Legal Risk

Report: Deutsche in U.S. Mortgage Probe

Deutsche Bank office Wall Street New York US Source picture-alliance - Pressefoto UL 12586304
Deutsche Bank faces more headwinds, this time in the United States.
  • Why it matters

    Why it matters

    Deutsche Bank is still struggling with past business activities and legal investigations, which have continued to weigh on the bank’s earnings.

  • Facts

    Facts

    • Germany’s largest bank is currently dealing with almost 8,000 legal cases.
    • Deutsche Bank has paid and set aside more than €12 billion in legal expenses since 2012.
    • Moody’s rating agency on Monday lowered a series of credit ratings linked to the bank.
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The U.S. Securities and Exchange Commission has launched an investigation into Deutsche Bank’s mortgage-backed securities positions around 2013 to determine whether the company delayed recording losses on the assets, news agency Bloomberg reported Monday, citing people familiar with the matter.

A Deutsche Bank spokeswoman said the bank was “cooperating with this investigation, which is looking into previously recognized losses on certain positions.” She declined further comment.

The revelation of another investigation, adding to nearly 8,000 legal cases that Germany’s largest bank is dealing with, came as credit rating agency Moody’s lowered the creditworthiness of Germany’s largest bank on Monday, citing risks to Deutsche Bank’s reorganization plan to structurally improve its profitability.

Deutsche Bank’s shares opened down 1.5 percent on Tuesday in Frankfurt, but quickly recovered in line with the German blue-chip DAX Index. The stock was up 0.9 percent by 10:47 a.m. at €15.30, compared with a 0.8-percent rise of the DAX Index.

Credit rating agency Moody’s lowered Deutsche Bank's creditworthiness on Monday, citing risks to the bank’s reorganization plan to structurally improve its profitability.

The SEC is investigating whether the bank delayed taking losses on some mortgage-backed securities over an extended period of time, Bloomberg reported. The losses could have amounted to several hundreds of millions of dollars. Any delays in writing down the bonds at a time of a market drop may have supported the bank’s earnings for at least a few quarters in 2013, Bloomberg reported.

John Cryan, who was put at the helm of Deutsche Bank last July and became its sole chief executive last week, has vowed to get the bank’s many legal cases under control. He is also in the process of overhauling the bank, selling risky operations and withdrawing from a number of unprofitable markets and countries to improve earnings.

Markets have their doubts that Mr. Cryan will succeed. The bank’s share price has lost about half its value in the past year, and many investors voiced their concerns during another turbulent annual shareholder meeting last week.

The downgrade by Moody’s was the latest slap for the bank, which has faced a difficult start to the year.

“We are very disappointed,” Mr. Cryan told Bloomberg Tuesday on the sidelines of a speech at the International Institute of Finance’s annual meeting in Madrid. Mr. Cryan insisted the bank has the capital to pay back its debts four times over.

The rating agency questioned whether Deutsche Bank could implement its ambitious strategy to remake the bank, and cut a series of ratings including for senior unsecured debt, long-term deposits and counter-party risks. The cut in senior unsecured debt to Baa2 leaves it just two above “junk” status.

“Moody’s estimates that the firm is unlikely to achieve its targeted profitability improvements unless there is a material and sustained improvement in the operating environment,” the rating agency Moody’s said in a statement.

The rating cut could have material effects on the bank. Many companies look at a bank’s rating before determining whether to use that bank as a hedge against interest or currency risks, for example.

“The conditions at which Deutsche Bank offers such hedging options could become less attractive,” said one financial manager of a medium-sized German company, who declined to be named. The reason is that a lower rating could force the bank to pay more itself to hedge in the derivatives business.

Marcus Schenck, the bank’s chief financial officer, reaffirmed Tuesday that all of the bank’s ratings remain investment grade, and stressed that the bank maintained an “A” rating in the areas most important to clients, such as counter-party risk.

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Deutsche Bank has paid and set aside more than €12 billion in legal expenses since 2012. Last year, the bank was fined $2.5 billion by U.S. and British regulators after managers were found to have manipulated Libor interest rate benchmarks.

Many of the bank’s legal costs stem from operations in Deutsche Bank’s investment banking arm, which trades in bonds, shares and currencies. The business was highly profitable before the financial crisis of 2008-2009, but earnings have since been volatile.

In a sign of discontent, shareholders of Deutsche Bank last week rejected the bank’s proposed lavish pay structure for its top executives in a public vote, which could force managers to make further cuts in compensation to the men and women running Germany’s loss-making financial flagship.

On Monday, Handelsblatt revealed Deutsche Bank is also facing a new dispute, one that pits the bank against managers responsible for the collapse of private bank Sal. Oppenheim, which is now a Deutsche Bank subsidiary. Another involves trading by seven managers who may have profited at Deutsche’s expense.

 

Gilbert Kreijger is an editor with Handelsblatt Global Edition in Berlin, covering companies and markets. To contact the author:  kreijger@handelsblatt.com

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