Deutsche Bank

American Nightmare

Traders walk by the post where Deutsche Bank is traded on the floor of the New York Stock Exchange, Monday, Sept. 26, 2016. Shares in Deutsche Bank are down sharply after a report that the German government won't intervene with U.S. officials who are pressing the bank to pay $14 billion to settle an investigation into its sales of mortgage-backed securities. (AP Photo/Richard Drew)
Deutsche Bank, once a high-flyer on Wall Street, has taken a serious beating of late.
  • Why it matters

    Why it matters

    Deutsche Bank’s precarious financial situation is mightily exacerbated by a multi-billion demand from U.S. authorities. The possible global economic and political fallout is immense.

  • Facts

    Facts

    • On September 30, Deutsche Bank’s share price fell for the first time below the €10 mark.
    • U.S. Justice Department reportedly is demanding $14 billion the selling of mortgage-backed securities ahead of the 2008 financial crisis. The figure represents 90 percent of the bank’s market value.
    • Deutsche Bank, once among the world’s top five investment banks, is now mulling a partial pullout of the United States to help pay for its legal costs.
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John Cryan was already known to have just about the worst job of any chief executive. The Brit has been in charge of Deutsche Bank since July 2015, and the value of his bank’s stocks has plummeted by more than 50 percent since. Questions are being raised louder than ever about what Deutsche Bank wants to be and why it’s still needed at all, and the answers seem to be convincing investors less than ever before.

And on the evening of September 29, the worst job in business turned into a veritable nightmare.

The panic selling of Deutsche Bank shares began in the United States, after it was reported that several hedge-fund clients had pulled their money. Even some normal private customers in Germany became nervous and took money out of their accounts. Shareholders of the bank were likewise alarmed and began selling stock.

September 30 was even more of a roller-coaster. In the morning, the bank’s share price fell for the first time below the magic €10 mark, prompting speculation about whether the country’s top bank might need its first-ever government bailout. Shortly after, a new rumor pushed the stock price up again, but by then Mr. Cryan and Co. had already gone through several near-death experiences.

Deutsche Bank was now seriously being mentioned in the same breath with Lehman Brothers – the U.S. investment bank that declared bankruptcy on September 15, 2008, prompting a massive financial crisis and bank bailouts across the globe.

So what got us to this point?

What has been particularly awkward about the current turmoil was that it wasn’t triggered by the markets. Instead, it was triggered by a government, specifically the U.S. government.

On September 15, it became known that the U.S. Department of Justice was demanding $14 billion from Deutsche Bank to settle accusations of illicit practices in its selling of mortgage-backed securities in the run-up to the 2008 financial crisis.

The size of the fine not only surprised the bank, which has so far set aside only €5.5 billion ($6.2 billion) for its many legal disputes, it also shocked investors and customers.

“I did not know if I should laugh or cry that the bank that made speculation a business model is now saying it is a victim of speculators.”

Sigmar Gabriel, Germany's economics minister

The $14 billion is considered an opening offer, and the situation for Deutsche Bank has calmed down since as some reports made the rounds that the bank might forge an agreement for a far lower sum. Nobody has any real idea what the final amount is going to be.

But the market reacted so hard to the payment threat largely because Deutsche Bank was in bad shape anyway. If it had been healthy, meaning it had ample capital in reserve to pay the fine, it would have at most shrugged its shoulders at such news. As it was, the bank was already almost devastated.

The extraordinary thing is that the bank’s financial problems were known to the U.S. authorities. They were equally well aware of how sensitively financial markets react to certain news. So why did the authorities nevertheless drive Deutsche Bank into a corner in such a way? Why are they demanding a penalty payment that amounts to around 90 percent of the bank’s market value? Was it ignorance? Or did they just not care?

Thomas Mayer, former chief economist at Deutsche Bank, suggested this goes beyond the bank itself. “It can be seen as an unfriendly act against the German taxpayers, who have to pay the bill if Deutsche Bank needs to be supported. How would the U.S. government have been likely to react if the German government had done something similar with an American company?”

Some Americans also consider the U.S. authorities’ course of action questionable. “The settlement amount of $14 billion was clearly excessive,” said Peter Henning, an expert on white-collar crime. Mr. Henning is at Wayne State University in Detroit and used to be with the U.S. Justice Department.

All of this suggests the Frankfurt-based bank has made enemies at the mighty Justice Department and among U.S. regulators. It would explain the aggressive actions of U.S. President Barack Obama’s top prosecutors and its law-enforcement agency. Especially since the leaking of the $14-billion figure, which was first reported by the Wall Street Journal, forced the bank to confirm the news.

Some bank insiders have said U.S. investigators were annoyed at the bank and for that reason demanded the large settlement sum. Relations have never been particularly solid ever since U.S. authorities accused Deutsche Bank of failing to cooperate in an investigation of the separate LIBOR rate-fixing scandal, for which the German bank eventually agreed to pay $2.5 billion.

