Deutsche Bank shares swing wildly amid sta­bil­ity con­cerns

Daily Local News (West Chester, PA) - - BUSINESS - By Frank Jor­dans and Pan Py­las The As­so­ci­ated Press

BERLIN>> Shares in Deutsche Bank swung wildly on Fri­day, touch­ing a record low be­fore roar­ing back to life, amid spec­u­la­tion about the sta­bil­ity of Ger­many’s big­gest bank and the Euro­pean fi­nan­cial sys­tem.

Hav­ing ini­tially fallen 8 per­cent, the shares ral­lied to close more than 6 per­cent higher on hopes the bank will be able to ne­go­ti­ate down the mas­sive cost of set­tling a U.S. in­ves­ti­ga­tion.

The U.S. govern­ment had been ask­ing for $14 bil­lion to set­tle claims over the bank’s sales of mort­gage se­cu­ri­ties, com­plex in­vest­ments that were one of the causes of the global fi­nan­cial cri­sis in 2008. The U.S. govern­ment says Deutsche Bank was among sev­eral com­pa­nies that mis­led in­vestors about the qual­ity of these in­vest­ments.

That price was so huge — just be­low the bank’s to­tal mar­ket value as of Fri­day — that it raised spec­u­la­tion that Deutsche Bank would have to raise new cap­i­tal, di­lut­ing the value of its shares.

Those con­cerns, as well as broader wor­ries about the bank’s

abil­ity to turn around its ail­ing busi­nesses, ham­mered its shares in re­cent weeks. They closed up 6.4 per­cent at 11.57 eu­ros — a strong close af­ter ear­lier in the day trad­ing be­low 10 eu­ros for the first time ever.

The rally was prompted by an un­sourced re­port by Agence France Press that the U.S. govern­ment had agreed to a set­tle­ment worth $5.4 bil­lion. Deutsche Bank de­clined to com­ment on the re­port.

In­vestors are likely “get­ting cold feet given the pos­si­bil­ity of more news over the week­end that could eas­ily send the shares soar­ing come Mon­day,” said Chris Beauchamp, chief mar­ket an­a­lyst at IG.

With or with­out a deal with U.S. au­thor­i­ties this week­end, Deutsche Bank faces ques­tions about its op­er­a­tions that will keep in­vestors on edge.

It is heav­ily ex­posed to com­plex in­vest­ments and has been slow to re­struc­ture its busi­ness. It is shed­ding some 35,000 jobs and sell­ing un­prof­itable units. It is also strug­gling to make a profit due to low of­fi­cial in­ter­est rates, which re­duce the amount of money it can make by lend­ing. Last year, it booked a 6.8 bil­lion euro ($7.5 bil­lion) loss.

Con­cern about its health was ap­par­ent in how quickly in­vestors pounced upon a re­port that about 10 hedge funds had pulled in­vest­ments they were keep­ing with Deutsche Bank. The funds were us­ing the bank to clear com­plex trades, and the move sug­gests they were wary of leav­ing their money with Deutsche Bank.

The re­port saw the shares plunge, prompt­ing Deutsche Bank CEO John Cryan to is­sue an open let­ter to em­ploy­ees on Fri­day in which he says the news about the hedge funds is “caus­ing un­jus­ti­fied con­cerns.” It should be seen in the wider con­text of the bank’s 20 mil­lion clients, he said.

“It is our task now to pre­vent dis­torted per­cep­tion from fur­ther in­ter­rupt­ing our daily busi­ness. Trust is the foun­da­tion of bank­ing. Some forces in the mar­kets are cur­rently try­ing to dam­age this trust.”

The bank, he in­sisted, is fun­da­men­tally strong, is meet­ings its cap­i­tal re­quire­ments, and has “an ex­tremely com­fort­able buf­fer” when it comes to liq­uid­ity, with re­serves of more than 215 bil­lion eu­ros ($241 bil­lion).

“There is there­fore no ba­sis for this spec­u­la­tion,” Cryan said.

He noted that other banks had paid far less than $14 bil­lion to set­tle sim­i­lar U.S. in­ves­ti­ga­tions. Goldman Sachs, for ex­am­ple, paid $5 bil­lion.

At the ground level, the bank’s cus­tomers seemed un­fazed.

“Deutsche Bank re­mains Deutsche Bank — it’s a big bank in the world and in Ger­many,” said Berlin prop­erty de­vel­oper Harry van Caem at a down­town branch. “I think the govern­ment will not aban­don let them, it al­ways had a good name and there will be a so­lu­tion.”

The wider worry is that Deutsche Bank may prove to be a “Lehman mo­ment” for the Euro­pean bank­ing sec­tor. In Septem­ber 2008, the U.S. govern­ment made clear that it was not go­ing to bail out in­vest­ment bank Lehman Brothers when it was in huge dif­fi­culty. Be­cause Lehman was con­nected to many other banks, the de­ci­sion to let it fail proved fate­ful: it trig­gered a col­lapse of con­fi­dence in the global fi­nan­cial sys­tem that pushed the world econ­omy into its deep­est re­ces­sion since World War II.

“Ger­man Chan­cel­lor An­gela Merkel says there will be no state bailout, but this might be a case of ‘fa­mous last words’, as the his­tory of bank­ing crises of­ten shows that ma­jor banks can­not be al­lowed to fail for fear of sys­temic risk af­fect­ing the fi­nan­cial sys­tem and neg­a­tively im­pact­ing the real econ­omy,” said Neil MacKin­non, global macro strate­gist at VTB Cap­i­tal.

One ma­jor dif­fer­ence to 2008 is that the Euro­pean Cen­tral Bank has a range of tools to shore up liq­uid­ity in banks un­der its ju­ris­dic­tion, the 19 coun­tries that use the euro. As a re­sult, Deutsche Bank should be able to avoid a fund­ing squeeze and a po­ten­tial run on de­posits of the kind Lehman suf­fered.

MacKin­non says the Euro­pean bank­ing sec­tor is nev­er­the­less likely to re­main un­der stress given the ab­sence of much-needed ef­forts to re­struc­ture and raise money.

“It is in­suf­fi­cient just for the cen­tral bank to pro­vide un­lim­ited liq­uid­ity,” he said. “As a re­sult, in­vestors need to be mind­ful of the po­ten­tial for a mar­ket up­set in the near term.”

AP PHOTO/MICHAEL PROBST

The bank’s logo is seen at the head­quar­ters of Deutsche Bank in Frank­furt, Ger­many, on Fri­day.

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