Personally i would love it to happen. We would get rid of two evils: The Vampires of Wall Street and the eternally broke Deutsche Bank. DB problems, particularly the litigation problems,would eat the Vampires of Wall Street’s (Goldman Sachs) capital in no time. As the French would say: Bon debarras! (Good riddance!)
Krisztian Bocsi | Bloomberg | Getty ImagesStatues stand outside a Deutsche Bank AG branch in Frankfurt, Germany.
Deutsche Bank has defended its risk and control system after proxy adviser Institutional Shareholder Services (ISS) called for shareholders to vote against the board.
The influential proxy advised its members to vote against “discharging” Deutsche’s board, the vote of confidence under the German corporate code, at its AGM on May 23. A vote against discharge is the strongest way for the shareholders to express their disapproval at the board’s AGM.
It cited the series of scandals resulting from the bank’s failure to uphold anti-money laundering (AML) controls as causing reputational and monetary damage which has been borne by shareholders.
In a statement issued Wednesday, Deutsche said the ISS report “does not reflect the current situation of our bank and its control environment.”
“The vast majority of the legacy cases mentioned date back to the time prior to 2016,” the bank added.
“While we acknowledge that there is still work ahead of us, we have significantly improved our risk and control systems in the last three years and we will continue to do so.”
Deutsche also argued that its share price should not be used to indicate financial instability, claiming it has a “very robust balance sheet with a high capital ratio, ample liquidity and a strong asset quality.”
In the advisory circulated to investors, ISS had dismissed Deutsche’s claims of improving “know your customer” and AML controls, according to a report in the Financial Times on Tuesday, and disputed that the bank’s performance resulted from an unfavorable market environment.
It is the first time ISS has called for shareholders to vote against ratifying the board, and followed similar guidance from fellow proxy Glass Lewis last week.
Deutsche Bank shares traded marginally higher during the morning session. However, the shares are down more than 40 percent over a 12-month period.
Americans generally think of Europe first as a wonderful place to visit. They rarely ponder the economic and financial ties between the United States and European Union, but in fact these ties are extensive and significant to the stability of both economies. One area of particular connection involves the large banks and companies that provide services on both sides of the Atlantic. It is this area of commercial finance that risks are actually growing to the United States—in large part due to political gridlock in Europe stemming from the 2008 financial crisis.
Credit market professionals have been aware of problems among the European banks for many years. Their lack of profitability, combined with high credit losses and a lack of transparency have created a minefield for global investors going back decades. Whereas the United States has a bankruptcy court system to protect investors, in Europe the process of resolving insolvency is an opaque muddle that leans heavily in favor of corporate debtors and their political sponsors.
When we talk about true mediocrity among European banks, one of the leading example are, surprisingly, German institutions. Germany, after all, has a reputation for being the economic leader of Europe and a global industrial power, thus the continued failures in the financial sector are truly remarkable.
The biggest example, Deutsche Bank, Germany’s largest bank, has had problems with capital and profitability going back decades.
But Deutsche Banks’s problems are not unique.
What is troubling and indeed significant for American policy makers, however, is the nearly complete failure of our friends in Europe to address their banking sector, either in terms of cleaning up bad assets or raising capital to enable the cleanup.
One of the political understandings that came out of the Basel III process (a regulatory regime first introduced in 2013 to promote stability in the international financial system) was that the United States would take a harder view on mortgage related exposures and particularly intangible assets like mortgage servicing rights. The Europeans, it is said by participants, agreed to take a tougher line on bad assets loitering inside banks and to particularly require banks to take a reserve against bad credits immediately.
Prior to 2018, when the president of the European Central Bank, Mario Draghi, directed EU banks to start recognizing bad credits, international accounting rules essentially allowed EU banks to ignore bad credits. Indeed, EU banks could pretend that loan payments were still being received. Loans that defaulted prior to 2018 were not included in the directive. Thus Europe has a decade of detritus sitting in the loan portfolios of many banks that is neither disclosed nor properly valued. Whereas in the United States banks must charge-off bad assets down to some expected recovery value, in Europe we extend and pretend.
Many observers were surprised several years ago when Chinese airline conglomerate HNA arrived on the scene as the new shareholder of Deutsche Bank, a significant global investment bank that provides a range of services in the United States. The German lender had been marketing an offering of new equity shares for years without luck, thus the arrival of the high-flying and highly-leveraged HNA was greeted with quiet gratitude in European capitals. No European politician wants to be caught dead talking about large banks in anything but the most responsible tones, thus nobody asked any questions about HNA or its owners.
Sadly the HNA equity investment in Deutsche Bank was financed with a lot of debt. When the Chinese firm started to literally implode two years ago due to massive debt payments on its $40 billion in obligations, it began to sell its shares in Deutsche Bank, creating the latest crisis for the chronically underperforming bank. Today HNA is being liquidated under the supervision of the Chinese government. And to this day, nobody among United States or European bank regulators really knows who owns the company that was briefly the largest shareholder of Deutsche Bank
The setback with HNA led to discussions of merging Deutsche Bank with Germany’s Commerbank, another poor performer among the country’s banking sector. Again, German politicians led by Chancellor Angela Merkel refuse to even hint at public assistance for Deutsche Bank, but the mounting troubles with banks across Europe may force Merkel’s hand as it has in Italy.
Bank earnings in Europe are weak, notes veteran bank consultant Mayra Rodriguez Valladares. As she exlains in a recent Forbes column:
Unfortunately, many of European banks’ woes are of their own making. A host of regulatory and legal fines and ongoing money laundering investigations of several banks do not bode well for European earnings. According to a Moody’s Investors Services report: ‘European banks were fined over $16 billion from 2012 to 2018 related to money laundering and trade sanction breaches.’
Rodriguez Valladares notes that U.S. and EU banks are enormously intertwined, particularly in terms of funding and derivatives—two areas of keen interest to U.S. regulators. But the fact of the matter is that the EU banking system and the EU economy are still too weak to shoulder the burden of a general cleanup of bad credits in EU banks.
The economic reality and ugly politics are both too daunting for EU leaders to engage publicly on these issues. Indeed, German Finance Minister Olaf Scholtz, who is touted as a possible successor to Merkel, was attacked by opposition politicians because of the prospective job losses in a Deutsche-Commerzbank merger.
But sadly the union of two zombie banks was not to be. “Banking giant Deutsche Bank and its crosstown rival Commerzbank ended merger talks, leaving in tatters the German government’s hope to shore up both banks and create a banking powerhouse,” The Wall Street Journal reported on April 25.
So now the German government must try to identify another politically expedient way to hide the Deutsche Bank problem without resorting to an explicit state bailout. Not only is financial help for EU banks problematic politically, but the EU simply lacks the economic resources to clean up the broader asset quality problems affecting European banks.
The tendency of EU politicians to stick their heads in the sand when it comes to these issues represents a smoldering threat to global financial stability. Troubles affecting Deutsche Bank and other EU lenders could easily explode into financial contagion if markets decide to turn away from these banks à la Lehman Brothers. For American business leaders and political leaders, the festering problems in European banks are a source of potential risk that could cause significant economic problems for all of us. Stay tuned.
In recent years there has been a distinct change in the market as it relates to the “reaction function” of traders vis-a-vis volatility: whereas in the past (i.e. prior to the 2008 financial crisis) sliding volatility was a clear signal for both risk appreciation and broad market participation, ever since central banks took over both bond and equity markets over the past decade, collapsing vol has been increasingly seen as a warning sign that something is just not right, that central banks as part of their vol suppression strategy are artificially reducing the market’s perception of risk, and as such, high risk prices are artificial.
One need look no further than market action in 2019 where despite fresh record highs in the S&P – mostly the product of the Fed’s sudden tightening bias reversal and subsequent easing by both the US central bank and its global peers – equity outflows have hit an unprecedented pace, with continued stock upside attributable almost exclusively to stock buybacks, forced short squeezes and delta and gamma-imbalanced dealer books, where the higher equities rise, the greater the “forced chase” by dealer to keep bidding stocks even higher. Meanwhile, both institutional and retail investors have continued to flee global equities as the chart below from EPFR summarizing broad asset flows shows.
Another confirmation that low vol is no longer seen as a broad participatory signal are market volumes, which continue to shrink the higher markets rise; an indirect validation of the lack of faith in record asset prices.
