The U.S. stages an election robbery and nearly triggers a panic.
How much money can the Obama Administration seize from banks before triggering a global financial panic? U.S. Department of Justice lawyers decided to find out by running a two-week experiment at Germany’s Deutsche Bank. The experiment appears to have ended on Friday, but not before Washington had ignited a run on one of the world’s largest financial institutions.
The government threat to Deutsche Bank’s safety and soundness began on Sept. 15. That’s when the Journal reported that Justice was demanding an eye-watering $14 billion to resolve an investigation of the bank’s sale of mortgage-backed securities prior to the 2008 financial panic.
Deutsche Bank then had to acknowledge the size of this government stick-up as its stock price proceeded to drop more than 20% in a fortnight. The lack of exuberance among investors was entirely rational. Washington’s proposed withdrawal represented most of the bank’s market capitalization.
Why announce this giant robbery now? Well, on Friday morning the Financial Times quoted two anonymous sources as saying Justice is seeking an “omnibus settlement” from Deutsche Bank, Barclays and Credit Suisse “to achieve maximum public impact by collecting an eye-catching sum in penalties” merely “weeks before the U.S. presidential election.”
The FT is often wrong, but we assume it didn’t make this up. And you don’t have to be a cynic to believe that this Administration would stage a bank raid that it could brag about to rev up voter enthusiasm among Bernie Sanders and Elizabeth Warren Democrats.
The problem is that the feds were creating the very systemic financial risk—aka “contagion”—that they claim to want to prevent. The public raid created so many doubts that major hedge funds began to flee Deutsche Bank amid uncertainty about its financial stability. The bank’s travails also called into question the strength of other European lenders, whose stock prices also fell.
Deutsche Bank CEO John Cryan had to write a letter assuring employees that despite “speculation in the media that a few of our hedge fund clients have reduced some activities with us,” the bank still had more than 20 million clients and strong fundamentals.
A crisis for the bank was averted when Agence France Press reported Friday that the U.S. government suddenly appeared willing to accept only $5.4 billion from Deutsche Bank, rather than the $14 billion it had been demanding. Not so coincidentally, the new settlement amount is roughly equal to the litigation reserves recently reported by the bank. The news appeared to quell the run, and Deutsche Bank shares rallied strongly.
To summarize this fiasco: The feds leak a giant settlement number of $14 billion against an already shaky European bank to make the Democrats look tough on banks only weeks before an election. But they misjudge the market reaction, and then quickly settle for less than half that amount when they realize they might end up toppling a giant bank and kicking off another global financial panic.
We’d sure like to see the phone and email communications between Treasury SecretaryJack Lew and Attorney General Loretta Lynch this week. Maybe Mr. Lew’s Financial Stability Oversight Council should investigate this case of government-induced systemic risk. He could bring in House Financial Services Chairman Jeb Hensarling as investigating counsel.
Notably missing here is any thought for proper justice in the creation of either settlement number. It all seems to have been an arbitrary political game. Justice lawyers have never even publicly stated what exactly Deutsche Bank is supposed to have done wrong. Does it even matter in Barack Obama’s Washington?