View from City Road: Bad penny for Deutsche Bank

Deutsche Bank hoped it had finally closed the book on the Metallgesellschaft fiasco but, unfortunately for Germany's largest bank, it is not being allowed to. Like a bad penny, it keeps on coming back.

A number of prominent US economists are going into press with learned articles on how Deutsche Bank made a bad situation infinitely worse by adopting a heavy-handed approach to the problem.

On another front, the sacked US head of Metallgesellschaft is taking Deutsche Bank to court with a claim for unfair dismissal, promising more revelations on how much the bank knew and when. As Deutsche Bank pushes ahead with plans for a big expansion into the US, this is the sort of publicity that it could well do without.

Deutsche's reputation is being darkened by a spate of detailed criticisms from the US economists of its handling of the Metallgesellschaft crisis. The main thrust is that Deutsche precipitated the disaster by closing off the complex oil hedging operation being pursued by Metallgesellschaft's US arm. If Deutsche had understood the market better, and left the positions alone, the theory goes, Metallgesellschaft might have survived.

A potentially more serious problem is that posed by the legal action being taken by the sacked head of Metallgesellschaft's American business. The trial, beginning in mid-October, is almost certain to expose much that Metallgesellschaft and Deutsche would rather keep to themselves.

The main question is how much Deutsche Bank knew about the oil trading Metallgesellschaft was embarking on. It is also unclear why Deutsche blocked Metallgesellschaft's access to a DM1.4bn international credit line at the height of its cash- flow problems. US regulations bar banks from involvement in activities such as oil trading, and Deutsche is believed to have signed a letter to the Federal Reserve Bank of New York to this effect.

Deutsche's close links with Metallgesellschaft suggest a potential for real problems here. It was, after all, Deutsche that hired Nancy Kropp, the oil trading specialist, to unwind Metallgesellschaft's positions. It seems improbable that Deutsche will end up losing its US banking licence; but the whole affair seems to add up to rather more than a costly embarrassment.