While not addressing this topic explicitly, in his latest note, everyone’s favorite credit derivatives post modernist, Deutsche Bank’s Aleksandar Kocic who with every subsequent analysis transforms himself ever closer to the linguistic equivalent of a financial Slavoj Zizek, look at the perception of volatility in recent years, particularly through its circular interplay with broader market leverage, and writes that in the post-central bank era, the “leverage-volatility cycle has been disrupted and its amplitudes attenuated – there are no more booms and busts, just mellow undulations around slower growth and benign inflation.“
Taking a somewhat different approach than our assessment, Kocic writes that in the past, low volatility was a signal of build-up of latent risk due to vol-leverage dynamics, as “low volatility leads to excessive risk taking and misallocation of capital, which ultimately results in forced deleveraging”, and after several cycles the markets learned that these dynamics are an inherent aspect of market functioning. As a result, the vol-leverage trajectory has become “an outward spiral” and “in each subsequent sweep, leverage is higher and risk premia compression more extreme than in the previous episode, leading, naturally, to a deeper crisis and a need for an even more extreme policy response.” Then, resorting to every Austrian’s favorite Schumpeterian “creative destruction” analogy, Kocic writes that if stability is indeed destabilizing, then the main challenge lies not in how to avoid the mistakes, but instead in how to control their costs, and answers that “post-2008, this has been addressed by regulations, and policy adjustments.” In short, central banks step in every time the cycle of vol-leverage dynamics threatens to spiral out of control.
Perhaps as a result of this now constant “Fed put”, which emerged so vividly in late December 2018, Kocic writes that while “in the past, fear has had bad reputation — it stood as a sign of incompleteness, something one needs to outgrow”, the “post-2008 period can be seen effectively as an exoneration of fear”:
Fear has become a sign of wisdom, elevated to a new heuristic or cognitive principle. On the back of this shift in attitude, the resulting excessive caution by both investors and policy makers led to generally lower risk tolerance and has been the leading cause of gradual collapse of market volatility.
While this does not directly address our fundamental thesis, namely that the prevailing sentiment toward low vol has been turned upside down due to central bank intervention, and is no longer a sign of “all clear, the water is warm” by investors but is rather a symbol of foreboding – confirmation that central banks are worried and are therefore artificially suppressing vol – Kocic next looks at just how the leverage-vol cycle broke down within the financial sector, where despite the collapse in vol, leverage never managed to recover.
As such, Kocic believes that the “financial sector was the center of leverage transmission pre-2008” and was essential for converting low volatility into high leverage, which was seen as one of the main engines of growth. This is shown in the chart below, which shows the history of financial subsector of the S&P index overlaid with the levels of volatility on the inverted axis. Periods of low volatility were most profitable for financial institutions as they provided the main engine for conversion of credit into liquidity risk.
And while prior to the 2008 crisis, the “prosperity of financial sector and low volatility show high degree of coordination”, the subsequent departure is a consequence of the changes in the regulatory environment and redistribution of leverage away from the financial into corporate sector, something which Kocic shows in the next chart.
This transition of leverage away from the financial to other sectors had singificant consequences for all aspect of risk prices, and naturally, for volatility. As Kocic explains the “rationale of this maneuver” when it comes to credit risk, “corporate sector is more transparent than the combination of households and financial sectors together. By resyphoning leverage from financials and households to corporates and government, risk has been made less systemic and the margin of error in assessing and monitoring the aggregate credit risk and its misrepresentations in the markets have been reduced.”
Superficially, this is good news, because as a result of the decline in financial sector leverage, “there are no longer casualties of big “collisions”, only parking accidents” as Kocic puts it:
This redistribution of leverage has put the speed limit on possible future encounters with forced deleveraging associated with booms and busts. There are no longer casualties of big “collisions”, only parking accidents.
And yet, going back to the Schumpeter analogy above, if the system is preemptively absolved from the risk of crashes, it also remove the potential for substantial real growth, or as the DB strategist puts it, “reducing and constraining the leverage of financial sector also confines its propagation into the economy. Although stabilizing, in the existing paradigm, this appears to stifle growth — by preventing bad behavior, in the economy which is dependent on financialization, the system is deprived of one of the main engines of growth.”
How do interest rates fit into this?
While the above discussion explains the drift in the traditional relationship between leverage and volatility, there is another distinct historical correlation between the yield curve (which in recent months has gotten abnormal focus due to its inversion) and volatility surface which recently have “topologically converged to each other”, or as Kocic explains, “the curve is on the verge of inversion and the surface on the verge of disinversion” and elaborates as follows: “While Inverted curve appears ominous (at least, in the eyes of the market), disinverted vol surface is soothing — it predicts persistent and uninterrupted calm”, even though we would disagree with this simplistic assessment of the vol surface which, as most traders will admit, reflect nothing more than central bank vol suppression, and therefore the more “normal” the vol surface appears, paradoxically the greater the level of underlying angst.
In fact, we are disappointed that Kocic seems to agree with the far more simplistic explanation, on which absolves the yield curve inversion of any ominous signaling, while suggesting that the disinverted vol surface should be taken at face value, and that any lingering concerns about low vol, or the “residual (consensus) discomfort before ominously low vol” is merely a “consequence of the aftertaste of previous crises when the current regulations were absent.”
Perhaps Kocic was listening to the latest Zizek audiobook when central banks injected their $20th trillion of liquidity in the artificial “markets” or when now chair Powell was making the stunning admission in 2012 that the Fed has a “short volatility position” to appreciate just how naive such an argument is, especially when other traders see right the farce of low vol and also right through the superficial sophistry of anyone who tries to underscore just how credible low volatility is… but we digress.
What is more interesting is not Kocic’s philosophical beliefs in what vol may or may not be telling us, but his quantification of the correlation between the vol surface and the yield curve… and how this has changed over time.
As the DB strategist writes, while the shape of curve and volatility term structure have a logical connection, “their relationship has undergone structural shifts as a consequence of significant changes in the market structure and conditions.” To wit, Kocic highlights three distinct regimes between these two key market vairables.
This is shown in the next chart which highlights the interplay between inversion of the vol surface and the 10s/30s slope of the curve. When seen in this context, Kocic claims that the current flattening of the yield curve is consistent with the surface if taken for what it really is, i.e. as a result of compression of risk premia, rather than a forecast of recession.
Looking at the three temporal regimes defined by Kocic, we start with…
Pre-2008: here, in this pre-central bank time, vol and curve were unified by carry. Kocic explains: “While logically the two are related, the transmission that reinforced that bond was mortgage convexity hedging. As both recession and mortgage prepayment are low rates phenomena, bid for rates volatility was reinforced in recessionary markets as mortgage hedgers became more active. Curve moved in bull steepening and bear flattening mode. Volatile bull steepening and calm bear flatteners associated with rate hikes were the stylized facts of that period.”
Post-2008: To the DB strategist, this period marks “the period of nationalization of negative mortgage convexity and severance of the traditional transmission mechanisms as well as the structural shift between the curve and vol interaction.” The front end of the curve was anchored and the referendum on effectiveness of the monetary policy was expressed by the back end. Bull flatteners marked volatile risk-off episodes while bear steepeners, being a positive verdict on QE, were calming, risk-on modes.
Describing the post-2008 phase in other words, the post-QE period “marks a gradual and systematic curve flattening while vol remained low and surface disinverted” amid the collapse of risk premia. To make his point that the yield curve is no longer signal but merely noise, i.e., it chases vol, Kocic claims that “the curve has converged to where volatility surface has already settled. The flattening pressure was a function of the tight fiscal policy, regulations, and supply shocks in oil.” As such the post-2014 sub-period marks “a systematic compression of risk premia across the board with markets continuing to align with slower growth, lack of excitement across extended horizons and a likely shift towards more aggressive savings.”
Going back to his analogy that we no live in a period where “there are no longer casualties of big “collisions”, only parking accidents”, Kocic next argues that this mode of curve repricing is consistent with the expectations of mild shocks and their persistent effect, and that the vol market “has captured this through low mean reversion, with lower vol and surface inversion remaining in a tight range, while other risk premia collapsed (Figure).”
Assuming this take is accurate, what does it imply for the future of volatility?
In the context of the reflexive relationship between vol and yield, at this point, volatility would appear to be a prisoner of the curve. Regressing to an analogy he has repeatedly used in the past, Kocic argues that the spread between short and long rate – “the playground that defines the range of what can possibly happen” – is now so tight that it does not allow any substantial range in rates, and therefore no meaningful rise in volatility.
The logical next question is what could prompt a spike in the spread in rates, to which the “derivative(s) Zizek” writes that “outside of tail risk, the first step in creating conditions for bear steepeners is a move towards tolerating higher inflation. This could be achieved by a change of inflation targeting policy. Additional disorder could follow the relaxing of the regulatory constraints, which would free bank balance sheets and boost the credit impulse that could possibly stimulate investment and in turn lead to higher productivity growth.”
