What's going on?

Shares of Deutsche Bank took a 10% dive on Friday after news leaked that the US government wants the German bank to pay as much as $14 billion for allegedly mis-selling investments to clients.

What does this mean?

Investors knew that Deutsche Bank was discussing a settlement with the US government over its role in selling investment products tied to the value of US mortgages (it relates to the type of investments that triggered the 2008 financial crisis, which are known formally as �mortgage-backed securities�).* Other banks have already settled similar lawsuits with the government and agreed to pay billions of dollars.


What was surprising was the size of the potential charge: $14 billion is a lot of money! It�s only the government�s opening salvo in the settlement negotiations, but investors now fear that the final agreement will be significantly more costly than the $2-3 billion that research analysts were predicting.

Why should I care?

For the stock: Investors are worried that Deutsche Bank might have to raise more money.

Banks, of course, have to be able to pay back customers that have lent them money (e.g. you, if you�ve deposited money in a bank account) and, as such, must maintain a certain amount of available cash. If that �buffer� drops below a certain level, the bank has to raise more money from investors, which is detrimental to current shareholders (who would then own proportionally less of the bank). The worry is that Deutsche Bank will have to pay the US government so much money that it will have to ask shareholders for more investment.


The bigger picture: The risk of fines are back in focus for banks.

In the years after the financial crisis, banks paid a huge amount of fines to cover past behavior. Investors had thought that the risk of further large fines was much lower than in previous years. But a recent admission from Wells Fargo (one of America�s biggest banks) that it was illegally overcharging clients and this Deutsche Bank news have put the risk firmly back in investors� minds.



*P.S. the popular movie The Big Short was about how mortgage-backed securities triggered the 2008 financial crisis – you can check out Finimize�s summary of the movie here.