If you're a senior managing director at Deutsche Bank, you're stuck. As we've noted before, Deutsche's most senior staff are fully locked-in. They have the entirety of their bonuses deferred for a five-year period. They can't quit without having these bonuses bought out at the current market rate - which isn't a pleasant prospect given that 2012's bonuses, for example, are now down around 70% on the day they were issued. This is one reason why headhunters say Deutsche's MDs in London are pulling together through the current turmoil. That, and the feeling that the German bank is unfairly being persecuted by a combination of the U.S. Justice Department and opportunistic hedge funds.
"Under John Cryan, Deutsche Bank is a far less political place than it used to be," says the head of one fixed income-focused search firm in London. "There was always a lot of infighting at Deutsche Bank, but now there's much more loyalty in the senior ranks and people are pulling together to get through this period. The feeling there is that Deutsche is being victimised both by the D.O.J. fine and hedge funds that are all piling into the trade of shorting the stock and sitting on the CoCos."
That hedge funds have been instrumental in the ongoing collapse of DB shares is undeniable. Last week, Markit said around €200m of shorts were put on DB stock; this week's figure will likely be higher still. However, it's the $14bn fine from the U.S. Department of Justice that started the current rout, and it's this that's getting the goat of Deutsche staff in London and banking analysts in Frankfurt.
"The general feeling among senior people at Deutsche Bank in London is that the business isn't inherently in trouble and that until now they've actually had quite a good year," says Christian Robbins at fixed income search firm Alpha Tradestone. "The problem is the size of the D.O.J fine: it threatens to wipe out their capital buffers."
The D.O.J is threatening to fine Deutsche Bank $14bn for the mis-sale of mortgage backed securities prior to the financial crisis. J.P. Morgan says Deutsche can afford to pay $4bn but no more, hence the panic culminating in today's allegations of a "top secret" plan (since denied) for the German government to take a 25% stake in Deutsche.
Speaking off the record, banking analysts in Frankfurt said there's a feeling that the size of the D.O.J's fine is unfair and amounts to economic warfare against Germany and the German bank. "We've seen for a long time that the U.S. fines European companies a lot more than U.S. companies and this is a continuation of that trend," says one analyst who covers Deutsche Bank. In a note released last week, Christian Koch, a banking analyst at DZ Bank in Frankfurt noted that the D.O.J. initially threatened to fine Goldman Sachs $15bn, but that Goldman's fine was subsequently cut substantially (to $5bn). This is feeding an expectation that Deutsche's fine will be similarly reduced. However, the Wall Street Journal reported yesterday that senior German officials aren't using diplomatic channels to try reducing the fine because they think it's pointless, in part because the French government failed to negotiate a cut in the $9bn fine imposed by U.S. prosecutors on BNP Paribas in 2014.
"What's happening to Deutsche Bank is not based upon fundamentals. It is based upon politics," says the German banking analyst. An analyst at a rival firm agrees, and says John Cryan's strategy of sitting out the storm is the best one in the circumstances: "The worst thing for Cryan to do now would be to raise more capital," he tells us: "If Cryan does that, he'll simply worsen Deutsche's negotiating position in the conflict with the U.S. authorities." Instead, he thinks Cryan's ideal strategy is to portray Deutsche as very weak until after the U.S. elections. - Only once a new U.S. administration is in place will Deutsche be able to negotiate the $14bn fine down to something more manageable, and the bank will be in a stronger position to do this if the size of the fine is seen as compromising its integrity.
U.S. elections are 42 days away though, and BreakingViews reported yesterday that Deutsche has enough liquid assets to cover net cash flows over a 30 day "stressed period." Isn't the waiting game a bit risky? Not at all, says the German analyst: "Deutsche Bank's liquidity position is actually rather good and even if the situation worsens, they can easily get money elsewhere. The ECB is over-supplying liquidity in the euro area." He adds that Deutsche's weak capital position isn't an issue right now: "Capital matters in the medium term. This is all about liquidity and Deutsche has no problems there."
Deutsche's senior bankers seem to have grasped this reality. "Senior people at Deutsche are questioning whether the D.O.J can act in such a way that the payment they're demanding creates a systemic problem in the banking system," says Robbins. "The answer is surely that it can't."
If Deutsche's senior investment bankers are happy to call the D.O.J's bluff, the banks' junior and mid-ranking staff are reportedly more unsettled by the turn of events. "It's the mid and junior levels at Deutsche that are panicking," says another London headhunter. "We've taken a lot of people out of there in the past year and there are a lot of people searching for a doorway now - if they can find one." He claims that Deutsche's senior staff have a degree of loyalty after being overpaid for years: "The MDs have been earning 20% to 50% more than the rest of the market."
In future, however, Deutsche's investment bankers will almost certainly earn less - and not just if the German government intervenes. Stefan Mueller, a former proprietary trader from Dresdner and Sal Oppenheim who now runs German brokerage DWGA, claims Deutsche is losing clients in Germany: "I'm getting a lot of private clients and corporates coming to me and asking if it's still safe for them to deal with Deutsche. This is going to affect their business - if you're a corporate that's planning an IPO you want stability, you're not going to choose Deutsche Bank to help you."
Deutsche's third quarter results, due in October, will be informative. In the meantime, headhunters say senior staff at Deutsche are increasingly resigned to having past bonuses clawed back and to being paid zero bonuses or bonuses that are entirely denominated in Deutsche's devalued stock for 2016. Robbins says the upside to this is that Deutsche's stock may yet rise off current lows and its bankers could one day benefit: "Either way, they know they'll be stuck with the stock for some time."