However, a problem emerges, as the demand-side has to be addressed at the same time. Indeed, the new technologies that would attract investment now destroy more jobs than they create as “the old paradigm does not seem to be capable of achieving these goals; it has failed to deliver desired results, while the new one is politically difficult to pass.” This, then brings us to the above core argument, namely that any effort in this direction is a source of further political volatility and dissipation of consensus which further stifles change. Paradoxically, one event that could restore some vol is an easier Fed, or as Kocic explains:
Adjustment of monetary policy through rate cuts would free some room for rates to move by opening the policy gap, the spread between long rate and near-term Fed expectations, from below. This is a temporary rise in realized volatility but without steepening of the long end of the curve.
Which brings us to the conclusion: barring the abovementioned “fat tail”, Kocic asks “have we reached the end” of the post-2008 phase of collapsing vol and flattening yield curve, and parallel to that “what could create conditions for volatility return?”
The answer here is that while there are two directions of curve-vol reshaping, Kocic argues that the main boost for volatility “is to liberate the right side of the (rates) distribution” which would mean “that higher rates and steeper curve have to be allowed.” In this mode, gamma would lead the way followed by the disinversion of the long-dated sector. The chart below shows two directions of change, i.e. curve first needs to steepen before realized volatility can rise.
This is also the “vol shift mode that could take us closer to the tail risk as concentrated risks in the corporates.” Incidentally, this takes us back full circle to what so many analysts believe will be the source of the next crisis: the wholesale prolapse of the BBB-rated investment grade space, a tsunami of “fallen angels” that would obliterate the junk bond market as it more than doubles in size overnight from $1.1 trillion, and catalyzes the next financial crash. Or, as Kocic puts it, “the global hunt for yield has encouraged investors to move down the credit spectrum to enhance returns. Within the IG universe, BBB issuance has grown significantly.” This is shown in the chart below, which shows that more than 50% of the entire IG index is now BBB-rated.
To Kocic, this is also the most negatively convex sector which is sensitive to spread wideners in steepening sell off. In other words, a possible wholesale downgrade to BB or lower would result in disorderly unwind of positions of the IG money managers which would be capable of raising volatility significantly. From there it would promptly spread to the rest of the market, and global economy, and lead to the next financial crisis. What happens to vol then should be clear to anyone.
The good news is that, at least in the near term, it appears that not much can go wrong as “there seems to be an embedded mechanism that dampens the volatility away from the upper left corner.” In fact, and ironically, at this moment it appears that the Fed seems to be the only source of shocks with their effects localized at the front end of the curve and the upper left corner of the volatility surface. For long tenor vol (gamma or vega alike) to revive, we need bear steepening of the curve.
Ever since it became apparent that the Deutsche Bank-Commerzbank tie-up wasn’t meant to be after all, despite incessant lobbying from the German Finance Ministry over the objections of pretty much every other stakeholder, both Deutsche Bank shareholders as well as the bank’s still-relatively-new CEO have probably been wondering: What’s next for Europe’s least-favorite perennially troubled megabank?
Well, as DB’s management team scrambles to close a deal with UBS to merge the Swiss bank’s once-storied asset-management business with DWS, the asset-management arm that functions as a separate corporate entity controlled by Deutsche, Bloomberg and the FT have effectively confirmed what most shareholders have been hoping for: Despite Sewing and Chairman Paul Achleitner’s insistence that the investment bank is vital to Deutsche’s future, it’s probably time for Deutsche to take an axe to its long-suffering investment bank (the bank has already reportedly been considering the ring-fencing of its most toxic businesses and assets in a shadow ‘bad bank’).
Specifically, the bank’s equities business (and more specifically, it’s US equities trading business) will likely be on the chopping block.
But even a restructuring would be difficult, coming with many up-front costs, according to analysts quoted by Bloomberg:
With a Commerzbank deal gone, Deutsche Bank’s only move is “a more radical investment bank restructure, with a potential exit from the U.S. region and the equities product line,” Citigroup Inc. analysts wrote in a note on April 29. Such a move would be difficult. Restructuring costs would hit upfront, and revenue would be squeezed at first, potentially exacerbating rather than fixing Deutsche Bank’s core problem. In any case, that option seems off the table. Achleitner and Sewing say the trading and corporate finance businesses are crucial. “Every executive has to constantly adjust to a changing market environment,” Achleitner told the Financial Times. “But in this regard, we are not talking about strategy, we are talking about execution” of the existing plan.
As if the bank needed another incentive, Reuters reported a few days back that Deutsche’s US operation – which would be greatly curtailed or shuttered entirely in a restructuring – is once again in danger of failing one of the Fed’s stress tests.
In a detailed insider account of the factors that inspired Sewing’s decision to walk away from merger talks (according to the FT, though it had been announced as a mutual decision, the idea to walk away was first broached by Sewing and his team, who argued that financing the deal would be too burdensome).
As one regulator put it:
“Calling the merger off wasn’t a strategic decision,” a top regulator said. “They could just not afford the deal.” “Without the one-off [accounting and tax] effects the transaction would have triggered, the deal stacked up,” the person said, adding it was “unsettling…[that] both banks do not have enough firepower to bring forward a merger that makes strategic sense.” Deutsche disputes that it lacked firepower to do the deal.
But while Commerzbank’s steady corporate business will make it an ideal acquisition target for another European lender (UniCredit and ING have reportedly been weighing bids), DB has no obvious path to finally shed the mantle of ‘most hated bank in Europe’.
US president Donald Trump and several members of his family on Monday sued Deutsche Bank to stop it from handing over financial records to congressional subpoenas investigating his companies’ financial dealings. Trump’s lawsuit contends that demands for records by Democrat-controlled House committees have “no legitimate or lawful purpose” and were issued to harass him as president. Deutsche Bank started providing financial records to New York state’s attorney general last week.
“The case of Danske Bank is not closed for us,” EU’s justice commissioner Vera Jourova has told the Financial Times. The commission’s pledge to follow up on the money-laundering scandal came despite a vote in the European Banking Authority on 16 April rejecting that its supervision of Danske Bank had failed, and shelving an investigation into the €200bn Danske Bank scandal linked to illicit Russian money.
(ZH) Thanks to the Wall Street Journal, investors won’t need to wait until later this week for a promised update on the status of merger talks between Deutsche Bank and Commerzbank. Based on reports about Deutsche’s continued contingency planning, we can surmise that the answer to the question ‘how are deal talks going?’ is clearly ‘not well’.
Fresh on the heels of reports that Deutsche CEO Christian Sewing has been scrambling to prep a ‘Plan B’ to sell to investors should the merger between the two troubled German lenders fall through, WSJ reported on Tuesday that part of this planning includes the possibility of forming a ‘bad bank’ to house Deutsche’s most toxic assets and unprofitable business lines.
Deutsche’s troubles have persisted for years. So why are they only discussing this now? Well, because, as WSJ reports, Deutsche’s troubled investment bank is creating more headaches during the merger talks than executives had initially anticipated, which seems more like an issue of unrealistically rosy expectations than anything else.
Deutsche Bank for years has been retooling its strategy and management, promising to reinvigorate profits, repair compliance weaknesses and cut rising costs. Executives insisted publicly up until late 2018 that the bank should only consider deals after it heals itself. Now, deep into merger talks, it is looking at a potentially bigger cleanup effort than it previously signaled.
Planning for a possible no-deal outcome has taken on greater urgency at Deutsche Bank as merger talks have proven more complicated than proponents originally expected, the people said.
Of course, even if Deutsche follows through with these plans, it doesn’t necessarily mean that a merger will be dead in the water. It could even help facilitate a deal.
A new unit for disposing of assets and discontinued operations – a so-called bad bank – could be used flexibly, whether Deutsche Bank strikes a deal or not, some of the people said. A merger would likely require Deutsche Bank to make sizable cuts to parts of its investment bank, narrowing the scope of businesses to focus resources on more-profitable areas as part of a strategy overhaul, some of the people said.
But as major DB shareholders have demanded cuts to its investment bank, particularly its troubled US equity trading franchise, and to a lesser extent its European equity trading business, it’s looking increasingly likely that DB is going to need to find a way to quickly shed its most problematic businesses and assets – or at least find a way to cleave them from the rest of the bank.
DB has tried the ‘bad bank’ model before with its infamous ‘noncore operations’ unit. But the fact that this is again under discussion shows just how difficult it will be for Deutsche to rid itself of these assets and businesses.
A new bad-bank unit would allow Deutsche Bank to wall off business lines it intends to close or de-emphasize as well as positions that take time to sell or run down. Deutsche Bank previously had a similar unit called noncore operations that it used to dispose of unwanted assets, many of them dating to the financial crisis. That loss-making unit reported revenues and other financial details distinct from the bank’s core businesses.
