true, but it had a market cap of well more than $100 billion as it did.
More importantly from the perspective of holders of DB stock, the feds asked Citigroup for $12 billion but agreed to settle for $7 billion.
Still a Nightmare for DB Stock
Ordinarily, whenever a stock takes this kind of plunge, you should be listening for the sound of cannons and looking for blood in the street.
This time around? Skip it.
DB stock was off 40% this year even before the Justice Department dropped this bomb. Negotiations between the government and the bank are almost certain to go on for months. Those talks, with all their risk and uncertainty, will produce a stiff headwind for Deutsche Bank stock in the meantime.
True, we should get a relief rally once the sides agree on a number. But then what?
The bank’s finances are fragile. The International Monetary Fund recently called Deutsche Bank “the most important net contributor to systemic risks” to world finance. And let’s not forget about the European debt crisis. It’s on a low boil these days, but it hasn’t gone away. Just ask DB how it feels about its exposure to Italy.
At some point, DB stock should be a terrific bargain pickup — if the bank doesn’t go bust first. Until then, it remains a name suitable only for gunslingers.
Investors need not apply.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.