Investors are fleeing Deutsche Bank AG (USA) (NYSE:DB) stock amidst growing talk that the bank could be hit with a $14 billion fine to resolve a probe into mortgage securities. The International Monetary Fund reiterating that the financial institution poses the greatest risk to the global financial system all but continues to compound the bank’s woes on the street.
$14 Billion Fine
However, it is the prospect of a $14 billion fine that seems to have rattled investors prompting a massive sell off the stock. The fine could not have come at the worst time for Deutsche Bank given that it is trying to reinvigorate its prospects amidst a slowdown in the global economy. Lower interest rates compounded by slowdown in major economies all but continues to evoke concerns about the bank’s ability to turn in some profits after years of losses.
Deutsche Bank finds itself in the current mess over the way it selected mortgages, packaged them into bonds and sold them to investors, dating back to 2005. The big question now is whether the bank can afford the bill given that it will be the largest ever issued in the US. The fine would also strain the bank’s finances given the amount of losses it has made since 2008. The banks’ ability to pay coupons as well interest payments to investors would also be impeded in the event the Department Justice hands over the fine.
Deutsche Bank Preparedness
Deutsche Bank has already termed the purported $14 billion fine an ‘opening position’ an indication it expects it to drop as negotiations proceed. A fine of more than €5 billion is expected to force the bank to tap into the financial market to raise additional capital. The bank has already set aside €5.5 billion, to cater for such losses, which might not be enough given that it is already battling more than 7,000 legal costs.
While attention now is on Deutsche Bank AG (USA) (NYSE:DB), the likes of Barclays PLC (ADR) (NYSE:BCS) and UBS Group AG (USA) (NYSE:UBS) are also negotiating a settlement with the Department of Justice.