Deutsche Bank races to reach U.S. settlement

Faces fine close to its market capitalization

FRANKFURT • Deutsche Bank AG is throwing its energies into reaching a settlement before next month’s presidential election with U.S. authorities demanding a fine of up to US$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 Fri- day that Deutsche and the U.S. Department of Justice were close to agreeing on a settlement of US$5.4 billion lifted the stock to close six per cent higher, but that report has not been confirmed.

“Clearly, so long as a fine of this order of magnitude (US$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 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 Wash- ington 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 U.S. authorities.

Like fellow large European banks also under investigation for mis-selling mortgage-backed securities, Crédit 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.

German business leaders from companies including BASF, Daimler, E.ON, RWE and Siemens lined up to defend the bank in a frontpage 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 bluechip 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, 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 (US$17.8 billion) and would almost certainly have to raise fresh cash to pay the full Department of Justice 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 US$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.”

OVER A FINE OF THIS ORDER OF MAGNITUDE … MARKETS WORRY.