Deutsche Bank closed the noncore unit in late 2016. In March 2017, the bank launched a share sale to raise €8 billion in capital. In the process, it designated a new pile of around €20 billion in risk-weighted assets as “nonstrategic.” They were earmarked to be run down within the investment bank rather than as a new separate unit.
The return of discussions about a noncore unit highlight Deutsche Bank’s continued difficulties in streamlining and cutting costs to focus on businesses where it has a competitive edge.
With more stakeholders – including the two banks’ powerful unions – opposing the deal, it’s hardly a surprise that German Finance minister Olaf Scholz’s quest to create a German ‘national champion’ to support Germany’s exporters appears to be in serious jeopardy.
Earlier, the FT reported the UBS was in talks to fold its asset-management unit into DB’s majority-owned asset-management subsidiary DWS, the most profitable of the bank’s businesses (though it’s technically a separate company).
Meanwhile, twitter wits couldn’t help but crack a few well-deserved jokes after seeing the WSJ headline flash.
Exclusive: in confidential internal report seen by the Guardian, bank says scandal has hurt global brand
Germany’s troubled Deutsche Bank faces fines, legal action and the possible prosecution of “senior management” because of its role in a $20bn Russian money-laundering scheme, a confidential internal report seen by the Guardian says.
The bank admits there is a high risk that regulators in the US and UK will take “significant disciplinary action” against it. Deutsche concedes that the scandal has hurt its “global brand” – and is likely to cause “client attrition”, loss of investor confidence and a decline in its market value.
Deutsche Bank was embroiled in a vast money-laundering operation, dubbed the Global Laundromat. Russian criminals with links to the Kremlin, the old KGB and its main successor, the FSB, used the scheme between 2010 and 2014 to move money into the western financial system. The cash involved could total $80bn, detectives believe.
Shell companies typically based in the UK “loaned” money to each other. Companies then defaulted on this large fictitious debt. Corrupt judges in Moldova authenticated the debt – with billions transferred to Moldova and the Baltics via a bank in Latvia.
Deutsche Bank was used to launder the money via its corresponding banking network – effectively allowing illegal Russian payments to be funnelled to the US, the European Union and Asia.
“Only with this intelligence received is it now possible for Deutsche Bank to start global investigations,” it notes.
In the embarrassing aftermath, the bank asked two in-house financial crime investigators – Philippe Vollot and Hinrich Völcker – to find out what had gone wrong. Their nine-page presentation was shared last year with the audit committee of the bank’s supervisory board and is marked “strictly confidential”.
The pair identified numerous “high-risk entities”. They included 1,244 in the US, 329 in the UK and 950 in Germany. These entities were responsible for nearly 700,000 transactions, the report says, involving at least £62m in the UK, $47m in the US, and €55m in Germany.
As part of its investigation, Deutsche Bank sent 149 “suspicious activity reports” to the National Crime Agency in London. Similar disclosures of potential money-laundering transactions were made to authorities in the US and elsewhere – with 30 private and corporate Deutsche Bank clients reported. Some may have been “unknowingly used”, the report says.
The affair is a further blow to Deutsche Banks’s ailing reputation. It comes amid police raids on its Frankfurt HQ over the Panama Papers, a plunging share price and talks over a possible merger with Germany’s Commerzbank. The raid last November came after German prosecutors alleged two bank employees helped clients launder money via offshore firms.
Deutsche is also under scrutiny in Washington over its financial dealings with Donald Trump. On 15 April, Democrats from the House intelligence and financial services committees issued a subpoena, demanding the bank provide documents about its lending to the president.
Over two decades, Trump borrowed more than $2bn from Deutsche. In 2008, he defaulted on a $45m loan repayment and sued the bank. Its private wealth division in New York subsequently loaned Trump a further $300m – a move that bemused insiders and which has yet to be fully explained.
In recent years, the bank has had a series of bruising encounters with international regulators. Between 2011 and 2018, it paid $14.5bn in fines, with exposure to dubious Russian money a regular theme.
In 2017, the UK’s Financial Conduct Authority imposed its largest fine – £163m – after Deutsche carried out a $10bn “mirror trade” scheme run out of its branch in Moscow. The New York Department of Financial Services (DFS) fined the bank $425m over the same case, in which roubles were converted into dollars via fake trades on behalf of VIP Russian clients.
Deutsche carried out an internal investigation into the “mirror trades” affair, “Project Square”. The leaked Global Laundromat report says there is “no systematic link” between the two Russian money-laundering schemes. However, it suggests some overlap. Two unnamed entities feature in both and 46 “mirror trade” entities “directly transacted” with 233 laundromat ones.
The leaked report says Deutsche has cleaned up its act. It says it has stopped doing business with the two banks at the centre of the Laundromat scandal – Moldova’s Moldindconbank and Latvia’s Trasta Komercbanka. Regulators in Latvia closed down Trasta in 2016 because of serial money-laundering violations.
Deutsche Bank says it has “reduced its footprint” across the post-Soviet region. It no longer has relationships with any banks in Moldova, Latvia, Estonia and Cyprus, the report says. All are favourite destinations for illicit Moscow money. The bank has scaled down its business activities in Russia and Ukraine, it says.
The bank is under investigation for its role in Europe’s biggest banking scandal, involving Denmark’s Danske Bank. Danske laundered €200bn (£178bn) of Russian money via its branch in Estonia. Deutsche provided correspondent banking services via its US subsidiary.
Deutsche Bank said it could not comment on “potential or ongoing investigations”, or on “any matters regarding our regulators”. It said it was committed to providing “appropriate information to all authorised investigations”.
The bank said: “We have considerably increased staff numbers in anti-financial crime and more than tripled our staff since 2015. Since 2016 we have invested €700m in upgrading our key control functions there.”
Christmas just came early for Maxine Waters and Adam Schiff.
As the leaders of the House Financial Services Committee and House Intelligence Committee ramp up an investigation into Deutsche Bank’s lending relationship with the Trump Organization (the first round of subpoenas has already been sent and Waters has said that DB is cooperating in the probe), Bloomberg has handed them a gift in the form of an extensive report chronicling a culture of chronic compliance failures at the bank’s US unit. At first glance, the story appears to support Waters’ claim that Deutsche is “one of the biggest money laundering banks in the country, or maybe the world.”
The report describes Deutsche’s US unit, which is headquartered inside a gleaming Wall Street tower, making it one of the few Wall Street banks still situated on Wall Street, as a “kind of legal mirage”. For years, the leaders of the US subsidiary were merely puppets, with little real power, influence or knowledge about the subsidiary’s operations. Even the distribution of bonuses was outsourced to the headquarters in Frankfurt, BBG said. Top executives couldn’t answer questions about the bank’s operations, and they had little influence over personnel decisions.
This lack of authority helped foster an atmosphere of lax compliance and AML controls, which endured even after US regulators demanded that changes be made.
After DB expanded its US presence by buying out the floundering Bankers Trust, which was mired in a scandal involving sales of shady derivatives products. But DB swiftly established a shady track record of its own:
From 1999 through 2006, it handled almost $11 billion in U.S. dollar transactions for customers in nations under sanctions: Iran, Syria, Libya, Burma and Sudan. Later, it helped rich Russians move $10 billion from their country using “mirror trades” – simultaneous stock trades in separate jurisdictions that bypassed customary hoops for transferring money.
And those were just the cases where the bank was accused of wrongdoing. Here’s a roundup of other incidents where the bank managed to escape regulatory scrutiny.
Russia’s Sberbank PJSC while the government-controlled bank was involved in a years-long scheme that funneled millions to a man in the U.S. who admitted to smuggling $65 million worth of potential nuclear technology to Russia, according to federal prosecutors;
Kenyan fraudsters who scammed U.S. income tax refunds using identities stolen from Indiana sex offenders;
and a Colombian drug cartel that received payments from the U.S. Drug Enforcement Administration as part of an undercover operation.
The payments, disguised as profits from auto-parts sales, were transferred into a Deutsche account and exhibited what a DEA undercover agent called “obvious red flags.”
Through interviews with more than a dozen former employees, as well as a review of hundreds of pages of court documents, a picture emerged of why Deutsche Bank waited so long to break off its correspondent banking relationship with Danske Bank’s Estonian branch, the epicenter for one of the biggest money laundering scandals in European banking history. JPM broke off its relationship with the unit in 2013, while BofA waited until early 2016. DB didn’t sever its ties until late in 2016.
Internal documents, court records and interviews with dozens of people – including more than 20 current and former employees of the troubled German lender – show that its U.S. unit largely resisted strict money-laundering compliance for years. The insider accounts help explain why Deutsche’s U.S. subsidiary kept handling Danske’s business after competitors quit.
