Last week, the US Department of Justice announced plans to fine Deutsche Bank $14 billion for its role in creating and selling opaque, toxic mortgage-backed securities.  The bank’s initial reaction was no way would it pay that amount.  The market didn’t buy this reaction and instead focused on the question of “if it paid a $14 billion fine, did the bank have enough book capital to meet regulatory minimums.”  This question quickly gave way to “if it paid the fine, could the bank stay open.”  This question quickly gave way to “would the German government bail out the bank.”

The German government responded by saying “no, it would not bailout the bank”.  This was helpful to the bank from the standpoint of it could blame the US DOJ for reigniting the financial crisis if the result of Deutsche Bank paying the $14 billion fine was it failed and through contagion brought down the EU, UK and US banking systems.

In essence, with the blessing of the German government, the bankers at Deutsche Bank can now play chicken with the US Department of Justice.  Is upholding the rule of law in the US worth the risk of potential reigniting the financial crisis?

This game of chicken wouldn’t be possible if banks provided transparency.  With transparency, market discipline would ensure the other banks didn’t have a greater exposure to Deutsche Bank than they could afford to lose.  As a result, while the failure of the bank would be painful, it wouldn’t trigger contagion and re-ignition of the financial crisis.

This game of chicken also highlights how the new regulations adopted since 2008 and the stress tests saying banks like Deutsche Bank could withstand armageddon have not ended Too Big to Fail.  If they had, there would be nothing to fear from a potential failure of Deutsche Bank.