Deutsche Bank is Failing, Bail Out Inevitable
At €10 a share Deutsche Bank is a delayed victim of the investment banking sector says Dr. Paul Steinhardt, co-editor of Makroskop
SHARMINI PERIES: It’s The Real News Network. I’m Sharmini Peries, coming to you from Baltimore.
Based in Frankfurt, the German Deutsche Bank is the third biggest bank in Europe, and the largest bank in Germany with branches all over the world. Now, the financial press has nervously been reporting a looming crisis at Deutsche Bank, and of late another troubling sign has surfaced when the CEO of the bank announced that it will attempt to recover its profits buy laying off over 9000 workers and closing about 10 percent of its branches, and cutting most of its investment banking activity. Let’s listen.
CHRISTIAN SEWING: The number of full-time employees will fall from 97000 to well under 90000 by the end of 2019. Ladies and gentlemen, we do not take such a decision lightly. But the layoffs are unavoidable if our bank is to remain sustainably profitable.
SHARMINI PERIES: And that was the CEO of Deutsche Bank, Christian Sewing, and he is trying to report to the shareholders that there are ways in which to recover the crisis that Deutsche Bank is undergoing. Now on to talk about this. With me today is Paul Steinhardt. He is the managing director of Makroskop, the Institute for the Study of Macroeconomic Policy, and it is based in Germany. He publishes numerous articles on Makroskop. I thank you so much for joining us today, Paul.
PAUL STEINHARDT: Thank you for having me.
SHARMINI PERIES: All right, Paul, let’s start off with what is exactly causing this crisis at Deutsche Bank, and its implications.
PAUL STEINHARDT: Well, the problem is that they overexposed to the investment banking sector, and that, you know, they have legacy, legacy assets, and obviously these assets still lose money. But there’s nothing like, you know, people actually were saying it has to do something with the theory that that’s it. That’s not true.
SHARMINI PERIES: And do you think that the route they are taking in terms of these layoffs and downsizing is the right route to take?
PAUL STEINHARDT: Absolutely. The only thing they can do. I mean, you have to cut costs. You have to get out of a loss-making segment as quickly and as much as they can.
SHARMINI PERIES: And Paul, how is the German government and the ECB responding to this crisis at Deutsche Bank?
PAUL STEINHARDT: Officially, not at all, really. I mean, there was, that’s actually happening already a couple of months ago. There were some statements about concerns. But officially not at all, even though it was rumored that there would already be emergency measures, kind of like, you know, like [inaudible]. But officially you don’t hear anything from politicians and [inaudible].
SHARMINI PERIES: All right. Now, in September of 2016 the stocks of Deutsche Bank sank to the lowest rate in years, and now we still see it falling. What caused that steady decline, over actually a long period of time now?
PAUL STEINHARDT: Well it obviously, you know, the markets had expected that the kind of bland structural changes would actually bring results. But the Deutsche Bank has to, it has to report losses over and over again. And that’s that’s what I said. I mean, in a way, really, nobody knows how many risks are hidden within Deutsche Bank’s balance sheet. So obviously there must be alarmed, because whenever they have announced that now they would be over the worst and they would see profits again, they have to be, have to make writedowns again.
So now what happened today, or actually yesterday, I don’t exactly know. But obviously, it’s serious. It’s actually the first time Deutsche Bank is now under 10 euros, which is the share price, which is, which is really serious. That tells me that somebody, at least, was informed that the problems are much, much, much bigger than anybody would have thought. Because you see, the layoffs, this is, this is not completely new. I mean, it was known for quite a while now that Deutsche Bank would have to lay off people.
SHARMINI PERIES: All right. Now, in 2017 Deutsche Bank was fined $10 billion for violating sanctions against Russia. The amount was later reduced to $7.2 billion. Was this, first of all, causing any of this turbulence?
PAUL STEINHARDT: I mean, obviously it added to it, I mean, if you, if you have losses. But I think at the end of the day, I mean, as I said, I think that Deutsche Bank is, in a way, the latest victim of the huge exposure to the investment banking sector. You know, other banks, like Credit Suisse, they had the problems much earlier, but they had the problems as well. And I personally really think it’s, it’s kind of like the investment banking strategy really failed. And of course, I mean, you know, the charges. I mean, obviously they are huge amounts. They definitely didn’t help. But I don’t think that’s the immediate cause. I think Deutsche Bank simply was betting too much on the investment banking sector.