Wirtschaft International 05.05.2008 Bankenkrise, Deutsche Bank Schriftzug am Eingang des Buerogebaeudes an der Wall Street in Manhattan. FOTO: Pressefoto ULMER/Markus Ulmer [ Rechtehinweis: picture alliance / Pressefoto Ulmer ]
Deutsche Bank is being forced to cut back its U.S. operations. Source: Picture Alliance

 

The U.S. Justice Department wouldn’t comment to Die Zeit’s about its demands or the negotiations. The department also declined to address the question about whether its negotiators had leaked information about the $14 billion demand to news media. But those with expert knowledge of the U.S. financial scene say they are certain that the information came from the Justice Department.

“Passing such information to the Wall Street Journal has been one of the ministry’s favorite ways of doing things for years,” said Richard Bove, a bank analyst for over 30 years.

That way, he said, the Justice Department achieves several goals simultaneously. The department’s negotiators use media reports about the horrific amount in the subsequent tug-of-war with the bank over the final amount. And it serves as a warning to other European institutions. While many American banks have already settled their claims, U.S. investigators are also scrutinizing Barclays, Credit Suisse, UBS and the Royal Bank of Scotland.

But of far more importance is that the government can make its tough actions against banks known with the leaking of a billion-dollar demand.

Mr. Obama’s Justice Department is under enormous pressure. When taking office in 2009, the president announced his intentions to clean up abuses on Wall Street. But during his time in office, not a single banker has been held accountable. In 2012, when Mr. Obama was running for a second term, he created a special task force. Since then, billion-dollar penalty payments have been imposed on banks such as Goldman Sachs, Bank of America and JP Morgan Chase.

Such successes are particularly relevant now because Mr. Obama’s Democratic colleague Hillary Clinton is running for president. Headlines about tough penalties against a major bank, and a foreign one at that, show that the Democrats are serious about cleaning up the financial industry. That would help Ms. Clinton, who is considered by many voters to be suspect when it comes to matters of Wall Street because of paid speeches she gave to New York’s top banks in the past few years.

But it isn’t all election campaigning. Deutsche Bank’s difficulties with the American authorities stretch back much further. It has been in a clinch with the U.S. Federal Reserve, the overseer of big banks in the United States, for years.

It all began in the fall of 2008, when Josef Ackermann, at the time head of Deutsche Bank, declared he would be ashamed to accept a German government bailout for his institution during the financial crisis.

That public stance certainly was a surprise for the heads of the Federal Reserve. While Mr. Ackermann’s bank didn’t receive direct support from the U.S. government’s bailout pot, it was among the largest recipients of funds that were passed on to banks through the 2008 bailout of insurance giant AIG.

AckermannVictory-AP
Former Deutsche Bank CEO Josef Ackermann was proud of not receiving a German bailout in 2008, but he got plenty of money from U.S. authorities. Source: AP

 

At the time, almost $12 billion flowed into Deutsche Bank through AIG, which had insured the now-worthless securities of many of Wall Street’s top banks. And in addition, according to a report by the U.S. Federal Audit Clearinghouse, Deutsche Bank was one of the most eager beneficiaries of an aid program with which the Fed bought up the banks’ junk securities during the crisis, taking in $354 billion.

At the time, there was a huge outcry when the Fed was compelled to disclose these billions in aid to foreign banks.

“How can we transfer umpteen billions to foreign institutions when, here with us, homeowners are no longer able to pay their mortgages and lose the roof over their heads?” said Ron Paul, a former congressman from Texas who also called for the Fed to be abolished.

The outcry in turn led those in charge of the Fed to implement a new set of regulations, which on Wall Street have been dubbed “Lex Deutsche Bank.” It says that foreign banks operating in America must maintain reserves equal to those of U.S. banks. Prior to that, the reserves in the parent bank in the home country counted. Suddenly, no more.

The new regulation has put pressure on Deutsche Bank and other foreign institutions. They suddenly had to pump capital into their U.S. subsidiaries. The bankers in Frankfurt believed they had found a way out of it. Deutsche Bank changed the legal status of its American subsidiary so it wouldn’t be subject to the new, higher equity rule. The Fed, however, was not satisfied with the accountants’ cheap solution.

That was hardly the only fight. Later, Deutsche Bank, along with the Spanish bank, Banco Santander, were the only ones not to pass the Fed’s stress test.

Deutsche Bank has apparently ruined its relationship with many who are now important to it. Not only in the United States. In Germany, Economics Minister Sigmar Gabriel said recently about Deutsche Bank: “I did not know if I should laugh or cry that the bank that made speculation a business model is now saying it is a victim of speculators.”

118 Deutsche Bank - Neu 2016-05-13-01

 

This article first appeared in the German weekly Die Zeit, a sister publication of Handelsblatt. To contact the author: redaktion@zeit.de

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