It is governments who make and break the banks

There is trouble in Germany’s largest bank. Deutsche Bank’s shares are taking a hiding, down 17% in the last week and a colossal 60% and counting in the last 12 months. The catalyst of the most recent sell-off was the September 16th announcement that the US Department of Justice is asking for $14 billion to settle their investigation into residential mortgage-backed securities traded by Deutsche in the years leading up to the financial crisis of 2008. Deutsche has been in dire straits for some time and we predicted the crisis back in August, though the ludicrous fine slapped on the bank has somewhat accelerated events.

Today, Bloomberg carries an article titled “Ten People Who Will Be Key in Deciding Deutsche Bank’s Future”, which deals with the brewing crisis. Of course, two of those people are the bank’s Chairman Paul Achleitner and CEO John Cryan. But who are the other eight to make the list? It could be other key Deutsche employees, or maybe an industry partner who could help Deutsche ride out the storm by backing up their liquidity. Or it could be a potential “white knight” investor, who could eliminate fears about the bank’s solvency by offering a significant cash injection, like Warren Buffett did with Goldman Sachs just after Lehman Brothers collapsed in 2008.

But no-one like that makes the list. Instead, the remaining eight places are taken by politicians and bureaucrats. In addition to Bill Baer, the Assistant Attorney General for the DoJ and German Chancellor Angela Merkel, there are spaces for Germany’s Finance Minister Wolfgang Schauble; European Central Bank chief Mario Draghi; the chair of the European Central Bank’s Supervisory Board Daniele Nouy; the chairwoman of the EU’s Single Resolution Board Elke Koenig, president of BaFin, Germany’s financial markets regulator, Felix Hufeld; and EU Competition Commissioner Margrethe Vestager.

Bloomberg is of course correct in their analysis; it is indeed governments who are in charge. It is the US DoJ who will determine the final size of the fine threatening to sink Deutsche, it is the German Finance Minister and Chancellor who will (against all they have previously stood for) want to use public funds to save the bank if it comes to that, and it is the myriad of public bureaucrats, most of them EU personnel, who will be in charge of the practicalities. It serves as a reminder that when people claim the financial crisis was a failure of capitalism, they could not be more wrong. Banks operate in the most regulated industry in the world. It is not free markets, but bureaucrats and politicians, who decide their fate; from telling them how to run their business to saving them if the rules they created turn out not to work after all.

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