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Deutsche Bank: The Chickens Coming Home to Roost

July 30, 2013

It has been almost two and half years since we had mentioned that Deutsche Bank was under reserving for litigation expenses (In our piece Deutsche Bank Creditor Concerns, March 2011).  Among the many reasons we had listed for asserting that the bank was woefully undercapitalized was

Litigation risk

It is doubtful that Deutsche Bank has sufficiently provisioned for the litigations it is exposed to. Only last week it lost a case in Germany for failing to advice a client properly on the true risk of a complex swap transaction. This litigation was not even mentioned in the 2010 Annual report. In the US, the bank has $ 588 million of outstanding mortgage repurchase demands on mortgages that were allegedly fraudulently securitized. More such demands could come up this year. The bank is also exposed to risk from the Auction Rate class action as well as the Trust Preferred Securities class action. It is unlikely that the bank will emerge unscathed from these lawsuits as the management wishfully claims.

Finally,  the chickens have come home to roost.  The Bank, in the  second-quarter, has set aside about 600 million euros ($796 million) to cover legal costs.  Wishful thinking can only go so far.

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From → Credit Analysis

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