No end to Deutsche Bank’s problems: new litigations in the US and frailty in EU stress test

Deutsche Bank Towers – Walkway from Tower A to Tower B. Headquarters in Frankfurt am Main. (Deutsche Bank Audiovisual Services, August 6, 2015).

Deutsche Bank Towers – Walkway from Tower A to Tower B. Headquarters in Frankfurt am Main (Deutsche Bank Audiovisual Services, August 6, 2015).

Last Wednesday, Deutsche Bank’s shares fell by 4.5% in the first hour of trading in Frankfurt, after the bank released its second quarter results, showing a measly profit of €20 million, in comparison to €818 million last year. The percentage fall of this stock is the biggest ever in such a brief time in the Deutsche Boerse, regarding a blue-chip share, constituent of the DAX index. However, apart from the problems the largest German lender has in relation to its crumbling credit worthiness and disappearing profits, new ones were added last week.

More New York litigations

Firstly, it’s about a new law suit. According to major English language business media, New York judge Deborah Batts decided to proceed litigations against the bank, staged by plaintiff customers who argue that in 2007 and 2008 it knowingly sold subprime products to them, without duly releasing information about the risks associated with those ‘investments’. In this affair, financial products of $4.5 billion are at stake, related to the, at the time, sinking real estate market. Allegedly, Deutsche customers were not informed about that. Let’s not forget that this is a New York Manhattan judge. There is more trouble for the German lender though.

Thirsty for capital

Secondly, but not of less importance, last week the European Banking Authority (EBA) published the results of its resilience stress test of a possible crisis, on 51 big Eurozone lenders. In this trustworthiness check Deutsche ranked tenth from bottom, well behind all its European peers. According to the test results, Deutsche, in case of a financial mess, would lose around one third of its capital. It is found that it would drop to 7.8% from 10.8% at the end of last year.

This EBA’s test result is interpreted by market pundits as showing massive needs of new capital, which unfortunately the bank is unable to produce by itself. At the same time, other analysts predict that its 2016 profits would oscillate around zero. It is common knowledge that a business which doesn’t produce profits is completely unable to increase its own capital. Let’s return to New York.

IMF and Fed messages

Important financial commentators, well known for expressing the views of the New York’s financial community, are observing that Deutsche didn’t get the messages, emitted by the International Monetary Fund and the American central bank, the Fed. It must be reminded, that the IMF in a recent report about the world financial system found that the German lender is the riskiest of all the major global banks. As for the Fed, it rejected as insufficient Deutsche’s contingency draft plan for a rainy day. All ‘systemic’ banks, and there are eight of them, operating in the US are obliged to draft similar plans.

As far as Deutsche Bank is concerned, both the IMF and the Fed are genuinely expressing the interests of the American lenders based in New York and possibly of the Washington administration as well. It is quite clear that the German bank is not welcome any more to New York and, at least, it has to stop contending the US lenders in their own markets.

Chased away from the US markets

Returning to the US media commentators, they now emphasize that this German financial group is not applying a strategy to drastically reduce its activities in the chaotic investment banking universe. On the contrary, Deutsche, unlike any other major European bank, insists on expanding its exposure to all the risky but very profitable markets, which come under the term of ‘investment banking’. It’s about CDSs, all kinds of derivatives and many more risky products. The same analysts note that all the other big European lenders are already applying strategies to reduce their exposure to investment banking.

In a way of speaking, those market analysts tell Deutsche, that it’s high time it left the investment banking to the American banks, and it complied to the ‘messages’ as all the other European banks did. In reality, the Americans are telling the Germans they are the last not to obey New York and Washington ‘orders’, and to leave these lucrative but risky ‘investment banking’ markets to the US lenders. Undoubtedly, this is a direct warning to leave this grey banking universe to its creators, the big New York banks.

Indemnities and fines

The last case in this New York battle is this judge’s decision, to open the way for the Deutsche customers to win hefty compensations. She also threatens the Germans with heavy fines. Truly, in the core of this case are the causes of the 2007-2008 financial meltdown and Deutsche Bank may find itself in the position of the only culpable party. If the plaintiffs win their case, the German lender may face more law suits for indemnities regarding more subprime securities exceeding by far the $4.5bn. There are many more financial products which were sold at that time as solid investments, but in reality, were just rubbish.

As things turn out, Deutsche Bank may held as the only identified culpable party involved in this nasty affair. No American bank was ever bluntly condemned for the same reasons. A New York prosecutor, who introduced such a case a few years ago, just closed it down, after having ‘found’ no substantial proofs to prosecute the US lenders for having cheated their customers. In this way, all the major American banks got away with having brought the whole world to its knees in the financial fallout of 2007-2010.

Sole culpable for the Armageddon?

Even the big three rating agencies, Moody’s, S&P and Fitch-IBCA were not convicted for having rated junk financial products as triple ‘A’ investment goods. Together with all the major Western banks they are the main culpable parties for encouraging the subprime financial product market to grow to such volumes, up to the point that, when bursting in 2007-2008, they threatened the whole world with an unseen before financial meltdown and a real economy Armageddon. Now the Americans seem to hold Deutsche Bank solely responsible for all that.

Unfortunately for the Germans, Deutsche Bank is currently a perfect victim, because of its very weak financial position, to be blamed though wholly on its own utterly imprudent steps. Today, with nonexistent profitability prospects, the creation of new capital with Deutsche’s own means is absolutely impossible.

