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Why is Deutsche Bank free falling?

The fear that the German government will not step in to bail out Deutsche Bank (DB), if need be, triggered share-value losses of 7.54% on Monday.

DB’s share is at its lowest level since the 1980s; since the beginning of 2016 it is down by 50%. Year on year, the bank has seen its value decline by more than 70%.

DB has broken successive negative records over the last two years.

Record losses

The weekend’s Focus Magazine report ruled out state aid for the German behemoth, citing unidentified government sources. According to the populist outlet, Chancellor Angela Merkel does not want a major bailout as Germany heads to the polls in 2017.

On Monday, the government’s spokesman Steffen Seibert called the issue of a government bailout “speculation” and neither confirmed nor denied Berlin’s intentions.

The word “bailout” was uttered when the US government fined the German lender $14bn for the sale of its mortgage derivative products. In a statement on Monday, DB denied there was ever an issue of a bailout.

“Deutsche Bank is determined to meet the challenges on its own,” the statement read.

The bank’s capital buffers are weak. Although it has an overall capitalization of 11%, many of its assets are “explosive.” The bank has a €9,6 trillion exposure in government bonds and is sitting on trillions of derivative bets that are multiple times over the size of the German GDP.

Too many skeletons

The fine of the US Department of Justice relates to products sold by the bank before the 2008 financial crisis; these were the subprime mortgage derivatives. The final sum to be paid could be significantly smaller than $14bn; on Monday, the government spokesman said he expects a “fair result” following the bank’s negotiations with the US Department of Justice.

But, as long as it is not clear how much money DB will have to cough up and without any German government guarantee, its value looks likely to remain under pressure.

DB’s skeletons in the closet keep coming out.

There is the issue of Russian precious metal trading that could be seen as a violation to international sanctions.

Litigation costs keep surging.

In April 2015, the Bank was fined $2,5bn for its role in manipulating the Libor interbank offered rate; and it set $1,5bn on reserve to pay for anticipated costs. 2015 closed with over €8 bn in litigation costs.

Financial analysts suggest DB cannot pay more than €5,5bn in 2016; if litigation costs exceed that, DB would need investors or the government to step in.

DB’s Chief Executive Officer John Cryan insists he can weather the storm. He has fired thousands and is shedding assets to bolster capital. But, as long as investors don’t know how much DB will have to pay, the value of the bank will continue to tumble.

A statement that “in principle,” the German government is unwilling to step in was the final straw.

The most dangerous bank in the world

In June, the International Monetary Fund called DB the most dangerous bank in the world.

Deutsche Bank became gigantic in the evil 1990s when other behemoths like Leman Brothers were surging in size. It gradually started accumulating skeletons in its closet.

In 2015 the bank announced the worst annual earnings report in seven years with net losses of €6,8bn.

Credit rating agencies are not trusting DB as much as the German economy. In May, Moody’s downgraded the ratings of DB across the board, in the long term, and in the short term. Moody’s also downgraded the ratings of US–based Deutsche Bank Trust Corporation. Deutsche Bank failed the US stress tests earlier this year.