Deutsche Bank is in trouble, some of it its own making.  Its history is in many ways the history of big banks in the 20th going into the 21st century.  To sum up:

1.  About 25 years ago DEutsche Bank started its transformation from a small German lender to a global investment bank, trading bonds, currencies and commodities (FICC).

2. DB offered issuing of bonds, hedging of foreign exchange risks to its corporate clients, mostly mid sized colmpanies in Germany.

3.  Gobal markets gave DB a chance to speculate for its own account and DB shares traded at twice the vallue of tangible DB assets.

4.  The outsized FICC business becomes a liability andthe hgiher the ahreof cinome from trading, the lower the share price.

5.  European banks argue that they need a trading floor to serve corporated clients.

6.  Low interest rates and bond market stability make corporate clients less prone to juggle their accounts

7.  All the big banks have been subected to big fines including DB.

8.  Post recession regulation is a big drag on big banks.  Rules imposed on domestic lenders in the US will be extended to foreign banks.  Regulators in the US have called DB reprorting, “low quality, inacurate, and unreliable.

Jeff Gerth writes about papers Timothy Geithner, Obama’s first secretary of the treasury, wrote which has cropped up as part of an ongoing legal case concerning AIG and the bailout.  With the SEC focused on insider trading, which Geithner descibes as disgusting but not the cause of the financial crisis, and poor supervision of the various institutions that bundled subprime mortgages, the aftermath of the crisis has still not be dealt with.

Weak remarks from Wiliaim Dudley, head of the New York Fed which Geithner ran before he went to the White House, illustrate how ineffective supervision of Wall Street was and is.  Specific criticisms are summaried in Geithner’s notes.  Timothy Geithner Talks About the Financial Meltdown, Somewhat Frankly

Geithner’s points: Illegal stuff was hard to prove, supervision was weak. Government relief programs were tepid and corporate wrongdoers have not been punished.

Can the New York Federal Reserve supervise Wall Street?

The financial crisis could never have happened without the passivity of federal bank regulators. And no agency’s failure was more pivotal than that of the Fed, which had the authority to crack down on the abusive lending that drove the financial system and the economy over the cliff, but repeatedly failed to exercise it

The New York Fed is a key part of the Federal Reserve, acting as the on-the-ground supervisor of the major Wall Street banks. According to an internal New York Fed report, written in 2009 but revealed recently, bank supervisors in the pre-crisis years ”saw issues but did not respond,“ were not ”willing to stand up to banks and demand both information and action,“ and were excessively deferential to the banks they regulated.

Five years later, a whistleblower’s tape recordings reveal a disturbingly similar pattern of inappropriate deference to regulated banks. A still more recent official report adds fuel to the fire by criticizing the New York Fed for sloppy oversight of the JPMorgan Chase office responsible for the $6.2 billion “London Whale” disaster.

Deutsche Bank, Germany’s largest, reported a net loss of 92 million euros, or about $117 million, compared with a profit of €51 million in the third quarter of 2013. Profit in the quarter had been expected to suffer after Deutsche Bank said last week that it had set aside an additional €894 million to cover legal costs.

The loss provides another reminder that Deutsche Bank and other large investment banks are still preoccupied with addressing the excesses associated with the financial crisis, as well as with increasing demands from regulators intent on curbing risk-taking by banks.

“It’s very clear that litigation legacy, coping with all of that, has proven to be more challenging for us and the industry than we would have thought,” Mr. Jain said on a conference call with analysts on Wednesday.

The bank is facing investigations over its role in the potential manipulation of global benchmark interest rates and inquiries into foreign exchange trading.

It is also facing lawsuits over mortgage-based securities sold in the US before the financial crisis.   Along with money set aside in previous quarters, Deutsche Bank has stockpiled a total of about €3 billion to cover potential litigation costs.

Mr. Fitschen and several former bank leaders are also facing criminal charges of colluding to give false testimony in a long-running lawsuit over the collapse of a bank client’s media empire.  In addition to legal issues, the chief executives said, headwinds include a slowing European economy and geopolitical risks, a reference to tension with Russia and fighting in the Middle East.

Deutsche Bank and its peers face increased scrutiny from regulators who are seeking to prevent future financial crises. The ECB  has already demanded more information than in the past, prompting many banks to invest in better information technology.

Deutsche Bank easily passed stress tests carried out by the ECB.  They have also actively increased equity.   But Deutsche Bank continues to face criticism that it is overly dependent on borrowed money.

The European Commission on fined four major financial institutions 93.9 million euros, or about $120 million, over two types of activity that it deemed as cartel behavior.

In one case, the European Commission fined JPMorganChase 61.7 million eurosion  for manipulating the Swiss franc Libor benchmark interest rate in an “illegal bilateral cartel” with the Royal Bank of Scotland. R.B.S., however, was granted immunity and avoided a fine of €110 million after it revealed the existence of the cartel to the commission.

“Anti-cartel enforcement is a top priority for the commission and no sector is exempt, including the financial sector,” the European Union said in a statement.

Several House Democrats say they fear Wall Street is using confidentiality agreements to keep people from blowing the whistle on misconduct.  Eight House Democrats sent a letter Monday urging the Securities and Exchange Commission (SEC) to send a “strong message” that such agreements won’t be tolerated and consider “bringing enforcement actions if necessary.” “While there are legitimate reasons for companies to use confidentiality agreements to protect sensitive information, such agreements should be structured as narrowly as possible,” wrote the lawmakers. “Employees should also be clearly informed that these agreements in no way restrict their right to voluntarily report securities law violations to the Commission.”

The 2010 Wall Street Reform Law, commonly referred to as Dodd-Frank, created the Office of the Whistleblower Protection within the SEC to try to encourage people to step forward with information about wrongdoing in the financial sector.  The lawmakers said the office has seen success, and are concerned that those gains could be jeopardized by the confidentiality agreements.

“We are also concerned by a growing body of anecdotal evidence describing retaliation through litigation and on-the-job harassment, which if left unaddressed, will also deter future reporting of securities violations,” they wrote.

David Shilpley writes:  The European Central Bank has just published the results of new “stress tests” on European Union banks, hoping to convince financial markets that the banking system is now strong enough to weather another crisis. This latest exercise is a big improvement over previous efforts, which were widely derided as too soft — but it’s still not good enough.

The test was in two parts.  One found that most of the over 130 banks had overvalued their assets.  The second part assessed whether the correct value of the assets kept the banks in a safety zone.  25 failed the test.  8 needed to raise 6.4 billion dollars.

Deutsche Bank raised 8.5 billion in equity this year to help them pass the stress test. Weak institutions, such as Portugal’s Banco Espirito Santo and Austria’s Volksbanken network, are restructuring or shutting down. By strengthening the system and increasing confidence in it, the ECB’s tests might reverse a two-year slump in private-sector lending.

The tests are pretty soft. Economists at Switzerland’s Center for Risk Management at Lausanne put the capital shortfall at 500 billion euros, not the 6.8 billiioin put forward by the ECB.  Of course, the ECB takes over as the euro areas’s supernational bank supervisor on November 4.  If it had been too tough it might have blown the euro back into crisis.

Economists like Anat Admati would rather have the percentage of equity determine a bank’s ability to withstand stress.

How DId the Bank Pass the Stress Test with So LIttle Cash?