Getting sued by your government is never comfortable. But, that’s essentially the position Deutsche Bank is in. Germany’s biggest lender is facing claims it fraudulently misled an investment vehicle owned by IKB, an industrial bank largely rescued by KfW, the state-owned development bank, in 2007. Deutsche contests the claim, but allegations that it cost taxpayers $440 million in subprime losses won’t improve chief executive Josef Ackermann’s already frosty relations with Chancellor Angela Merkel.
The IKB vehicle claims Deutsche concealed the poor quality of subprime debt it bought in 2006 and 2007. It also claims Deutsche colluded with a hedge fund which wanted to sell subprime debt short in structuring one of its investments.
The suit which Deutsche is fighting is one of many cases that have been brought against banks that were active in the subprime market. The claim is also relatively small: US regulators recently filed suits against 17 lenders — including Deutsche — over toxic mortgage bonds worth $196 billion. IKB is not singling out Deutsche: it has also sued Credit Suisse, Citigroup and JPMorgan. And, success is far from assured: many subprime cases have failed because buyers were supposedly sophisticated investors.
Even so, the suit — which includes quotations from Deutsche’s top CDO trader Greg Lippmann, describing “stupid Germans” buying subprime debt — cannot help the bank’s image in its home market. That matters because the once-warm relations between Ackermann and Merkel have cooled. The German chancellor believes European banks need more capital, and that German banks shouldn’t be exempt from stress tests. Ackermann’s position is that Deutsche doesn’t need capital, despite having one of the lowest capital ratios of the world’s big banks under the tough, new Basel III rules.
Moreover, some German politicians feel hoodwinked by the deal, brokered by Ackermann in July, under which banks are taking a haircut of just 21 per cent on Greek sovereign debt. Merkel is already coping with the political fallout from angry Germans who feel they are being stuffed with the bill for profligate countries and unwise lenders. The suggestion that her compatriots were seen as patsies by the country’s biggest bank will limit her ability to cut Deutsche any slack in future.