When main trading ended in Frankfurt on Thursday, Deutsche Bank’s shares were 1% up on the day—cause for quiet relief in another jittery week. At close of play in New York four and a half hours later, they were 6.7% down. The catalyst: a Bloomberg report saying that “about ten” hedge funds that use Deutsche’s prime brokerage had moved part of their derivatives holdings elsewhere, to reduce their exposure to Germany’s biggest lender.
Bloomberg noted that “the vast majority” of clients had not budged. Deutsche responded that it was “confident that the vast majority of them have a full understanding of our stable financial position”. But the news dealt another blow to Deutsche’s already battered shares, which have been plumbing 33-year lows. Deutsche has been reeling for a fortnight, since receiving a request for $14 billion from America’s Department of Justice (DoJ) to settle claims that it mis-sold residential-mortgage-backed securities between 2005 and 2007.
A $14 billion legal bill would blow a sizeable hole in Deutsche’s capital (it has set aside €5.5 billion, or $6.2 billion, for legal claims, and other cases are pending). The bank insists it will not pay anywhere near that much, and no one expects it to. Though the likely bill should be bearable, Deutsche can ill afford to pay a lot more than it bargained for. It is struggling for profitability: German domestic banking is fiercely competitive; and its once-swaggering investment bank is being left in the dust by American firms. Its plans to plump up its capital cushion without asking investors for money looked a stretch even before the DoJ came knocking. This week it stuffed in a few more feathers by selling Abbey Life, a British insurer, for £935m ($1.2 billion).
But trouble begets trouble. Unhelpful rumours have been swirling that the German government is drawing up a rescue plan for Deutsche. The government denies this; Deutsche’s chief executive, John Cryan, has told Bild, a tabloid, that state aid is “not an option”. But it is unsettling that aid is even being gossiped about.
Deutsche is not the only German bank with woes. On Thursday Commerzbank, the second-biggest lender, said it was cutting 9,600 jobs and suspending its dividend. The country’s local savings and co-operative banks are squealing about the slow squeeze on their margins—the product of the European Central Bank’s negative interest rates and a flat yield curve. But Deutsche is the biggest and most immediate headache.
Should push yet come to shove, Germany would surely stand behind its biggest bank. Both the country’s politicians and bankers must be desperate to avoid such an embarrassment; and these days, under Europe’s stricter state-aid rules, the consequences can be severe. Shareholders and junior bondholders stand to be bailed in. Meanwhile, Greeks, Italians and others who are fed up of German lectures about financial rectitude may be enjoying a new sensation. The Germans have at least given them a word for it: Schadenfreude.