Although U.S. executives routinely promised regulators they’d get tough, former staffers say such efforts were often disregarded in favor of cozy relationships with overseas customers. The suspicious billions kept flowing — not just from Danske’s Estonian branch, but from various clients that would eventually be snared in other global money-laundering scandals.
And what’s worse, the bank failed to act even after managers in the bank’s Jacksonville, Fla. office, its second-largest in the US, where most of its compliance workers were stationed, confronted executives about their concerns after more than $150 billion in suspicious funds flowed through Deutsche’s correspondent banking unit. How did the executives respond?
They told the compliance workers to shut up and worry about the work in front of them.
Years before regulators learned about what may be one of the biggest money-laundering pipelines in history, low-level bank employees in Jacksonville, Florida, sounded repeated alarms.
Compliance workers for Deutsche Bank AG flagged some of at least $150 billion in transactions that the bank’s U.S. subsidiary handled for a tiny Estonian unit of Danske Bank A/S, according to a former compliance officer.
It’s not clear how urgently the Florida team warned executives at Deutsche Bank Trust Co. Americas. But when workers sought broader scrutiny of certain clients, they got a familiar response from some higher-ups, the officer said: Shut up, focus on the transaction in front of you, file your paperwork and move on.
Moving on, BBG discussed how the leaders of the bank’s US unit repeatedly broke promises to regulators to reform the bank’s AML controls. During the 2000s, the unit was led by Seth Waugh, who was later called out by the Federal Reserve Bank of New York for making “no progress” on improving the bank’s AML controls.
Employees said Waugh’s failure wasn’t surprising. They recalled how during conversations about bank operations, Waugh often couldn’t answer questions because the real decisions were made in Europe.
When that money flow began, the chief of the German lender’s US business was Seth Waugh, a perpetually tanned executive who wore his graying hair a bit long by bankers’ standards.
Waugh pledged to regulators in 2005 that he’d overhaul the bank’s money-laundering protections. But in a 2013 letter that served as a scathing review of his tenure, the Federal Reserve Bank of New York concluded that “no progress was made” on concerns first raised in 2002.
Waugh, widely described as affable and approachable, had only limited influence over staff members’ bonuses or other personnel matters – or even key points of Deutsche’s U.S. balance sheet, according to several former colleagues. Employees say he often couldn’t answer questions about bank operations or regulatory matters because the real decision-makers were sitting in Europe.
One New York executive recalled visiting Waugh’s 46th-floor office to tell him about bonus-hungry co-workers who ignored danger signs to chase risky accounts. Waugh seemed sympathetic but said he wasn’t sure what he could do, the executive recalled.
In a sign of just how much value Deutsche placed on compliance, the bank hired a former one-star general with no investment banking experience to run the locus of its compliance operations – effectively killing two birds with one stone: Showing its peers that it was serious about hiring veterans, and hamstringing its compliance operation. In a shareholder lawsuits brought against the bank in 2016, an executive who was deposed by the investors’ lawyers said compliance staff were treated as “one step above janitors.”
In 2010, Brigadier General Michael Fleming of the Florida Army National Guard began talking to Deutsche about a new career, running its veteran-recruitment program. He got a bigger job instead: running its new outpost in North Florida.
“I really didn’t have any corporate investment banking experience at that point,” the one-star general told Fox Business Network in 2013. Fleming, who left Deutsche Bank in 2014, didn’t respond to requests for comment.
Former employees said he wasn’t a hands-on leader. Before his arrival, Deutsche executives had transferred some bank functions, including anti-money-laundering efforts, to the main Jacksonville site, several low-slung concrete buildings that surround a man-made pond in a suburban office park. It grew to become the bank’s second-largest office in the U.S., with approximately 2,000 employees working in various operations. Former compliance workers there describe a disregard for their work that emanated from New York.
Throughout Deutsche Bank, compliance staff members were considered to be “one step above the janitors,” an unnamed former executive told lawyers who filed a 2016 lawsuit against the bank. The suit, in which investors claimed Deutsche Bank misled them about the effectiveness of its anti-money-laundering efforts, was later dismissed.
But in what was perhaps the most humorous detail from the story, BBG reported on how DB’s correspondent bank would hand out “excellence awards” to clients who raised the fewest number of red flags from the bank’s automated compliance system. A Cypriot bank later accused of laundering money for terrorists received one of the awards, though DB wasn’t accused of wrongdoing.
Still, some aspects of the bank’s approach raise questions. Like other correspondent banks, it relies on a largely automated system called “straight-through processing,” or STP. That system checks names and places against government risk lists and other factors. For years, executives have bestowed an “STP Excellence Award” on customers that successfully move money through Deutsche’s system while raising the fewest red flags. The awards have sometimes gone to questionable recipients.
Cyprus-based FBME Bank Ltd. won eight of them through 2013, according to news releases. The Treasury Department later accused that bank of having weak money-laundering controls that allowed customers to conduct more than $1 billion in suspicious transactions through various correspondent accounts, including one with Deutsche Bank’s U.S. unit, from 2006 to 2014. Treasury officials said FBME helped organized crime and terror groups move money, evade sanctions and develop banned weapons. Deutsche Bank wasn’t accused of wrongdoing in the case.
Ironically, though it apparently had no problem offering banking services to criminals, terrorists and sanctioned governments, DB drew the line in 2016 when it opted not to lend more money to the Trump Organization over fears of being associated with such a controversial candidate, as well as worries about being put in the awkward position of seizing assets from the president should his company default while in office.
In summary, terrorists and criminals good, Trump bad.
FRANK RUMPENHORST | DPA | Getty ImagesPicture taken on March 17, 2019 shows the headquarters of German banks Deutsche Bank (L) and Commerzbank in Frankfurt am Main, western Germany.
Commerzbank shares rose following a report that UniCredit stands ready to make a rival bid for the bank if merger talks with fellow German lender Deutsche Bank fail.
The Financial Times, citing people familiar with the matter, reported Thursday that the Italian bank was prepared to make a multibillion-euro offer for a sizable stake in Commerzbank.
Commerzbank would be merged with German Unicredit subsidiary HypoVereinsbank, the FT reported, and the combined entity would be based in Germany while UniCredit maintains its headquarters and listing in Milan.
Shares of Commerzbank were up around 3 percent in morning trade on the back of the news.
Commerzbank declined to comment. UniCredit was not immediately available when contacted by CNBC.
While the German government’s stance on this remains unclear, it has been speculated that a Deutsche Bank-Commerzbank tie-up would be seen as favorable as it would create a domestic banking champion. A deal with UniCredit would mean a foreign lender taking control of Germany’s second-largest bank.
Commerzbank’s executive board is reportedly set to decide whether to intensify discussions with Deutsche Bank — or back away from a deal — on April 9.
BERLIN (Reuters) – Commerzbank’s executive board is due to decide on April 9 whether to intensify merger talks with Deutsche Bank or back away from a deal, German business weekly Wirtschaftswoche said on Wednesday.
The magazine said Commerzbank’s management is scheduled to discuss how to proceed in the merger talks during its next regular session, Wirtschaftswoche added, citing company sources and an internal memo.
Commerzbank and Deutsche Bank declined to comment.
Upon initiating formal talks with Deutsche Bank on March 17, Commerzbank chief executive officer Martin Zielke told bankers that management aimed for a decision on whether to go forward with a merger in the next two to three weeks, two sources with knowledge of the matter said at the time.
In a memo to employees days later, Zielke wrote: “I can promise you that we will strive to keep this period of uncertainty as short as possible and we will work hard to ensure that a decision is reached soon.”
Deutsche Bank supervisory board chairman Paul Achleitner said that the banks aim to announce more concrete steps on the merger by late April.
(ShareCast) Shares in Deutsche Bank have slipped following reports that the bank is considering raising as much as €10bn as part of ongoing merger negotiations with smaller rival Commerzbank.
Sources familiar with the talks were quoted as saying that between €3bn and €10bn of extra capital could be raised by issuing fresh equity. Such a move would help assuage concerns about whether Germany’s biggest lender has enough capital, according to theFinancial Times. The newspaper said that at the end upper end of the range, the capital increase would equal about 40% of the two bank’s combined market capitalisation.
But investors, many of which have yet to be convinced about the economies of a deal, were not convinced, and sent the stock 3% lower by 1230 GMT. Commerzbank was off 2%.
Further depressing the shares was a report by Reuters, which alleged first-quarter trading at Deutsche Bank had been weak. It quoted an unnamed source familiar with the business, who claimed: “January was catastrophic, February was bad and March got slowly better.”
A tie-up between the two banks has long been speculated, and both sides finally confirmed merger talks were underway earlier this month.
