re: Deutsche Bank Litigation / Bailout Watch

The more I read about this, the more it looks like it is a case of regulator-induced financial distress. See today's WSJ: " Who’s the Systemic Risk Now?"

quote:

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The German bank’s share price has fallen as much as 20% since a Sept. 15 Journal report that the U.S. Justice Department is seeking a fine of up to $14 billion for selling mortgage-backed securities between 2005 and 2007. That is well beyond Deutsche Bank’s ability to pay, given its $18 billion market capitalization before the story broke.

Deutsche Bank says it “has no intent to settle these potential civil claims anywhere near the number cited.” Markets are spooked anyway. A fine much above $3 billion would strain an institution that faces potential payouts in other regulatory cases, and the bank has already settled claims for billions of dollars for the likes of alleged interest-rate rigging. That includes Deutsche’s Bank’s $1.9 billion share of the 2013 settlement of the bizarre U.S. claim that numerous banks somehow deceived the sharks at Fannie Mae and Freddie Mac.

So it’s not crazy to think this fiasco could become a systemic crisis. With a €1.8 trillion ($2.022 trillion) balance sheet often criticized for its opacity, Deutsche Bank would struggle to replenish capital at today’s share price. Trouble at one of the European Union’s largest banks could trigger a new round of market fears over counterparty risk and political uncertainty.

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quote:

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The new imponderable is the U.S. settlement raid that’s among the largest it has demanded. The huge fines rest on a dubious theory that government prosecutors know better than investors how assets ought to have been priced in a market mania 10 years ago. And with a handful of exceptions (none at Deutsche Bank), regulators haven’t found individual bank employees who committed prosecutable crimes in the mortgage mess. These bank robberies are political.

Some Europeans think the Deutsche Bank raid is American retaliation for the EU’s August ruling that Apple owes back taxes of €13 billion in Europe.

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So there are problems with balance sheet opacity and poor risk management controls, but overall, this looks like something based more on politics rather than ordinary business mistakes. In a way, that's good for Deutsche Bank, because that means the end result will likely boil down to a legal settlement that will be negotiated with input from both Obama and Merkel.

It's not as if the Obama Administration wants to see a new banking crisis, so the incentives here would seem to preference calling off the dogs, while trying to leverage some waning influence to prevent more EU tax cases like what happened to Apple. The wildcard in all of this, of course, is that the Obama Administration doesn't want to say any of this publicly, because it would enrage the Bernie Sanders / Elizabeth Warren wing of his own party.