Why Worry About Germany?

Photo by Ingo Joseph

The German financial giant Deutsche Bank now stands at the precipice of a merger with Commerzbank AG. As the Financial Times reports, the proposed merger would leave the mega-bank “with €1.8tn in assets and derivatives exposure of €361bn.” This deal would put Deutsche Bank in league with Wells Fargo and Bank of America which have a stated worth of $1.9tn and $2.1tn respectively. With complex and deep-running ties to dozens of nations, the United States included, the pending merger would make Deutsche Bank one of the largest financial institutions in the European Union. In an era where banks and investment firms are so large that the economic fallout from their failure can have disastrous global results, the implications of creating another such monolith are troubling to consider.

Despite being a German bank with comparatively little name recognition in the United States outside of the financial sector, Deutsche Bank maintains a commanding presence on Wall Street and has been involved in some of the greatest financial scandals of the 21st Century. In the lead up to the 2007-2008 global financial crisis, Deutsche Bank was one of the principle proprietors of collateralized debt obligations (CDOs) on Wall Street. The bank even went so far as to sell poor quality CDOs to investors at AAA prices while simultaneously betting against the subprime mortgage market in anticipation of its collapse. When the global economy went into recession in 2008, Deutsche Bank received over $11bn in US taxpayer money from the AIG bailout, despite having been one of the greatest perpetrators of volatile CDOs on Wall Street.

“In an era where banks and investment firms are so large that the economic fallout from their failure can have disastrous global results, the implications of creating another such monolith are troubling to consider.”

In 2011, Deutsche Bank and Goldman Sachs both featured prominently in a US Senate report on abuse of the financial market, specifically with regard to the trading of volatile subprime mortgages. The report found that in 2007, Deutsche Bank assembled a $1.1bn CDO fund known as Gemstone VII from a variety of junk bonds and low-quality assets. It then aggressively marketed this fund as a safe investment which promised high returns. By the end of that year, shares of Gemstone VII were virtually worthless. In 2017, Deutsche Bank agreed to pay $7.2bn to US investors over allegations of financial misconduct regarding mortgage-backed securities.

Deutsche Bank’s unscrupulous business practices doesn’t end there. Over the past few years, Deutsche Bank has been at the center of numerous allegations of global financial mismanagement, including crimes of aiding Russian oligarchs and handling financial transactions for North Korea. In 2015, Deutsche Bank agreed to pay $258 million in fines due to repeated sanctions violations with Iran, Syria, Sudan and other rogue states between 1999 and 2006. In November 2018, Deutsche Bank again found itself at the center of yet another investigation by the Federal Reserve, this time over an alleged $230bn money laundering scandal.

Despite the mountain of bad press against them, Deutsche Bank remains one of the key financial pillars of the European Union. Amidst the flurry of media coverage on the Mueller Report, the Deutsche Bank/Commerzbank merger has gotten comparatively little screen time. With such a monumental deal on the horizon, Deutsche Bank seems poised to grow even bigger, to the point that economic experts in Germany are worried that it may soon become the next ‘too big to fail’ bank, if it isn’t already. As the global economy continues to recover in the shadow of the 2008 Recession, the world is reminded of what happens when unscrupulous banks are allowed to operate unchecked and precisely what happens when they do become too big to fail.

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