Deutsche Bank is a leading player in the global banking sector but in recent years has endured boardroom battles, been fined for failing to prevent money laundering and has seen persistent declines in revenues.
Commerzbank, meanwhile, is seen as vulnerable to foreign takeover, and it is understood there was mounting political pressure for the two banks to consider a tie up.
Deutsche Bank told the FT it was “much too early at this stage of the due diligence process to make a credible assessment if there is any potential capital need at all”.
FRANKFURT (Reuters) – Deutsche Bank and Commerzbank confirmed on Sunday they were in talks about a merger, prompting labor union concerns about possible job losses and questions from analysts about the merits of a combination.FILE PHOTO: Banners of Deutsche Bank and Commerzbank are pictured in front of the German share price index, DAX board, at the stock exchange in Frankfurt, Germany, September 30, 2016. REUTERS/Kai Pfaffenbach/File Photo
Germany’s two largest banks issued short statements following separate meetings of their management boards, a person with knowledge of the matter said, indicating a quickening of pace in the merger process, although both also warned that a deal was far from certain.
“In light of arising opportunities, the management board of Deutsche Bank has decided to review strategic options,” Deutsche said in its statement.
Christian Sewing, Deutsche Bank’s chief executive, told employees that Deutsche still aimed “to remain a global bank with a strong capital markets business… with a global network”.
Sewing said many factors could still prevent a merger and a Deutsche spokesman said the talks were expected to last some time. Commerzbank described the outcome as open.
However, formal disclosure of talks appeared to boost the chances of concluding a deal first floated in 2016 before the banks opted to focus on restructuring.
The German government has pushed for a combination given concerns about the health of Deutsche, which has struggled to generate sustainable profits since the 2008 financial crisis.
The government, which holds a stake of more than 15 percent in Commerzbank following a bailout, wants a national banking champion to support its export-led economy, best known for cars and machine tools.
Berlin also wants to keep Commerzbank’s speciality – the funding of medium-sized companies, the backbone of the economy – in German hands.
“SHAKY ZOMBIE BANK”
A merged bank would likely be the third largest in Europe after HSBC and BNP Paribas, with roughly 1.8 trillion euros ($2.04 trillion) in assets, such as loans and investments, and a market value of about 25 billion euros.
However, sceptics questioned the wisdom of a merger.
“We do not see a national champion here, but a shaky zombie bank that could lead to another billion-euro grave for the German state. Why should we take this risk?” said Gerhard Schick, finance activist and ex-member of the German parliament.
While the banks had not publicly commented on merger talks until Sunday, Finance Minister Olaf Scholz last Monday confirmed that there were negotiations.
On Sunday, the ministry acknowledged the announcement and said it remained in regular contact with all parties.
However, there were signs of political opposition.
Hans Michelbach, a lawmaker from the Christian Social Union (CSU), the Bavarian sister party of Chancellor Angela Merkel’s Christian Democratic Union (CDU), urged the government to sell its 15 percent stake in Commerzbank before a deal.
“There may not be an ownership by the federal government in a merged big bank indirectly through an old stake. We do not need a German State Bank AG,” he told Reuters.
The supervisory boards of both banks are scheduled to hold long-planned meetings on Thursday, four people with knowledge of the matter told Reuters. The status of merger negotiations is expected to be discussed.
A merged bank would have one fifth of the German retail banking market. Together the two banks currently employ 140,000 people worldwide – 91,700 in Deutsche and 49,000 in Commerzbank.
Germany’s Verdi labor union on Sunday renewed its objections to a merger, saying that tens of thousands of jobs were at risk and that a tie-up added no value.
Jan Duscheck, head of the union’s banking division and a member of Deutsche’s supervisory board, said the union would raise its concerns on both banks’ oversight bodies.
U.S. authorities investigate FAA approval of Boeing plane: WSJ
Deutsche emerged unscathed from the financial crash but later lost its footing. German officials fear a recession or big fine could derail the bank’s fragile recovery.
Other than Deutsche, Commerzbank is Germany’s only remaining big publicly-traded bank, after a series of mergers.
Commerzbank has also struggled to rebound, and German officials say it is vulnerable to a foreign takeover. If an international rival snapped it up, that would increase competition for Deutsche on its home turf.
Initial reaction among analysts to a deal was skeptical.
There will only be limited benefits of adding Commerzbank’s clientele of retail and small and medium businesses to Deutsche, said David Hendler, an independent analyst at New York-based Viola Risk Advisors, which specializes in risk management.
“It doesn’t change the fact that Germany is not getting a flagship bank that can compete on the world stage. It’s still a stunted bank with a lot of problems,” Hendler said.
One of the biggest risks is how to fill what one German official has told Reuters will be a multi-billion-euro financial hole because a merger could trigger an adjustment to the valuation of some bank investments.
Commerzbank, for example, has about 30.8 billion euros of debt securities such as Italian bonds that now have a value of 27.7 billion euros. A tie-up could crystallize this loss. Deutsche has such securities at market value in its accounts.
Executives are looking for reassurances they’ll get government backing for potential job cuts as they consider going public with their potential plans, according to people involved in the discussions. While the German Finance Ministry has encouraged the struggling banks to combine, Merkel has stayed on the sidelines so far, the people said, asking not to be identified discussing private deliberations.
The government owns 15 percent of Commerzbank and the chancellor will eventually have to give the deal her green light in order for it to happen.
Proponents of a deal say the combination would create a stronger German champion that can better compete with rivals but Merkel remains skeptical that a merger would fix the banks’ problems and the chancellor is keen to avoid being drawn into more bank bailouts. With as many as 30,000 jobs under threat, the possible combination of Germany’s two largest listed lenders is also likely to face a public backlash and no one wants to be seen as the instigator.
Despite those reservations, the discussions have continued to move forward. Deutsche Bank Chief Executive Officer Christian Sewing and his counterpart at Commerzbank, Martin Zielke, are increasingly looking at a combination as their best option as their restructuring efforts fail to quickly bear enough fruit, people have said. The Finance Ministry is also concerned that the deal needs to happen now before Germany’s slowing economy makes such a move even more difficult.
Spokespeople for Deutsche Bank, Commerzbank, the Chancellery and Finance Ministry declined to comment.
An announcement of formal merger talks is potentially imminent, the people said, but executives want to dispel doubts over their political cover before moving ahead. The two banks’ supervisory boards are both due to meet next week, separately, and that could be an opportunity to finalize an announcement.
As the banks deliberate the merits of a deal, the government’s position is still being hammered out, the people said. While the Finance Ministry clearly backs the deal, the government’s stance will be decided in talks that also include the Chancellery and Economy Ministry, headed by close Merkel ally Peter Altmaier, they said.
Finance Minister Olaf Scholz is keen to create a national champion for the German banking industry and wants to bolster Deutsche Bank before the economic slowdown starts to bite. Union leaders from Deutsche Bank and Commerzbank have closed ranks in opposition to the potential job losses, warning the risks of a tie-up would outweigh the advantages.
Labor representatives aren’t alone in their criticism. Representatives of two large Deutsche Bank shareholders have expressed doubts about a combination, while financial regulators are also wary, according to people familiar with the discussions.
For the politicians, there’s also the prospect of European parliamentary elections in May, where Scholz’s Social Democrats will be competing with Merkel’s Christian Democrats. With their national coalition already coming under pressure, particularly from Scholz’s rank-and-file, high-profile job losses would make life difficult for both leaders.
In recent days, Scholz himself has steered clear of the issue, dodging questions when asked by lawmakers at closed-door meetings, according to people briefed on the discussions. At another meeting last week, one of Scholz’s deputies waved off the idea that the ministry was pushing a tie-up, the people said.
While executives may want a solid commitment from Berlin, they’re unlikely to get public support from the chancellor and will likely have to make do with whatever reassurances she is prepared to offer in private, some of the people said.
(BBG) By Steven Arons8 de março de 2019, 07:32 WET Updated on 8 de março de 2019, 16:19 WET
Informal discussions picking up amid government pressure
Deutsche Bank CEO is said to have given up resistance to deal
A merger of Deutsche Bank AG and Commerzbank AG is shaping up as the most likely endgame as Germany’s largest listed lenders are running out of time to show they can grow as standalone companies.
The banks are intensifying informal talks as their turnaround efforts sputter, according to a person familiar with the matter. While there’s no formal mandate to pursue a merger and other options are still being considered, Deutsche Bank Chief Executive Officer Christian Sewing has given up his resistance to doing a deal this year, according to the person, who asked not to be identified in disclosing internal deliberations.
Less than a year after taking over, Sewing is still struggling to reverse a long slide in revenue amid a slowdown in the economy that’s delaying a return to more normal interest rates. The Finance Ministry favors a merger of both lenders before the situation gets worse to support the small and mid-sized companies that are the backbone of the export economy, people familiar with the matter have said.
