Deutsche Bank races against time to reach US settlement

As shares hit record low on news of a €14bn fine from US, bank is keen to agree lower sum

 Deutsche Bank  in London: Deutsche will want to get a deal done before the US election, while the current administration is in power. Photograph:  Luke MacGregor/Reuters

Deutsche Bank in London: Deutsche will want to get a deal done before the US election, while the current administration is in power. Photograph: Luke MacGregor/Reuters

 

Deutsche Bank is throwing its energies into reaching a settlement before next month’s presidential election with US authorities demanding a fine of up to $14 billion for mis-selling mortgage-backed securities.

The threat of such a large fine has pushed Deutsche shares to record lows and a cut-price settlement is urgently needed to reverse the trend and help to restore confidence in Germany’s largest lender.

A media report late on Friday that Deutsche and the US Department of Justice (DoJ) were close to agreeing a settlement of $5.4 billion lifted the stock to close 6 per cent higher, but that report has not been confirmed.

“Clearly, so long as a fine of this order of magnitude ($14 billion) is an even remote possibility, markets worry,” UniCredit’s chief economist, Erik F Nielsen, wrote in a note on Sunday.

Deutsche is much smaller than Wall Street rivals such as JPMorgan and Citigroup.

But it has significant trading relationships with all of the world’s largest finance houses and the International Monetary Fund (IMF) this year identified it as a bigger potential risk to the wider financial system than any other global bank.

Deutsche chief executive John Cryan will be in Washington this week for the annual meeting of the IMF, and the Frankfurter Allgemeine Zeitung reported that other executives would join him to try to negotiate a settlement with the US authorities.

Like fellow large European banks also under investigation for mis-selling mortgage-backed securities, Credit Suisse and Barclays, Deutsche will want to get a deal done with the current administration still in power.

A new administration, to be installed after the November 8th election, will bring unknown risks and likely delays.

At home, Deutsche Bank is fighting a rearguard action, seeking to shore up confidence among the public, politicians and regulators who say the bank brought many of its problems upon itself by overreaching itself and then reacting too slowly to the 2008 financial crisis.

It suffered a further blow to its image this weekend with a third IT outage in the space of a few months on Saturday that prevented some customers getting access to their money for a short time.

Industry support

German business leaders from companies including BASF, Daimler, E.ON, RWE and Siemens defended the bank in a front-page article in the Frankfurter Allgemeine Sonntagszeitung.

“German industry needs a Deutsche Bank to accompany us out into the world,” BASF chairman Juergen Hambrecht said.

A spokesman for a blue-chip company that did not feature in the article said he had been asked by Deutsche for an executive to provide a similar supportive comment.

Deutsche Bank and the government in Berlin have had to play a delicate balancing act, emphasising the substance and importance of the bank without implying any need for state aid or willingness to supply it.

The bank has a market capitalisation of only around €15.9 billion and would almost certainly have to raise fresh cash to pay the full DoJ demand.

Both the bank and Berlin this week denied reports that the government was preparing a rescue plan.

The Bild am Sonntag newspaper wrote on Sunday that Deutsche’s chairman had informed Berlin just before it disclosed the potential $14 billion fine but had not asked for help.

The same newspaper quoted the president of the Bavarian Finance Centre, Wolfgang Gerke, as saying the German government should step in and buy a 20 per cent stake in the bank before its value fell any further. The group represents financial services companies in the southern German state.

“Fundamentally, I’m against state interventions,” he told the newspaper, but added that in this case a government stake would be “a signal that could turn the whole market”.

– Reuters