It's taken 10 years and a series of disastrous unfortunate events, but now Deutsche Bank is teetering dangerously close to financial ruin.
Its shares have lost more than 50 per cent this year, in fact they're down 20 per cent just this month, and hedge funds have begun pulling money out of the 147-year old institution.
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Germany denies starting Deutsche Bank rescue plan
The German government denies it's working on a rescue of Deutsche Bank as Germany's biggest lender boosted its balance sheet by selling its British insurance business.
Investor fears have spilled over into the Australian market because Deutsche Bank is considered a "globally systemically important bank". Its collapse would have widespread repercussions as its sales are equal to roughly 12 per cent of the entire eurozone's GDP.
Last week, the German bank revealed the US Justice Department is demanding a $US14 billion ($18.3 billion) penalty payment to settle an investigation into residential mortgage-backed securities the bank traded before the 2008 financial crisis.
The fine is more than double the money Deutsche Bank has set aside for litigation, prompting investors to speculate the German government might have to step in to help.
Europe's largest investment bank insists it won't pay anything like $US14 billion as there is still room to negotiate the figure down, and the German government has so far ruled out any intervention, but investors are wary and have sent the stock to 30-year lows.
The bank has sold €1.75 billion of so-called CoCo bonds (short for "contingent convertible bonds"), a newfangled financial instrument which spreads the risk to investors rather than taxpayers as those bonds can convert into shares. But that might not be enough.
Now Berlin is faced with an inordinately awkward question: does Deutsche Bank have enough capital to withstand the market's gyrations, or will authorities have to bail it out, something the Merkel government has publicly rejected?
How did the venerable banking giant – the largest bank in Europe, flagship of its most stable economy – get into this situation?
What sparked Deutsche Bank's problems?
Most observers point to the Libor scandal, for which the bank was fined $US2.5 billion in April 2015. This involved a handful of Deutsche Bank employees – traders, managing directors and a vice-president across Europe, North America and Asia – who were charged with rigging the London Interbank Offered Rate (Libor) between 2004 and 2015.
Libor is the rate banks charge each other for short-term loans, and is set by a panel of 16 global banks. It is tied to trillions of dollars in securities and loans. For a period of 11 years, these Deutsche Bank employees artificially inflated the rate to boost the value of their trading books.
This was a helpful racket, because the bank was actually hiding $US12 billion in losses to avoid a government bailout following the global financial crisis. While the rest of the world watched in horror as Lehman Brothers collapsed, Deutsche Bank's then CEO Josef Ackermann announced the bank had plenty of capital to withstand the shocks.
The share price remained steady, but just to be on the safe side, the bank in 2013 raised €3 billion with a rights issue. At the time, it said no additional funds would be needed. Then in 2014 the bank raised another €1.5 billion, and after that, another €8 billion.
The prosecutions are ongoing, but in October last year the bank incurred a $US2.5 billion fine for the Libor scandal.
How many times has Deutsche Bank been fined?
Almost three, if you count the most recent demands from the US government
Two weeks after the Libor scandal at the end of last year, the German bank was fined again for doing business with countries that were under US sanctions between 1999 to 2006.
Countries including Iran, Libya, Syria and Sudan were severely restricted because of Iran's nuclear program and widespread human rights abuses in the region. The United States had also prohibited doing business in countries it deemed havens for possible terrorist financing.
Using "non-transparent methods and practices", Deutsche Bank conducted more than 27,000 transactions in US dollars, valued at over $US10.86 billion, for parties within all of the restricted countries.
And rather than an isolated group of rogue employees, the New York Department of Financial Services found that bank employees were encouraged to conduct transactions for these countries and indeed had written a training manual for new employees on how to avoid detection when processing these transactions.
On November 5, 2015, the bank was charged $US257 million for those dealings. With hindsight, they appear now to be like the beginning of the end, setting off Deutsche's downward spiral.
What happened to the share price?
After the two fines at the end of last year, the share price fell 40 per cent and spiralled out of control throughout the year.
Deutsche Bank kicked off 2016 by announcing a record loss of €6.8 billion for the year prior. Investors took one look at that figure and fled.
Co-CEO John Cryan then went on a "PR binge" and declared the bank "rock solid". The company announced it was cutting 9000 jobs across the business and pulling out of 10 countries.
The market sort of believed the streamlining would help the bank, and the share price remained fairly well supported. German Finance Minister Wolfgang Schäuble also chimed in, saying he had "no concerns" about Deutsche Bank.
But things took a turn for the worse when it became public that Deutsche had 40 times more debt than assets on its books, holding a derivatives portfolio worth about $US46 trillion at the end of last year – about 12 per cent of the total notional value of derivatives worldwide.
Derivatives are a product that base their value on another asset, like a commodity, currency or security. Deutsche Bank's portfolio is the world's largest.
In June, the Brexit decision hit Deutsche Bank hard and its shares fell further. The bank is the largest European bank in London and receives 19 per cent of its revenues from the United Kingdom.
Following that, the International Monetary Fund announced the bank "appears to be the most important net contributor to systemic risks" and, one day later, the US Federal Reserve said Deutsche failed its stress test "due to 'poor risk management and financial planning'."
Its shares are now just worth 8 per cent of their highs of May 2007.
Does it have enough money to pay its way out of this new fine?
Maybe. But it's not a very strongly capitalised bank at the moment. The European Central Bank requires Deutsche to hold enough capital to cover a potential loss of about 10 per cent of its assets (which are the loans and trades it makes).
Losses, including the legal costs, eat into its capital base.
So far, Deutsche Bank has about $US3.3 billion to cover the latest looming fines, and most analysts are saying any final settlement over $US4 billion could force it to sell more shares or bonds (again), which is why the stock price is falling now.
But in a twist, German law limits the amount of new shares a company can issue in a year to 50 per cent of the outstanding total. At the market level of this week, that is about €8 billion.
Where do the CoCo bonds fit into this?
This was a popular financial instrument invented after the GFC in 2008. After watching the vicious collapse of Lehman Brothers and the outrage from taxpayers asked to bail out the Royal Bank of Scotland, regulators created "contingent convertible bonds".
CoCos are issued as a bond, meaning the bank promises to pay the investor a fixed rate for a fixed period of time. The major difference from traditional bonds is that CoCos can stop paying interest and automatically convert into shares, or be written down in value if the bank is in trouble and its capital falls below a certain level.
Needless to say, Deutsche Bank has issued a lot of CoCos: it has about €1.75 billion worth on its balance sheet.
As of yet, the bonds haven't converted into shares, but their trading volumes has soared in September to levels more than seven times those in August. So people are passing them around, just in case the bank's capitalisation falls below the required level that would trigger their conversion into shares.
The market is circling.
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