Deutsche Bank in February reaffirmed its 2019 profitability target but also made clear that it would need to implement tougher measures if markets don’t play along and revenue continues to decline. January was a terrible month for the trading business though February has seen improving conditions, several people familiar with the matter said.
The bank is now planning to implement tougher cost cuts as one step to ensure it can reach the profitability target, said the people. Other strategic options include a merger with another European bank, though that’s seen as remote. People close to Deutsche Bank’s leadership have floated names like UBS Group AG, BNP Paribas SA and ING Groep NV.
Deutsche Bank dropped 0.8 percent at 5:17 p.m. in Frankfurt trading and Commerzbank fell 1.7 percent. The banks declined to comment on the talks, which were reported earlier by German magazine Focus. The Finance Ministry also declined to comment.
The two companies previously discussed a merger in the summer of 2016 under then-Deutsche Bank CEO John Cryan. Sewing was part of those discussions as head of the retail division at the time. The talks fell apart and the lenders embarked on their respective restructurings.
Almost three years later, those turnaround plans are sputtering. Commerzbank has dropped most of its 2020 financial targets after cutting its revenue outlook. Deutsche Bank, too, has been unable to reverse a long decline in revenue. Both lost more than half of their market value last year.
For Deutsche Bank, the urgency to address the situation is exacerbated by high funding costs and the risk of a credit rating cut. Chairman Paul Achleitner sees an expansion of Deutsche Bank’s retail deposit base — which a Commerzbank deal would bring — as one way to lower funding costs, the people said.
Two credit rating providers — Moody’s Investors Service and Fitch Ratings — have a negative outlook on the lender and see progress on revenue and profitability as key to maintaining their rating.
Finance Minister Olaf Scholz and Joerg Kukies, a former Goldman Sachs banker who serves as his deputy, have been favoring a merger with Commerzbank, people familiar with the matter have said. While a deal is viewed by some as an imperfect solution, some in the government think it will be impossible for Sewing to turn around Deutsche Bank before an economic slowdown exacerbates the situation, Bloomberg has reported.
The idea back in 2016 was to merge Commerzbank with a subsidiary of Deutsche Bank that would also contain its retail and some of its corporate banking operations, and then float that business on a stock exchange, according to one of the people. Deutsche Bank’s trading operations would have remained separate, perhaps with a view to selling or merging them with another bank at some point.
Deutsche Bank last year laid some groundwork that would make such a split easier, by setting up a largely separated retail and commercial clients operations when it combined its two German retail subsidiaries. The move was aimed at placating regulators’ requirements that the new entity could be separated easily from the rest of Deutsche Bank should it be necessary to wind down the trading operations.
Several of the largest Deutsche Bank shareholders said they would need to see a concrete proposal first before deciding whether they would support it. Two of them said they currently lean toward opposing a merger, while one would back a deal. All spoke on condition of anonymity.
Critics of the Commerzbank option say it would lock Deutsche Bank into several years of restructuring and come with high execution risks, as job cuts are difficult to implement given Germany’s tough labor laws. They also warn that Deutsche Bank’s disappointing track record of technology integration would make it tricky to achieve savings.
Another option under consideration — and currently favored by the two shareholders skeptical of a merger — would see deep cuts to the bank’s U.S. investment banking operations. In this scenario, the bank would redeploy the freed capital in growth areas. That option, however, would erode the bank’s top line even more, at least initially. Sewing has said that the bank will remain in the U.S., with the investment bank a key revenue contributor.
Top Deutsche Bank AG executives were so concerned after the 2016 U.S. election that the Trump Organization might default on about $340 million of loans while Donald Trump was in office that they discussed extending repayment dates until after the end of a potential second term in 2025, according to people with knowledge of the discussions.
Members of the bank’s management board, including then Chief Executive Officer John Cryan, were leery of the public relations disaster they would face if they went after the assets of a sitting president, said the people, who asked for anonymity because the discussions were private. The discussions were about risks to the bank’s reputation and did not relate to any heightened concerns about the creditworthiness of Trump or his company, the people said.
The bank ultimately decided against restructuring the loans to the Trump Organization, which come due in 2023 and 2024, and chose instead not to do any new business with Trump while he is president, one of the people said.
A spokesman for Deutsche Bank declined to comment, and the people with knowledge of the discussions said they didn’t know why the bank ultimately decided not to extend the loans. The White House didn’t respond to requests for comment.
“This story is complete nonsense,” Eric Trump, a son of the president and an executive vice president of the Trump Organization, said in an email. “We are one of the most under-leveraged real estate companies in the country. Virtually all of our assets are owned free and clear, and the very few that do have mortgages are a small fraction relative to the value of the asset. These are traditional loans, no different than any other real estate developer would carry as part of a comparable portfolio.”
Deutsche Bank had been Trump’s go-to lender for decades, even as other commercial banks stopped doing business with him because of multiple bankruptcies. Although the German lender’s investment bank had severed ties with Trump during the financial crisis, after he defaulted on a loan and then sued the bank, its wealth management unit continued to extend him credit.
But, as the New York Times first reported, Deutsche Bank had already turned down a request for a loan from the Trump Organization for work on a Scottish golf course in early 2016, during the campaign, in part because of concern that it might have to collect from a sitting president.
The head of the retail bank at the time, which includes the wealth management unit, was Christian Sewing, who replaced Cryan as CEO in April. Sewing initially favored approving the loan application, but he submitted it to Deutsche Bank’s reputational risk committee, which recommended turning it down, according to a person familiar with the matter. Sewing supported the decision, the person said. The Trump Organization said it never sought such a loan.
The outstanding Deutsche Bank debt includes $125 million for the Trump National Doral Miami resort, which matures in 2023, according to federal records and mortgage documents. The company also owes $170 million for the Trump International Hotel in Washington and has another loan against a Chicago tower, both of which come due in 2024.
Trump’s dealings with Deutsche Bank are facing heightened scrutiny now that Democrats are in control of the House of Representatives and two party members — Maxine Waters and Adam Schiff — are sitting at the top of powerful committees.
Democrats on the House Intelligence Committee have already described in detail what they want from Deutsche Bank. In a March report, they said they would seek to interview senior executives in the bank’s risk division who could tell them about due diligence conducted on Trump after the 2016 election. They also want documents about the bank’s earlier transactions with Trump and would like to interview his personal banker, Rosemary Vrablic.
In the four years before his election, Trump borrowed more than $620 million from Deutsche Bank and a separate lender, Ladder Capital, to finance projects in Manhattan, Chicago, Washington and a Miami suburb, federal documents and property records show. Jack Weisselberg, a top loan-origination executive at Ladder, is the son of Allen Weisselberg, the Trump Organization’s longtime chief financial officer who previously worked for Donald Trump’s father, Fred. Ladder loaned Trump $282 million for four Manhattan properties, records show. Jack Weisselberg declined to comment.
The loans are split between variable-rate and fixed-rate mortgages. Some are interest-only loans, with balloon payments due at maturity, according to property records and securities filings.
The maturities on Trump’s Deutsche Bank loans haven’t changed since his preelection financial disclosure, filings show. Government-run databases containing local property filings for New York, Washington, Chicago and Miami-Dade County don’t show any changes in the terms of Trump’s mortgages.
Executives are said to worry bank is running out of time
CEO Christian Sewing has pleaded for patience with his plan
Deutsche Bank AG executives are worried that they’re down to the last 60 days to turn around their struggling franchise.
On the eve of fourth-quarter results that are likely to reflect its troubles, the bank’s ability to avoid a government-brokered merger with Commerzbank AG could rest on its performance in the first quarter of 2019, according to people briefed on the thinking of its top executives.
A spokesman for Deutsche Bank declined to comment.
“If this is true, the economic situation at Deutsche Bank must be worse than seen by the outside,” said Andreas Plaesier, an analyst with M.M. Warburg. “A merger with Commerzbank at this point doesn’t make sense because it offers few possibilities to achieve client growth.”
Chief Executive Officer Christian Sewing has pleaded for patience with his current plan, which is centered on cost cuts and efforts to stabilize market share, but dramatic images of a police raid in November have compounded the impact of a challenging market. That’s threatening to undermine a return to growth after several failed turnaround attempts. The German government has been intensifying efforts to help fix Deutsche Bank, studying ways to make it easier to merge it with Commerzbank in a bid to add scale and slash expenses.
Although the bank’s largest investors continue to support Sewing, they’re unhappy with the losses they’ve sustained, according to people familiar with the matter. The stock lost more than half of its value last year, before recovering some of those declines this year.