Demanding more subsidies

As a result, the Germans recognize that very loudly. In this respect, two weeks ago David Folkerts-Landau, Deutsche’s chief economist, demanded capital injections with taxpayers’ money of at least €150 billion, to be infused to all the major Eurozone lenders. Of course, he must have had in mind that a good part of it should go to his employer. Reportedly, his bank urgently needs an absolute minimum of €7bn in capital increases. That is, on top of the hundreds of billions in public subsidies all the ‘systemic’ Eurozone banks have received after 2007.
.
All in all, the truth remains that Deutsche Bank is amongst the few ‘systemically’ more important banks of the globe, so it ‘cannot die’. Given that, the Americans would press it up to the point as to make the Germans pay dearly for the bank’s rescue and probably for something more. The same scenario may be used for other ‘too big to fail’ or ‘systemic’ but ailing Eurozone lenders. It’s the same old story the taxpayers will again be called in, to save the ‘undead’ bankers. The American taxpayers have done that already and in a more efficient way.

Advertising

Advertising

Advertising

Advertising

Featured Stings

Stopping antimicrobial resistance would cost just USD 2 per person a year

Our present and future tax payments usurped by banks

Why Italy will not follow the Greek road; Eurozone to change or unravel

Worldwide UN family celebrates enduring universal values of human rights

We are close yet so far…

China hopes EU Commissioner De Gucht drops super anti-dumping tariff on solar panels

Can the EU last long if it cuts Cyprus out?

Could Rwanda become Africa’s healthcare leader?

Do the EU policies on agro-food smell?

EU-UK: A deal synonymous to ‘remain’, England pays the Irish price

Court of Auditors: EU budget money is there to be spent not to create value

“BEUC cautions against TTIP that would seek to align EU and US chemicals management frameworks”

EU Top Jobs summit ended with no agreement: welcome to Europe’s quicksand!

A new bioeconomy strategy for a sustainable Europe

Window for a Brexit deal: Brussels to think again May’s proposal

MEPs react to breaches of human rights in Moldova, Burundi and Somalia

MWC 2016 LIVE: Telenor CEO calls on operators to embrace Mobile Connect initiative

European Commission recommends to the European Council (Article 50) to find that decisive progress has been made in Brexit negotiations

European Youth Capital 2019 announced: Novi Sad, Serbia

EU unveils plan to accelerate Capital Markets Union ahead of London’s departure from the bloc

7 key challenges for the future of ASEAN – and how to solve them

COP21 Breaking News_04 December: Launch of CREWS, climate risk & early warning systems

‘Dire consequences’ for a million children in the Middle East, North Africa, as funding dwindles

Dear China

Respect people’s peaceful assembly and fair trail rights, UN human rights wing urges Nicaragua

Despite funding crisis, Palestine refugee classrooms set to stay open, says UNRWA

How wealthy people transmit this advantage to their children and grand children

ECB should offer more and cheaper liquidity if Eurozone is to avoid recession

Aid teams respond to escalating southwest Syria conflict: 750,000 civilians are at risk

Social inclusion: how much should young people hope from the EU? 

Parliament adopts its position on digital copyright rules

To win combat against HIV worldwide, ‘knowledge is power’, says UNAIDS report

Africa’s inspiring innovators show what the future could hold

IMF: All you want to know about Argentina

EU’s Bank signs € 150 million loan to India as part of record investment in clean energy

Why Eurozone’s problems may end in a few months

Have central banks missed the exit train?

For how long will terror and economic stagnation be clouding the European skies?

Charlie’s tragedy energized deeper feelings amongst Europeans; back to basics?

Trump asked Merkel to pay NATO arrears and cut down exports ignoring the EU

We can’t tell if we’re closing the digital divide without more data

Erasmus+: an expected budget of €3 billion to be invested in young Europeans and to help create European Universities in 2019

UNICEF appeals for end to ‘war on children’ in Syria and Yemen

Economic sentiment and business climate stagnate in miserable euro area

UN chief condemns attack targeting international forces in northern Mali

Rule of law in Hungary: Parliament should ask Council to act, say committee MEPs

Budget MEPs approve €104.2 m in EU aid to Greece, Spain, France and Portugal

Lithuania vs Parliament over 2014 EU budget

Further reforms can foster more inclusive labour markets in The Netherlands

Banks suffocate the real economy by denying loans

EU’s new environmental policy on biofuels impacts both the environment and the European citizen

Northern Ireland: Parliament wants to secure post-Brexit regional funding

A Sting Exclusive: “Europe must be more ambitious in COP21 and lead on climate finance and sustainable development”, Green UK MEP Jean Lambert points out from Brussels

Russia and the West use the same tactics to dismember Ukraine

Campaign kicks off with High-level Event on #FairInternships

How dearly will Germany pay for the Volkswagen emissions rigging scandal

11 lessons the history of business can teach us about its future

IMF: How To Deal With Failed Banks

A Sting Exclusive: “Junior Enterprises themselves carry out projects focusing on the environment”, JADE President Daniela Runchi highlights from Brussels

Is Data Privacy really safe seen through Commissioner’s PRISM?

‘Passport to dignity’ that schools represent may expire fast, without emergency funding warns UN Palestine refugee agency

More Stings?

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s