NEW YORK (AFP) - Deutsche Bank is near a deal with US officials to slash a huge fine over its dealings prior to the 2008 financial crisis, a source said Friday, sparking a dramatic rally in the German giant's shares.
Stock in Germany's biggest lender closed at €11.57, up 6.39 per cent on Thursday's close after a flurry of last-minute buying activity following the news the bank had negotiated a much lower fine than expected with the US Department of Justice.
Deutsche Bank is close to settling the fine over its sales of toxic mortgage bonds transacted ahead of the financial crisis for US$5.4 billion (S$7.3 billion), well below the government's initial US$14 billion demand, a person familiar with the talks between Deutsche and the DoJ told AFP.
An agreement could be announced in the next couple of days, the source said. The final amount of settlement could also be slightly different.
Deutsche Bank and the DoJ declined to comment, as did the German finance ministry.
The bank's tumble as the Frankfurt stock market opened saw shares fall by more than 9 per cent at one point, hitting a historic low of €9.90.
This sparked fears that a banking meltdown reminiscent of the 2008 crisis was in the making, dragging other European banks and global markets down with it.
The rush to sell started after a group of hedge fund clients had cut their exposure to Deutsche Bank on Thursday.
Concern had been mounting all week over the DoJ demand and conflicting reports in German media on whether Berlin would come to the troubled bank's aid if necessary, which have sapped the bank's market valuation since Monday.
But by the afternoon a statement from Deutsche chief executive John Cryan lifted the mood on markets and saw the price move modestly back upwards, before a rush for the shares in the final minutes of trading in Frankfurt.
"At no time in the last two decades has Deutsche Bank been as safe as it is today," Cryan wrote in a memo to his staff, pointing to the bank's €215 billion (S$329 billion) in liquidity reserves, ongoing restructuring and a €1 billion operating profit in the first half.
The new total of US$5.4 billion is just shy of the total Deutsche has set aside in provisions for its thousands of outstanding legal actions, and "may make a rights issue more palatable and makes a government bailout much less likely," CMC Markets analyst Jasper Lawler wrote in a note.
Investors had been spooked by signs that Deutsche's "sophisticated clients are feeling the same twitchiness as investors," he went on, causing "a mass crisis of confidence."
Bloomberg News reported on Thursday that about 10 hedge funds that clear trades with Deutsche Bank withdrew some excess cash and derivatives holdings and moved the assets to other firms this week, citing an internal bank document.
AFP sources knowledgeable of the situation confirmed that 10 hedge funds had pulled funds out, including Millennium Partners, Capula Investment, and British fund Rokos Capital Management.
Bloomberg said that the "vast majority" of the bank's clients have made no changes to their exposure at the bank, a position echoed by Deutsche itself when it insisted that some 800 remaining customers trusted in its "stable financial position."
Deutsche has repeatedly said that it will not have to pay the full amount demanded by the DoJ over its role in the devastating subprime mortgage crisis, pointing to US banks that negotiated much lower settlements.
But investors feared that the fine could still be large enough to wipe out the US$5.5 billion in provisions the bank has set aside for legal entanglements.
The subprimes case is just one of 8,000 burdening Deutsche Bank, with an investigation by New York regulators over allegations of money laundering at its Moscow office looming on the horizon.
Deutsche was among the worst performers in a European Banking Authority stress test of large banks whose results were released in July, although Cryan insisted the exercise had demonstrated the institution's resilience to future crises.