A huge settlement with US feds could crush a big Wall Street player
The German bank has been facing several issues. US authorities are demanding a fine of up to $14 billion for mis-selling mortgage-backed securities, and Deutsche Bank is throwing its energies into reaching a settlement before next month's presidential election.
On Friday, Agence-France Presse reported that Deutsche and the US Department of Justice were close to agreeing a settlement of $5.4 billion - much lower than the $14 billion expected, though that report has not been independently confirmed. The news Friday popped up Deutsche's stock price over 15%.
Whatever the end cost of the settlement, 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 restore confidence in the bank, which is Germany's largest lender.
"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.
Other issues have plagued the bank in recent weeks, including rumors of a bailout - or lack thereof - from the German government and big hedge funds decreasing their exposure to the bank.
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 Nov. 8 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
Meanwhile, German business leaders from companies including BASF, Daimler, E.ON, RWE and Siemens lined up to defend the bank in a front-page article in the German news outlet, 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 told Reuters 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, emphasizing the substance and importance of the bank without implying any need for state aid or willingness to supply it.
The bank has a market capitalization of only around 15.9 billion euros ($17.9 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 percent 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".