SHARMINI PERIES: All right. OK, now, Paul, how important is Deutsche Bank to the EU, and of course, Germany? And of course you have seen in the recent news that the political crisis in Italy, and that has also created a lot of nervousness in terms of the banking sector. How is this dive in the market of Deutsche Bank playing itself out against Europe, and, and what else is going on politically in Europe?
PAUL STEINHARDT: See, I would say it depends very much on how the financial authorities, the ECB, and yes, you may know we have something kind of like very unique now in Europe called the banking union where, you know, they want to bail in so so-called creditors. Now, it depends very much on, if Deutsche Bank gets through the problem, it depends very much on how they will handle it. I mean, they handle it wisely it is primarily a problem for the employees and the shareholders. I don’t think it is generally not even so big. Deutsche Bank is huge. If they handle it right, it’s not a major problem for the banking industry in Europe. It’s the same, the same thing is true for the Italian [inaudible]. But if we handle it stupidly, I mean, if they really believe, you know, kind of like, seriously, these, these kind of like, bailing procedures could work, and they would have to try it with Deutsche Bank, now we’re not yet there. But it might happen. You might actually see a huge banking crisis all over Europe.
So hopefully, you know, the people responsible, the business sector understand that like the U.S., you know, they cannot allow another Lehman disaster, because they believe kind of like, you know, the banks have to, have to be liable for what they did. Unfortunately it doesn’t work, you know. So I think it depends very much if they handle it wisely, and they make sure that especially the payment transfer systems is not jeopardized.
SHARMINI PERIES: All right. When you say handling it wisely, what is it exactly you mean? What do they need to do?
PAUL STEINHARDT: Usually you would say people don’t like that. You have to pay them out one way or another. And there are various ways to do it. But they have to pay them out. Now, the bailout, of course, might be politically very difficult because especially in Germany people believe that a bailout involves taxpayers’ money. OK. I mean, that’s, that’s basically how we have communicated it. In Europe, whenever you rescue a bank or you, you know, rescue a state, it’s basically taxpayer money. Now the reality of course is not taxpayer money. But nonetheless, politically it might be very, very difficult, let’s say, you know, like if Deutsche Bank would be in great difficulty, you would have to somehow bail them out. But politically it might be difficult. As you could see in the States, it is not a problem. I mean, if you just don’t think and just bail out LIBOR institutions and just restructure it, you can handle it. But if you have too many political problems, then you actually might cause huge [inaudible].
SHARMINI PERIES: All right. Now, the Deutsche Bank itself is resorting to some techniques in order to boost its stock, stock and its value and its sustainability, A) By laying off people and downsizing; 2) By de-emphasizing the investment sector of the bank, and thirdly by selling more stock. But who would be buying that stock if it’s declining?
PAUL STEINHARDT: That is the question. I mean, of course, you know, what the management cannot do, really, in debt situation, the management cannot do much else than try to basically cut costs. You know, that’s just the way it is. And of course, the other thing is raising equity. Now it seems they need more equity, and you know, that of course will be the question, if there is enough appetite for the equity. If there’s not enough appetite for the equity, one way or the other, you need state involvement. Now, that’s, that’s the only way it can work. You know, Deutsche Bank is not in a position, and let’s say the Italian banks, if the market is not willing anymore to put equity into the company, buy its equity, then you have to find ways, you know, directly or more likely indirectly, to basically bring the state in. Which wouldn’t be new. You know, I mean, [inaudible] Bank also was bailed out by the German government. So it wouldn’t be new. So, but how this is going to happen exactly nobody knows. Because as I said, it’s politically, this is all pretty, politically this is all pretty sensitive.
But I think what one can say is that Deutsche Bank has, I mean, huge, huge, huge problems. They can, you know, if they can actually solve them, nobody knows. And you know, now we talk about the extremely strong stock market. We talk about fairly good general economic environment. Now, you know, if we have more problems in Europe, we might well have more problems pretty soon depending on what happens in Italy, then actually you will see even more problems with Deutsche Bank.
SHARMINI PERIES: All right. Paul, I thank you so much for joining us. I’ve been speaking with Paul Steinhardt, and he’s the managing director of Makroskop, the Institute for the Study of Macroeconomics and its Policies in Germany. Thank you so much for joining us.
PAUL STEINHARDT: Thank you. Bye bye.
SHARMINI PERIES: And thank you for joining us here on The Real News Network.