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posted on 04 October 2016

What Right Does The U.S. Have To Bring Charges Against Deutsche Bank?

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The U.S. Department of Justice (DoJ) has announced it will seek penalties of up to $14 billion to settle charges that Deutsche Bank (CB) committed fraud with MBS (mortgage backed securities). What gives the U.S. the right to bring charges of this magnitude against a German bank?

The simple answer is that DB did business with U.S. securities and conducted business in the U.S. But the answer is more complex in context.

For one thing, during the Great Financial Crisis, DB received massive bailout support from the Federal Reserve and the U.S. government. Pam and Russ Martens have reported the total of that support was $354 billion.

Secondly, the U.S. is DB's second largest market with 25% of total net revenues before (before provisions for credit losses), not far behind German revenue (31%), according to the 2015 Annual Report.

Third, Deutsche Bank is one of the 19 megabanks that is subject to the annual Fed stress tests every year, so they obviously intend to comply with U.S. law.

The legalities and political realities of the Deutsche Bank situation were discussed yesterday by Prof. William K. Black on The Real News Network:

Transcript of Prof. Black's interview on The Real News Network, 02 October 2016:

JAISAL NOOR, TRNN: On Thursday, a German newspaper claimed that inside information about a bailout plan for Deutsche Bank, one of the world's largest financial institutions. The German government and the bank's CEO immediately denied a bailout was in the works. The news is caused some to question that Deutsche Bank is the next Lehman Brothers. The bank currently faces a fourteen billion dollar fine from the US government for the misdeeds that helped contribute to the 2008 financial crisis and in a declining stock value that has dropped by more than fifty percent this year alone.

Well now joining us to discuss this from Kansas City, Missouri, is Bill Black. Bill is an Associate Professor of Economics and Law at the University of Missouri, Kansas City. He's a white-collar criminologist and a former financial regulator, author of The Best Way to Rob a Bank Is to Own One. And of course a regular contributor to The Real News. Thanks for being with us again, Bill.

BILL BLACK: Good to be here.

NOOR: Before we get to the broader implications of a possible collapse of the Deutsche Bank, let's take a quick look at how we got here. Wasn’t this bank, too big to fail, as we were discussing before the interview started?

BLACK: Well that’s why Deutsche Bank is not going to collapse. It is too big to fail, both politically and economically. So while Prime Minister Merkel has denied that there would be any bailout. Anyone in the world knows that Deutsche Bank would be bailed out, by the German government.

NOOR: So some are pointing to this recent Department of Justice fine totaling some fourteen billion dollars, which is troubling because something like the total assets of the bank is something like seventeen billion. Talk about why this fine was put into place and if you think its fair? The bank does not think its fair.

BLACK: First the total assets of the bank are more like one-point-seven trillion dollars. It’s a vastly bigger bank than you may have been thinking. Again, this is why it is, by any measure way too big to fail. But Deutsche Bank was a very aggressive lender. It was a very aggressive player in financial derivatives. It was at the core of the Libor manipulation, the largest cartel in world history by three orders of magnitude. Its gotten in trouble in all of these areas. A large part of what you see in places like Greece and Ireland, these bailouts, supposedly of Greece and Ireland are really bailouts of the banks, the major creditor banks, particularly German banks and particularly, Deutsche Bank in a number of these cases.

But they’ve also been losing money in financial derivatives and they’re not alone.

So, many of these trading operations are being cut back, not because of government regulation but because they’ve been so unprofitable. That affects most of the largest banks in the world but in the German context, Deutsche Bank and Commerzbank, that is a story, as we’re talking, running in the Wall Street Journal, about how they’re going to cut their total staff by more than ten percent.

So that’s the second whammy that’'s hit them. Then there was Libor, where they got caught. They gave, for example, over a hundred-million-euro bonus, so roughly a hundred and twenty million US dollars in bonuses, to only two people running this Libor trading operation, because they make us “mountains of money.” “Mountains of Money,” was the famous phrase.

The CEO also said that what’s great about this is its guaranteed. Now, this is a high-risk behavior, so the only way it can be guaranteed is if you’'re cheating, which is of course what they were doing. And by the way, that senior executive that gave that bonus rode the supposed success of Libor, became the co-CEO of the company, he’s been shed. So, Deutsche Bank has gone through a series of senior management changes.

Now this fourth one, to clarify, it’s not a fourteen billion dollar fine by the United States. That'’s simply the opening negotiation number the Justice Department attorneys gave. If it ends up at five billion, it will be considered, by the Department of Justice, to be a huge success. So, probably, we’re looking three to five billion dollars, ultimately, in settlement. And indeed the concerns about Deutsche Bank’s precarious financial condition is one of the reasons we would be shocked if they United States seriously tried to get fourteen billion from Deutsche Bank because while the asset size is enormous, the capital of Deutsche Bank was already inadequate for the sum of all the reasons that I’ve talked about. Indeed, the Germans have been resistant to the global efforts to raise capital requirements for banks precisely because of Deutsche Bank’s inadequate capital. That’s been acting as a break on necessary reforms, for some time.

And all of this is hitting when Angela Merkel is very weak, politically, and there’s been an enormous rise of the AfD Party, which is this anti-immigrant, increasingly hard-right party. That embarrassed her first in her home state and what used to be east Germany and now in major cities in the west that there have also been losses for Merkel’s party and a significant pick-up for this anti-immigrant party. So, all of this is coming together, Angela Merkel can’t afford to have this kind of political catastrophe on her watch. While she would assuredly bail it out rather than have it fail, if she were to have to agree to a bailout of Deutsche Bank, her popularity would suffer dramatically. Her party would suffer dramatically, as well.

NOOR: And I wanted to touch up on Greece. One motivation for denying this bailout is in the works for the German government is that it would be highly embarrassing for Germany, which has steadfastly opposed a bailout for Greece in recent years, to bailout Deutsche Bank, would it not?

BLACK: Well, of course, in the supposed German bailout of Greece that has occurred over the last seven years has overwhelmingly actually been a bail out of foreign banks, particularly, German banks, but not remotely exclusively German banks. Their debts owed by various Greek entities, usually, private parties, other Greek banks for example. So, yes, it would be too explicit to have to openly bail out Deutsche Bank with German funds.

And by the way, I’'ve mentioned Deutsche Bank and I’ve mentioned Commerzbank, these are the really big conventional banks but folks who should not believe that public ownership of banks is a panacea, so the German public owned banks, the Landesbanken, have also been very bad actors in the lead-up to many of these crises and have already been formally bailed out by the German government. So, Germans have a lot of scar-tissue already that they don'’t want ripped off in the form of new bailouts because people will start thinking about the earlier bailouts as well and how furious they were.

NOOR: Bill Black, thanks so much for joining us.

BLACK: Thank you.

NOOR: And thank you for joining us at The Real News Network.

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