The US Justice Department
has imposed a fine of $14 billion on violations ranging from violating US laws
of embargo with certain countries, and selling mortgage loans without
collateral. The US Justice Department is charging the bank for contributing to
the economic crisis of 2008. This led to a drop in the share price by 7.5% in
the European trading. The amount that will be charged is highly unlikely that
it will be paid, and the bank will likely resist. In the past however, other
banks have paid the amounts they were charged with.
In 2014, Bank of America
agreed to pay the fine of $16.6 billion. Goldman Sachs agreed to a court
settlement and paid $5 billion. The drop in the share price led to rumors that Deutsche
Bank will seek assistance from the German government, and that reports said
that the German Chancellor has no intention of doing so. A representative from
the Bank said that discussions of additional increase in share capital is
speculation. State aid was ruled out by the German Chancellor, as was reported
in the Magazine Focus.
The banks woes are amid a
period where low and negative interest rates are not bringing in profits, and
that even if the purported fine was set to half the amount, the bank would have
no other option. On January 20th,
2016 the WSJ reported that Deutsche bank would report a fourth quarter loss of $2.1
billion, with additional charged tied to legal and restructuring costs. The
bank said that it will also report its first loss since 2008 of $6.7 billion. In
that same report by the WSJ, Deutsche bank admits that it has set aside a total
of $5.2 billion, for purposes of litigation, and $800 million for restructuring
and severance costs.
Litigation has an adverse
impact on a corporation and also an effect on earnings, and eventually lead to
bankruptcy. Investors should look for pending suits in the 10K and the proxy
statement because they outline pending litigations. If a company is
anticipating that it will settle a large amount of lawsuit, it will take
reserves (charges) against earnings to be prepared for the liability.
The accounting treatment
is that a contingent liability becomes an actual liability and a loss only if
the company is found guilty. Contingent is that someone promises you to pay you
something but does not do so. An actual liability is if a bank gives you a
loan, then you have an actual liability. If the company has a contingent
liability and is found not guilty, then it does not become an actual liability,
and hence a loss.
In accounting there is a
journal entry that is recorded to report a liability on the balance sheet (liabilities
are recorded on the right side – credit- of the balance sheet), and a loss on the
income statement (losses on the income statement are debited, hence they reduce
owners’ equity. And this only if it is probable and the amount is known with
certainty.
If a contingent liability
is probable, then from the accounting view, it is not recorded as journal
entries, but they are disclosed in the financial statements.
Bill T. Alexandratos, MSc.
BA
Finance
