The US Department of Justice settled its claims against Deutsche Bank, the biggest German lender, for packaging and selling toxic mortgage securities to uninformed customers prior to the 2008-2010 financial crisis. Initially, the Justice Department had asked for $14 billion, but it seems it settled for a fine of $7.2bn. However, this is not the end of Deutsche problems with the American authorities.
Deutsche is also investigated for breaking the US sanctions against Iran and for participating in the exchange rates manipulation ring. Just for allegedly violating the sanctions against Iran, the French giant bank BNP Paribas has paid an exuberant fine of $9.2bn. The German lender is also accused of illegal dealings on Russian equities. To be noted, during the past four years, Deutsche has already paid around €12bn in lawsuits including a settlement with the twin semi-public US mortgage groups Fannie Mae and Freddie Mac.
No end to Deutsche’s problems in the US
In short, the US Authorities appear determined to chase Deutsche Bank away from the American markets or at least oblige her to back away from the lucrative but risky business of derivatives of all kinds and leveraged/distressed loans. The US Department of Justice has also persecuted American and other European banks for participating in the toxic mortgage securities market. Currently, Credit Swiss and HSBC are prosecuted for participating in these subprime dealings, a widespread activity amongst the major world banks in the years up to the 2008 financial meltdown. The US authorities have also settled similar litigations with the major American banks (Goldman Sachs for $5.5bn, Citigroup for $7.2bn, JP Morgan $13.1bn, Bank of America 16.6bn).
No major American bank has been accused, though, for breaking the sanctions imposed on Iran or Cuba. On top of that, all the systemically important American banks profited from the $800bn that the George W. Bush administration decided to allot to the New York banking giants in January 2008, as free capital input. This move came under the extraordinary measures that Washington adopted to save the US financial and economic system from a full 1929 kind of crash. At the same time, the US central bank, the famous Fed, started handing out hundreds of billions of dollars to banks at zero interest rate cost. Only in November 2015 did it stop after having distributed $4.5 trillion. As result, in a few years up to 2011-2013, the New York banking conglomerates managed to fully recover and adequately recapitalize.
Europe acted too late spent too little
Unfortunately for Deutsche Bank and the rest of the major Eurozone lenders, the European Central Bank and the euro area governments didn’t follow the same comprehensive strategy, because Germany didn’t allow it. Berlin believed then and still believes now that monetary measures do not represent a viable policy to remedy a financial crisis and restore confidence. For the Teutons of the Wolfgang Schäuble kind its only ‘arbeit’ that creates ‘true’ value like the Mercedes and the Audis.
In reality though, the extraordinary monetary policies worked very effectively in the US and now the American banks are in a much better position than their euro area competitors. The European Central Bank managed to overcome the German ‘nein’ only in 2013 and her extraordinary monetary measures were termed by many analysts as ‘too little too late’. The key issue is always capitalization, and the US lenders are now sufficiently equipped, while the euro area banks are not.
The capitalization issue
This was exactly the problem Deutsche and the rest of the Eurozone systemic banks ware confronted with, in the aftermath of the 2008 crisis. The German lender however didn’t wait patiently like the rest of her European peers for things to change to the better. On the contrary, in 2008 according to Reuters, Josef Ackerman Deutche’s CEO at those difficult times kept boasting that his was the best capitalized bank of the world. To achieve that Ackerman needed fast and big profits. But the only way to do so was to quickly inflate the US subsidiary of Deutsche and make sure it borrowed billions of dollars at zero interest rate cost from the Fed. Then he risked the American money in the grey financial markets. There are rumors that today Deutsche Bank sits uncomfortably on anything around €40 trillion risky derivatives and other perilous assets.
Deutsche risked in but damaged Greece
In the line of risky moves, early in 2009 well into the financial meltdown, Ackerman decide to lend tens of euro billions to the Greek government at hideously high interest rates and commissions. According to Athens sources, he nevertheless risked to lose the principal. At that time, everybody knew that Greece was about to go bankrupt. In a very peculiar way it didn’t. Since then, Greece anguishes to repay all its debts, strangely enough in full nominal values. Let’s follow the facts around the Greek tragedy and the rescue of Deutsche Bank by the exhausted Greek taxpayers.
In December of 2009, the Greeks curiously enough, instead of defaulting and negotiating about what percentage of their debt would be repaid, decided to repay it in full. To do this they accepted intra-governmental loans, mainly from Germany and France in order to repay Deutsche in full nominal value. In this way, Berlin via Athens saved Ackerman who traveled several times to the Greek capital to ‘fix’ that. By the same token, the Greek debt from a private affair became an intergovernmental issue. Understandably, it’s very difficult for Athens to convince hostile Parliaments, like the Bundestag in Berlin to negotiate a settlement of debt. By the same token, the Greek debt passed under British law, while the loans of Deutsche were accorded under the Greek legal system. This means the Greek courts could have decide about repayment.
In short, Ackerman then and later on his successors, kept borrowing US money from the Fed and betting it in the risky and grey financial universe, in order to pocket hefty returns and recapitalize. Deutsche even had negotiated to purchase Lehman Brothers, which went bankrupt on September 2008. It’s not a secret that Deutsche pumped half a billion dollars into Lehman the very previous day before the bankruptcy, and of course lost it. In any case, Deutsche, being deprived of the ample government backing her US competitors enjoyed, turned rather ‘naughty’ and only in this way managed to survive the financial crisis and remain, until recently, a big player in New York.
To this day Deutsche is up its neck involved in the risky and grey markets of structured finance, debt, equity and interest rates derivatives and distressed and highly leveraged loans. According to well informed sources, the leverage ratio of Deutsche is currently more than 20 times its equity, while for the riskiest American lenders it doesn’t exceed 15.
There is an end to all
So, last summer the Americans ruled that all banks operating in the US have to increase their buffer capital and this capital to be held in the US. For Deutsche this is a grave hit, given that the bank needs more capital even to pay the fines imposed or pending by the Department of Justice. This is unquestionably the final call for the German lender to leave Wall Street and the American markets after sorting out its obligations there.
All in all, in reality Deutsche Bank is chased away from New York at a great cost to her standing and profitability. Obviously, due to the lack of own resources, the price to save her from the US grip has to be paid by Germany, be it the Berlin government or a consortium of Teuton business interests.