Against this opaque backdrop, Deutsche Bank seems to be tripping over its own toenails. I admit that during the financial crisis I was one of the few journalists who was critical of the good ship DB. I didn’t like the fact that shortly after Lehman’s collapse, Deutsche posted a surprise third-quarter profit by reclassifying some €25 billion of trading assets under new accounting rules. I also couldn’t understand how a house that had been so big in complex derivative products did not need to raise more capital – although Deutsche did eventually raise capital in late 2010 in association with the takeover of Deutsche Postbank.
During the past few months, a torrent of bad publicity has engulfed the German bank. Three former employees alleged to US regulators that Deutsche Bank traders, with the connivance of senior executives, failed to recognize up to $12 billion of paper losses during the financial crisis and that these "marks" helped the bank avoid a government bailout. Deutsche has insisted that such allegations are "wholly unfounded". Nevertheless, mud might stick. The Financial Times ran a ferocious analysis piece entitled: "Deutsche Bank: show of strength or a fiction?" The article concluded: "But the three former employees told the SEC that ... the allegations should [not] be forgotten. ‘If Lehman Brothers didn’t have to mark its books for six months it might still be in business,’ says one of the men. ‘And if Deutsche had marked its books it might have been in the same position as Lehman.’
The ink was barely dry on this article when the firm’s co-CEO, Jürgen Fitschen, and Stefan Krause, the CFO, were caught up in a tax-evasion probe. In mid-December, prosecutors raided various offices of Deutsche Bank and made five arrests in connection with conspiracy to avoid sales tax on trading of carbon-emission certificates.
Furthermore, an old lawsuit continues to haunt the bank: a civil case, brought by the heirs of media mogul Leo Kirch, claims that the bank cast doubt on Kirch Group’s financial health. According to the Financial Times Deutsche Bank has estimated that legal cases for which it has not yet made provisions could end up costing it more than €2.5 billion. That’s a lot of money. And of course, the bank still faces fines in connection with the Libor manipulation probe.
As if this were not enough, the bank also issued a profit warning in December stating that fourth-quarter earnings would be reduced because of valuation adjustments and restructuring charges.
Did I mention that 2012 was the year the penny finally dropped? "Investors will start to examine the quality of earnings and how sustainable they really are," a mole mused. "In an era of less leverage, greater regulatory scrutiny and higher capital requirements, will Deutsche’s earnings of the past few years be easily replicable?" The key questions are: what effect will all this have on Deutsche Bank’s share price, which has performed poorly this year, and, can Anshu Jain and Fitschen survive as co-chief executives of the bank? Last spring, Josef Ackermann stepped down as Deutsche’s chairman and was replaced by Paul Achleitner – the former Allianz head of group finance. In my December 2011 column, I was sceptical about this appointment. In other words, "A" following "A" might not equate to a triple-A rating.