Deutsche Bank Wrangles with Another Lawsuit as Europe Teeters

September 8th, 2011 by Trefis Team
-20.15%
Downside
16.13
Market
12.88
Trefis
DB: Deutsche Bank logo
DB
Deutsche Bank

Deutsche Bank (NYSE:DB) received another jolt on the legal front this week when it was sued by the Stichting Pensioenfonds ABP, the second largest pension fund in Europe, over allegations that it improperly sold residential mortgage-backed securities in 2006-2007. [1] This is the same as past lawsuits and will do little to help the European banks that are already hampered by concerns surrounding a teetering debt crisis in Europe. Deutsche Bank CEO Josef Ackermanm made matters worse when he said, “It is obvious, not to say commonplace, that many European banks wouldn’t cope with having to mark the sovereign debt held in their banking book down to market value” as this was perceived as an indication of problems with the bank’s sovereign debt portfolio. [2] Deutsche Bank competes with other global banking giants including Credit Suisse (NYSE:CS), UBS (NYSE:UBS), Bank of America (NYSE:BAC), Citigroup (NYSE:C), Morgan Stanley (NYSE:MS) and Goldman Sachs (NYSE:GS).

We have a near $61 price estimate for Deutsche Bank which is a significant premium to the current market price of the stock. We believe the current low price reflects the market’s negative sentiments over the growing Eurozone debt crisis.

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The lawsuit by ABP alleges that Deutsche Bank intentionally misrepresented the risks associated with its mortgage-backed securities by dressing up the values of the underlying mortgage loans as well as the creditworthiness of the borrowers.

The list of similar lawsuits against the German bank is growing with the Teachers Insurance & Annuity Association of America (TIAA) and the European financial group Dexia filing similar petitions over the last 2 months (See Deutsche Bank’s Mortgage Suit Exposes Risks to $61 Valuation). The new suit essentially echos past suits such as those from from Dexia and TIAA that Deutsche Bank marketed securities on one hand then went out and shorted the same portfolio to make additional gains.

These allegations present a lingering problem for Deutsche Bank and other banks that are facing similar suits. Each additional lawsuit makes the situation more precarious because if the bank loses one of them, it would likely end up paying through the nose to settle all of them because of the similarity of the charges. This could be a substantial amount considering that the lawsuits demand compensation for the loss in market value of the securities in addition to principal and interest payments. [1]

See our full analysis for Deutsche Bank.

Notes:
  1. Dutch Pension Fund ABP Sues Deutsche Bank Over Securities, Bloomberg, Sept 7 2011 [↩] [↩]
  2. Deutsche Bank CEO: Many EU Banks Can’t Handle All Sovereign Losses, The Wall Street Journal, Sept 5 2011 [↩]