As Deutsche anxiety grows, clients scatter

Hedge funds move holdings to other firms

Amid mounting concern about Deutsche Bank AG’s ability to withstand pending legal penalties, about 10 hedge funds that do business with the German lender have moved to reduce their f i nancial exposure. The shares slumped.

The f unds, which use the bank’s prime brokerage service, have moved part of their listed derivatives holdings to other firms this week, according to an internal bank document seen by Bloomberg News. Among them are Izzy Englander’s US$ 34 billion Millennium Partners, Chris Rokos’s US$4 billion Rokos Capital Management, and the US$ 14 billion Capula Investment Management, said a person familiar with the situation who declined to be identified talking about confidential client matters.

Deutsche Bank’s New York- listed shares fell as much as 9.1 per cent on Thursday to a record low, and closed down 6.7 per cent down at US$11.48.

While the vast majority of Deutsche Bank’s more than 200 derivatives- clearing clients have made no changes, the hedge funds’ move highlights concern among some counterparties about doing business with Europe’s largest investment bank. Deutsche Bank’s stock and debt have been under pressure after the U. S. Justice Department t his month requested US$ 14 billion to settle an investigation into residential mortgage-backed securities. The bank has said it expects to negotiate that lower, as other Wall Street banks have.

“Our trading clients are amongst the world’s most sophisticated investors,” Michael Golden, a spokesman for Deutsche Bank, said in an emailed statement. “We are confident that the vast majority of them have a full understanding of our stable financial position, the current macroeconomic environment, the litigation process in the U. S. and the progress we are making with our strategy.”

Millennium, Capula and Rokos declined to comment when contacted by phone or email. The hedge funds use Deutsche Bank to clear their listed derivatives transactions because they are not members of clearing houses.

The amount sought by the U.S. is not far from the Frankfurt-based company’s current market value of 15 billion euros (US$16.8 billion). Creditdefault swaps protecting Deutsche Bank bonds surged to a six- month high earlier this week, according to data compiled by CMA, while the stock hit a record intraday low of 10.18 euros.

The financial pressure on the lender is spilling over into German politics, stirring speculation Chancellor Angela Merkel’s government might be forced to offer support. Chief executive John Cryan told Bild newspaper this week that government aid was “out of the question.” Any taxpayer- funded solution for the bank’s troubles would be Merkel’s downfall, according to the leader of Germany’s biggest opposition party.

“The issue here is now one of confidence,” said Chris Wheeler, a financial analyst with Atlantic Equities LLP in London. “That’s what’s going on here. The thinking is, ‘ Deutsche Bank is fine, but there’s a slim chance it might not be, so why leave my money in there?’”