Deutsche Bank fell 3.5 percent at 12:12 p.m. in Frankfurt trading, reversing earlier gains. Commerzbank declined 3.7 percent.
The cost of insuring debt sold by both Deutsche Bank and Commerzbank fell to the lowest levels since November.
While a deal is viewed by some as an imperfect solution, the German government thinks it will be impossible for Sewing to turn around Deutsche Bank before a potential economic slowdown exacerbates the situation, people familiar with the government’s thinking said. Berlin on Wednesday slashed its economic growth forecast for this year to just 1 percent, which would be the weakest pace in six years.
The Finance Ministry declined to comment.
The country still owns a large stake in Commerzbank after a bailout. It doesn’t own a stake in Deutsche Bank, but Finance Minister Olaf Scholz has said repeatedly that he wants strong international banks to support Germany’s export-oriented companies.
Talks between the lender and the government have recently intensified. Representatives of Germany’s largest bank had 23 discussions with officials in Berlin since the new government was formed in March, most of them with Deputy Finance Minister Jorg Kukies. Sewing and supervisory board Chairman Paul Achleitner each had six exchanges, according to a Finance Ministry letter seen by Bloomberg.
Sewing has ruled out any mergers before 2020, but he’s also said in private that he will have to change his strategy before that if his plan fails. Many officials at Deutsche Bank and the German government favor a merger with Commerzbank as the best option available to Sewing, people familiar with the matter have said.
Analysts polled by the bank now anticipate an eighth consecutive decline in group revenue for the fourth quarter. Chief Financial Officer James von Moltke recently told Bloomberg News that December was a difficult month for the bank.
Still, at least one large shareholder appears ready to double down on the company. Deutsche Bank won a commitment for new investment from Qatar, which already has two vehicles with stakes in the lender, people familiar with the matter have told Bloomberg. The new investment is likely to be made through the the country’s sovereign wealth fund.
As rumors about a possible Deutsche Bank merger with rival troubled German lender Commerzbank continue to swirl despite the seemingly never-ending investigations into a suite of alleged misdeeds by the bank, Bloomberg has given would be merger arbs weighing whether to buy the German lender’s battered shares one more reason to hold off.
In a follow-up to a report late last year that the Department of Justice had expanded its probe into what could be the largest money laundering scandal in history – that is, the infamous Danske Bank money laundering scandal, which involved some $230 billion of suspicious money flowing into Western Europe from shadowy sources in the former Soviet Union – by looking into the role played by the various correspondent banks that cleared many of these transactions (a group that included DB, BofA and JPM), Bloomberg reported on Wednesday that the Federal Reserve is examining how DB moved billions of dollars on behalf of Danske’s Estonian branch, the epicenter of the fraud.
Though this line of inquiry is said to be in its early stages, the implications are clear: US regulators are growing increasingly dissatisfied with correspondent banks and their deference on all KYC-related issues to the client banks whose transactions they are clearing.
Deutsche Bank said that month it has controls in place when acting as a correspondent for other banks, but its ability to know about their clients is limited. As a correspondent, “your only relationship is with the bank and the bank itself has the responsibility to check its own client to monitor the transaction and to do all these kinds of checks”, a company representative said at the time.
The Fed is exploring whether Deutsche “adequately monitored funds” moving through Danske’s Estonian branch.
The Fed’s probe is in an early stage as it scrutinizes whether Deutsche Bank’s U.S. operations adequately monitored funds from an Estonian branch of Danske Bank A/S, according to two people briefed on the situation, who asked not to be named because the inquiry isn’t public. Danske, which used correspondent banks such as Deutsche Bank to move money abroad, has admitted that much of about $230 billion that flowed through the tiny Estonian outpost may have been dirty.
For what it’s worth, DB denied that the Fed or other US regulators or law enforcement agencies were investigating the bank. Instead, it said they were merely asking questions.
“There are no probes,” Deutsche Bank said in an emailed statement, but the bank “received several requests for information from regulators and law enforcement agencies around the world. It is not surprising at all that the investigating authorities and banks themselves have an interest in the Danske case and the lessons to be learned from it. Deutsche Bank continues to provide information to and cooperate with the investigating agencies.”
The Fed is supposed to ensure that banks in its jurisdiction properly scrutinize their clients. One factor that may have attracted scrutiny from the Fed was testimony from a Danske whistleblower who told lawmakers in Denmark that DB moved $150 billion – the bulk of the suspected illicit cash – on behalf of Danske.
The U.S. requires banks operating under its jurisdiction to scrutinize clients and their dealings to detect potential money laundering and alert authorities to suspicious transactions. The Fed is among regulators that ensure banks have adequate systems in place to fulfill those duties.
A Danske Bank whistle-blower who outlined the illicit flow of cash through that firm has said much of it passed through Deutsche Bank in the U.S., and one of the people said the Fed is focusing on the German lender’s trust bank. Deutsche Bank has been cooperating with the Fed, the people said.
A Fed spokesman said it doesn’t publicly discuss confidential probes.
Last week, DB CEO Christian Sewing said he had launched an internal probe into the bank’s correspondent banking practices even though he hasn’t seen anything to suggest wrongdoing. Much of the illicit activity under investigation took place between 2007 and 2015.
The bank had previously reviewed its actions in the case, Sewing said at an event in Berlin. He urged people not to “prejudge” the bank or its employees, presuming their innocence unless proven guilty.
Whether the Fed probe results in financial penalties remains to be seen. But banks and investors should take note: Correspondent banks, who have previously been allowed to feign ignorance when their involvement in money laundering violations has come to light, might soon be facing a lot more scrutiny.
According to Handelsblatt, German officials have taken a keen interest in the possible combination of late, as shown by the fact that Deutsche executives and German government officials met no less than 23 times last year. As always, the question about this long-mooted merger is two-fold: Why? And why now?
The answer to both is harder today because the story has shifted of late. It started a couple of years ago as a quest for a possible acquirer of the 16% stake in Commerzbank held by the German government. These days, it looks more like an attempt at a Deutsche Bank rescue.
Neither bank immediately responded to a request for comment.
Commerzbank benefited from a large-scale German government bailout in 2008 and 2009. Over the years, Spain’s Santander (SAN.Spain), France’sSociété Générale (GLE.France), and BNP Paribas (BNP.France), Italy’sUnicredit (UCG.Italy) or Swiss UBS (UBS) were mentioned alongside Deutsche Bank as potential buyers of the resulting government stake.
Berlin, however, never hid its preference for the potential creation of a private national champion in a country with a large but challenged public banking sector.
Germany’s problem now is less to find an acquirer for the Commerzbank stake than to take care of Deutsche Bank. After a string of bad business news in the last year, the bank, humbled by its rapid expansion into investment banking abroad, is now the target of a major money-laundering and tax-evasion probe.
The CEO appointed last year, Christian Sewing, is in the middle of a turnaround plan he says is beginning to bear fruit. But the group has lost money three years in a row and is trading at less than a fourth of its book value. Even though it can hope for better market conditions for its investment-banking business in the months to come, a merger with Commerzbank, from the German government’s viewpoint, would help avoid a takeover by a foreign competitor.
According to Handelsblatt, the European Central Bank, which supervises the eurozone’s largest banks, would instead favour a combination with another European lender. Meanwhile rumors of a combination with UBS are resurfacing, although the respective size of the two banks (UBS’s market capitalization is nearly three times that of Deutsche.) would make it more an outright, humbling acquisition by the Swiss group than a merger. In any case UBS chairman Axel Weber, who once headed the German central bank, earlier this year said it would “make little sense to consider mergers now” since “they paralyse companies for years.”
It’s easy to see how a strictly German deal would appeal to the government, which is eager to shore up the country’s somewhat archaic banking sector. It may notably help paper over the €3 billion-plus loss a government so keen on fiscal rectitude would have to take on its Commerzbank stake at current market prices.
And German plans may be favored by the fact that potential European buyers are currently busy enough with their own problems. SocGen this week issued a warning on its investment-banking revenue, Unicredit’s own turnaround is challenged by financial markets’ concerns about the Italian government’s economic policies, and Santander is still looking for a chief executive.
That leaves BNP Paribas, which makes no mystery of its ambition to expand in the German retail market and become a player as a lender to the many small and medium-size companies that form the Mittelstand, the backbone of Europe’s strongest economy. It probably wouldn’t be interested in Deutsche Bank’s troubled investment bank, but may consider taking over the Postal service’s banking operation, which Deutsche acquired ten years ago.
Whatever the end game, Deutsche boss Sewing is likely to keep insisting that it wouldn’t make sense to enter serious merger or acquisition talks before he has a chance to prove his strategy right. Meanwhile don’t expect the rumors to end anytime soon.