Battle over blame puts Deutsche Bank's past in spotlight

Deutsche Bank's complaints that it is the target of speculators are triggering debate in Germany over where responsibility really lies for the troubled giant's woes.

After an eventful week that saw the Frankfurt institution's shares plumb historic lows on fears over its financial health, Vice-Chancellor Sigmar Gabriel blamed the past decisions of "irresponsible managers" for Deutsche's state.

From the height of banks' bid to compete with global investment banks in May 2007, when its shares sold for over 100 euros, its stock plunged to a new low below 10 euros last Friday on news hedge fund clients were pulling money out.

CEO John Cryan wrote to employees, saying Deutsche was the victim of "forces in the market that want to weaken trust in us" and insisted that the bank's fundamentals were strong.

Its shares then staged a dramatic recovery late Friday after a source told AFP that the bank was close to reaching a deal with the US Department of Justice to bring down a looming fine from an unaffordable $14 billion (12.5 billion) to a more palatable $5.4 billion. The final figure could still change, the source added.

By mid-afternoon in Europe, the shares were selling for 11.87 euros, well above Friday's lows of around 9.90 euros.

But Gabriel, who is also German economy minister, reacted with dismay to Cryan's memo blaming speculators for the turmoil of the past days.

- 'Laugh or cry?' -

"I don't know whether to laugh or cry that the bank, which turned speculation into a business model, is now calling itself a victim of it," he told reporters at the weekend.

Instead, he said Deutsche executives should take responsibility for their past mistakes, which have led the bank to embark on a tough restructuring that will cost some 9,000 jobs.

The outspoken comments triggered an immediate backlash, with conservative politicians taking Deutsche under their wing.

"We shouldn't limit (Deutsche Bank's) chances on the market by badmouthing it," Hans Michelbach, conservative leader in the Bundestag's finances committee, told the Passauer Neue Presse newspaper on Tuesday.

Deutsche's ill-fated bid to break free of its traditional West German business began in 1989 with the takeover of British investment bank Morgan Grenfell, followed by US investment bank Bankers Trust.

By 1999, half of Deutsche's 100,000 workers were outside Germany.

Deutsche "capitalised on the success of its activities, but pushed risks back until later. They materialised as the legal risks that are now costing the bank so dearly," said Hans-Peter Burghof, a professor specialising in the banking sector at the University of Hohenheim.

In 2007, Deutsche reported a profit of 6.5 billion euros.

Around 70 percent of that profit came from the bank's investment banking arm, according to Der Spiegel.

But Deutsche Bank has been plunged into difficulties in recent years after at first appearing to withstand the financial crisis in relatively good shape, as new regulations and a series of hefty regulatory fines have weighed it down.

- Regulators' new demands -

"Most of Deutsche's current problems come from its investment banking arm," now "not profitable", said Jerome Legras, head of research at Axiom AI, pointing to high costs, legal entanglements and especially increased capital requirements under post-crisis regulations.

European banks which had been operating with very small capital reserves compared with American competitors suddenly had to set aside vast sums to meet regulators' new demands.

Deutsche had to increase its hard capital ratio to 12 percent from around 2.0 percent before the financial crisis.

Struggling to keep up with better-capitalised American competitors, Deutsche has lost market share, Legras said.

Beyond its regulatory struggles, Deutsche paid out more than 12.7 billion euros in fines between 2012 and 2015 over its roles in the sub-prime mortgage crisis, interest-rate fixing, and other legal breaches.

Meanwhile, low interest rates, fierce competition and low profits in home market Germany have kept its retail banking arm from being a reliable shock absorber for the investment bank.

Cryan has promised hard times ahead before things get better for Deutsche.

After he was named CEO in 2015, the bank reported a 6.8-billion-euro loss -- its first since 2008 -- in part due to high litigation costs and provisions for yet more legal risks.

The IMF labelled Deutsche "the most important net contributor to systemic risks in the global banking system," in a June study.

Until Deutsche is stronger, any criticism of the bank is likely to be met with outrage by German politicians keen to see it restored to glory.

Beyond criticising Gabriel, MPs in the Federal Republic have accused US regulators of launching a "trade war" as their fine demand against Deutsche came just weeks after the EU demanded $14.5 billion in back taxes from US tech giant Apple.