This week financial regulation achieved a home goal.
Following the 2008 financial crisis, regulators have become keen to sweep up previous banking sector misdemeanours and send out a message for future rule-breakers.
But punishing a bank to the point it could collapse and return global markets to a Lehman Brothers-style pandemonium isn’t supposed to be with a regulators terms of reference.
Yet that is what, at the brink, happened this week with Germany’s biggest commercial lender, Deutsche Bank (NYSE:DB) after US regulators fined the bank $14bn and the defendant said it would defy to pay up.
The bank’s shares hit a 1983 record-low on Thursday in Europe as the standoff with Berlin continued. The German government, sensing how expensive and unpopular a bailout promise would be, has shied away from making any promises.
DB’s market value was below $17bn as of Thursday's close – barely enough to cover the fine let alone operate a global banking operation.
The bank’s CEO even rather capriciously accused financial markets in a staff letter of being “out to get us”.
But, almost miraculously, the shares hit back on Friday. In Frankfurt, they closed up 6.4% at 11.57 euros. Even more impressively, in New York they were heading for a 14% advance of $13.06.
It appears that regulators in Washington have paused for breath following a zealous fine. And pundits might have seen this coming – the regulators are about to scale back the fine in the interests of the global financial system.
Deutsche Bank shares leapt on Friday on a French news agency report that the bank was near a settlement with the US Department of Justice. AFP reported that DB is close to a $5.4bln settlement with the Justice Department over mortgage bonds. That would represent nearly a two-thirds reduction on the original fine.
But if the number was correct, under German capital market rules Deutsche Bank would be required to confirm the amount by now. Its failure to do so indicates the number is not correct.
The capital market rules say the bank would have to react almost immediately to a report on such a settlement. That's why two weeks ago, after The Wall Street Journal reported on the initial $14-billion figure, Deutsche Bank quickly put out a release confirming the news.
The figure of $5.4bn is also potentially pie in the sky. As of June 30, Deutsche Bank said it had 5.5bn euros ($6.17bn) in litigation reserves, according to a presentation the bank gave during quarterly earnings. A reduced fine would therefore be snugly inside that bracket.
While the figure may be in dispute there is no doubt that regulators have seen the original fine as unpractical and are back at work determining a more suitable settlement that would be enforced and without causing a bank meltdown.
Will Oracle boost its NetSuite bid?
While there is talk of fines coming down, there is talk of bids going up.
Specifically, word is out that Oracle (NYSE:ORCL) which is keen to snap up enterprise cloud app operations NetSuite (NYSE:N) may be poised to up its bid for the firm.
In late July, as Proactiveinvestors reported, Oracle made a $9.3bn $109-per-share offer for NetSuite following weeks of speculation. But now NetSuite faces a shareholder revolt.
The second-biggest shareholder T Rowe Price (NASDAQ:TROW) isn’t happy about what it seems as potential conflict of interest in the deal and wants to exact a higher bid from Oracle, which just could happen.
From the start, the all-cash deal has faced conflict-of-interest questions due to the fact that Oracle chairman Larry Ellison directly or indirectly controls about 45% of NetSuite's shares and, per NetSuite's filings, has "control over approval of significant corporate transactions."
The companies have tried to deflect such questions by stating that the deal was unanimously approved by "a Special Committee of Oracle's Board of Directors consisting solely of independent directors," and that a majority of NetSuite shares not owned by management, directors, or entities affiliated with Ellison will have to be tendered for the deal to close.
That hasn’t impressed T.Rowe Price which suggested that "the inherent conflicts of interest between NetSuite, the Ellison entities, and Oracle are daunting and may be impossible to manage."
although Oracle is paying a 44% premium relative to where NetSuite traded before the first acquisition rumours surfaced, T. Rowe Price believes the acquisition price doesn't account for the synergies an Oracle-NetSuite deal provides. It adds that NetSuite is being sold at a discount to the valuation given to cloud HR and financials software leader Workday (NYSE:WDAY) .
Media reports further suggest that a smaller investor, Brown Advisory, which has a 3.8% stake in NetSuite, also now opposes the deal.
With Oracle's tender offer set to expire on October 6, there's now a real possibility a majority of NetSuite shares not controlled by Ellison, management or board members won't be tendered.
NetSuite shares closed up 0.8% at $110.69. Oracle ended up 0.4% at $39.28.