Ger­mans rocked as bank tan­gles with U.S. reg­u­la­tors

The Washington Times Weekly - - Geopolitics - BY AUSTIN DAVIS

BER­LIN | Pre­par­ing to face the vot­ers again in 2017, Chan­cel­lor An­gela Merkel has had to deal with an on­slaught of chal­lenges over the past year, from the Greek debt cri­sis to an up­surge in far­right pop­ulism to a re­bel­lion in her own Chris­tian Demo­cratic Party over her open-door pol­icy for Syr­ian refugees.

But it’s un­likely that Ms. Merkel was ex­pect­ing a prob­lem on an­other front, a prob­lem that could dam­age not only her elec­toral prospects but Ger­many’s global im­age as a model of eco­nomic qual­ity, fi­nan­cial con­ser­vatism and mar­ket ef­fi­ciency: the sound­ness and fu­ture of the coun­try’s flag­ship fi­nan­cial in­sti­tu­tion, Deutsche Bank.

“When you think of Ger­many, you don’t tend to think of fail­ing banks,” said Todd Wil­liamson III, a se­nior fel­low with the At­lantic In­sti­tute, a non­par­ti­san Ber­lin think tank. “It doesn’t help the case for Ger­many, which has been sta­ble and is the fi­nan­cial and eco­nomic leader in Europe.”

Last month, Deutsche Bank, Ger­many’s largest, was thrown into tur­moil after an ex­tended clash with the U.S. Depart­ment of Jus­tice. As part of its cam­paign against some of the world’s big­gest banks, the Jus­tice Depart­ment has de­manded $14 bil­lion in penal­ties to set­tle a case in­volv­ing sales of res­i­den­tial mort­gage-backed se­cu­ri­ties by Deutsche Bank in the run-up to the 2008 global fi­nan­cial col­lapse. Spec­u­la­tion that the bank might not have the cap­i­tal cush­ion to pay the fine im­me­di­ately raised ques­tions about whether the 146-year-old fi­nan­cial in­sti­tu­tion might be­come the world’s next Lehman Broth­ers and trig­ger an­other melt­down.

The de­vel­op­ment was just the lat­est body blow to the Frank­furt­based in­vest­ment bank.

Deutsche Bank’s stock has plum­meted by more than half in the past year as its in­vest­ment bank busi­ness has shrunk due to nega­tive in­ter­est rates, ane­mic growth in Europe and new reg­u­la­tions adopted after the 2008 cri­sis to curb risky spec­u­la­tion. It has re­cov­ered some of those losses in the past month, but the volatil­ity of the stock con­tin­ues.

This sum­mer its U.S. unit failed a Fed­eral Re­serve “stress test,” and the In­ter­na­tional Mone­tary Fund named the bank as “the most im­por­tant net con­trib­u­tor to sys­temic risks.”The bank re­cently an­nounced dras­tic staff cuts and is re­port­edly con­sid­er­ing scrap­ping bonuses and trim­ming down its Amer­i­can op­er­a­tions sig­nif­i­cantly to im­prove its bal­ance sheet.

For Ms. Merkel, the press­ing ques­tion to­day is whether or not the Ger­man gov­ern­ment should sup­port Deutsche Bank in the event of a cash crunch that could have cat­a­strophic reper­cus­sions from Wall Street to Hong Kong. Ms. Merkel has not ruled out a gov­ern­ment bailout of the bank, but she hasn’t sig­naled her sup­port for one ei­ther.

Com­pli­cat­ing Ms. Merkel’s task is the hard line she has taken on bailouts for other coun­tries in the Eu­ro­pean Union’s eu­ro­zone, de­mand­ing “aus­ter­ity” and deep so­cial spend­ing cuts from other coun­tries that failed to man­age their fi­nances. She and her aides have been par­tic­u­larly crit­i­cal of other EU gov­ern­ments bail­ing out fail­ing na­tional banks.

And the case is also putting a new strain on Ger­man-Amer­i­can re­la­tions, with many here ar­gu­ing the huge Jus­tice Depart­ment fine is in fact re­tal­i­a­tion by the Obama ad­min­is­tra­tion for the EU’s rul­ing in Au­gust that U.S. com­puter gi­ant Ap­ple must pay some $13 bil­lion in back taxes over its op­er­a­tions in Ire­land. Peter Ram­seur, who chairs the Ger­man par­lia­men­tary com­mit­tee over­see­ing the econ­omy, told the Welt am Son­ntag news­pa­per this month that the mas­sive Deutsche Bank fine “has the char­ac­ter­is­tics of an eco­nomic war.”

Deutsche Bank’s ex­ec­u­tives have in­sisted they won’t need to raise cap­i­tal to re­main in the black. An­a­lysts agreed, say­ing the bank was un­likely to col­lapse. Ger­man fi­nan­cial news­pa­pers re­ported re­cently the com­pany was hop­ing to whittle the U.S. fine down to be­tween $4 bil­lion and $5 bil­lion.

Re­ports of a res­cue plan

But Ger­man press out­lets have re­ported that Ms. Merkel’s gov­ern­ment has drawn up a draft res­cue plan for the bank. Se­nior mem­bers of her con­ser­va­tive gov­ern­ing coali­tion have openly ruled out such claims, how­ever, say­ing fed­eral aid sim­i­lar to the life­lines Ger­many, the U.S. and other Western gov­ern­ments threw to fail­ing banks after the 2008 fi­nan­cial cri­sis were out of the ques­tion.

“The Ger­man gov­ern­ment isn’t in­ter­fer­ing here,” said Ms. Schafer. “This is the is­sue of a large pri­vate bank deal­ing with U.S. courts. The first step in re­solv­ing this is­sue is that the bank is ac­tive, and not the gov­ern­ment.”

A rep­re­sen­ta­tive of the Ger­man Min­istry of Fi­nance echoed this sen­ti­ment but re­fused to com­ment in de­tail on the mat­ter, in­stead say­ing that “it’s a mat­ter of ne­go­ti­a­tion be­tween U.S. ad­min­is­tra­tive bod­ies and Deutsche Bank.”

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