Deutsche Bank’s DoJ punishment does not fit the crime
For an institution supposed to be providing an example of honest regulation, the US Department of Justice’s tactics smack of extortion
“My object all-sublime, I shall achieve in time — To let the punishment fit the crime”
- The Mikado, Gilbert & Sullivan (1885)
This objective was obviously not in the mind of the US Department of Justice (DoJ) when it caused the shares of Germany’s largest bank to collapse by nearly a quarter.
Reports that the US was demanding a $14 billion (that’s with a ‘B’) fine for mis-selling relating to mortgage lending during the global financial crisis caused the fall.
The alleged crime contributed, like many other factors, to the global financial crisis, it said.
But the proposed punishment is stupid, as if fines are not too big to scale.
On the face of it, the DoJ looks to have handpicked a number that the bank might be able to afford, rather than something that would cover damages.
It also smells that the US authorities would not dare to exert such pain on a US bank. Deutsche’s peers have indeed been fined, but within their capability to pay.
Deutsche has been rumoured for a long time (unfairly, though not without some cause) to be a bank in trouble. Apart from its slender capital base, it has a huge book of derivative contracts – the value of which depends very much on its own solvency.
The merest hint the bank could have difficulties put immense pressure on its share price. This has had a knock-on effect on all European bank shares with the worry drifting into the currency and bond markets.
The whole matter raises questions about the DoJ’s behaviour.
Deutsche may be frail but it obviously believes that it’s not too big to nail. They just misjudged the number. Right on cue, by the very end of Friday trading, the purported settlement was down to $5.4 billion (a mere third of the market cap) and not dissimilar to Deutsche’s litigation reserves of €5.5 billion for litigation costs. Amazing that.
A relieved market drove the stock up 14 per cent. This week a penitent, cap-in-hand Deutsche CEO, John Cryan, is meeting the DoJ this week to finalise the number.
For an institution supposed to be providing an example of honest regulation, the DoJ’s tactics smack of extortion as they have many powers to ban the bank from operating in the US.
We all know that the way to make a small fortune is to start with a big one. So they drop a rumour of a buttock-clenching fine in the hope of landing a punishment way above that for the crime in law.
If the rest of us did this, we would be up in front of the regulator for share price manipulation. Oh, they are the regulator.
They will argue that such a figure is pour encourager les autres, a message to the market to stay in line, and a way of raising money. But the seriousness with which the markets took the news is a lesson. For such behaviour might well trigger a crash.
Deutsche is not too big to fail, as the German government cannot support Europe’s biggest bank – especially after Chancellor Merkel chided the Italians for even thinking of bailing out their third biggest bank Monte dei Paschi di Siena.
Many in the market believe that Deutsche might actually be too big to bail (in or out). The Bank’s balance sheet is as big as the entire annual output of the German economy.
It also places German US diplomatic relations on thin ice at a time when America needs friends in Europe. Bringing down the heights of the European economy is unlikely to help the global balance of power.
Levying massive fines on companies is stupid, for one day a bank will go to court for a judgement if only for mere survival.
A court case might cost a bank US$100 million in legal fees but result in damages of just a few million, rather than billions. The real cost will be to the credibility of the regulators – which is critical in maintaining faith in the system.
Such fines punish bank account holders and investors who did nothing wrong.
At least in Hong Kong, the SFC disciplines not just companies but also the responsible directors with fines going back to shareholders.
To make the punishment fit the crime the regulators must target the individuals who are responsible – the directors who get paid the big bucks and who should shoulder the big responsibility. No matter how big they are, they need to get on their tail and send them to jail.
Richard Harris is chief executive of Port Shelter Investment Management.