The German government is pursuing discreet talks with US authorities to help Deutsche Bank secure a swift settlement over the sale of toxic mortgage bonds, according to sources in Berlin.
Until now, German officials have played down their role in the standoff, saying it is up to Deutsche to work out a deal with the US Department of Justice (DOJ), which is demanding up to $14 bn to settle claims the lender mis-sold mortgage-backed securities before the financial crisis.
But government officials in Berlin, speaking on condition of anonymity, told Reuters they hoped to facilitate a quick deal that would buy Deutsche Bank time to regain its footing.
One senior government official told Reuters there was "contact at all levels" between German and American officials.
Another source said Finance Minister Wolfgang Schaeuble was not planning to meet DOJ officials during a trip to Washington this week for International Monetary Fund meetings, but added: "You can hold talks. It doesn't have to be the minister."
Deutsche has been engulfed in crisis since news of the $14bn US demand emerged last month. It is fighting the fine but could have to turn to investors for more money if it is imposed in full.
The resolution of the crisis through a reduced settlement is crucial for Chancellor Angela Merkel, who faces a federal election next year. It could be political poison for her government to rescue a bank that got into trouble through speculating. At the same time, officials recognise that Germany's biggest bank, which employs around 100,000 people, cannot be allowed to fail.
"Everyone knows the significance of the bank," said a third government official.
Berlin is hoping a near-term settlement well below the mooted $14bn will ease pressure on Deutsche Bank.
The first government official said the ideal solution for Germany in the longer term would be a merger between Deutsche and its smaller domestic rival Commerzbank, even if it would be better to wait several years until both banks were cleaned up before sealing such a deal.
Berlin has previously declined to comment on the topic of bank mergers. The official's comments about an all-German tie-up mirror the view of others in Berlin who spoke to Reuters on condition of anonymity, although it is unclear whether they represent official policy in the Chancellery.
"We are not Austria," the official said. "We are the biggest economy in the European Union, one of the world's leading exporters. We need a big bank with a European and international presence but which is anchored here in Germany."
The official added that merging Deutsche with a European rival was fine in principle but only if Germans controlled the combined entity.
Worries over a major bank in Europe's largest economy have stirred painful memories of the 2007-2009 financial crisis and sent tremors through global markets.
For Merkel, Deutsche's woes could hardly have flared up at a worse time. Her Christian Democrats are losing support to the far-right Alternative for Germany (AfD) and are at loggerheads with their Bavarian allies over migrant policy.
With her strength in a fractured post-Brexit European Union also sapped, the last thing Merkel needs in the run-up to the election is Deutsche turning to her government for help.
"Rescuing Deutsche Bank would not be popular," the senior government official said. "No government in the world ... wants to have to save banks before an election. But I don't believe this will be necessary."
The German Finance Ministry has denied it is working on a rescue plan for Deutsche. But government sources said it was crucial that trust was restored in the bank.
While this will take time and Deutsche's business model still needs work, agreeing a settlement with the DOJ would help alleviate the pressure on the bank, buying time for asset sales and possibly another capital hike.
Comments on Sunday from Economy Minister Sigmar Gabriel, a Social Democrat, accusing Deutsche of making speculation its business, were a signal that Merkel's opponents will not hesitate to use the Deutsche issue to score political points.
"The German government would face stiff opposition if it decided to help Deutsche Bank," said Joerg Rocholl, president of the ESMT business school in Berlin and member of an economic advisory board to the German finance ministry.
"I would expect opposition parties to seize on this in a massive way to question the credibility of the government in the run-up to the federal election next year," he added.
In an Emnid survey for Focus magazine on Saturday, 69 pc of those polled opposed state aid for the bank, with 24 pc] in favour. Lawmakers in Merkel's Christian Democrats (CDU) have said they do not want to see the government jump to Deutsche's aid.
"Deutsche Bank caused these problems itself," said Eckhard Rehberg, a budget expert in the CDU parliamentary party. "At the present time, I rule out capital assistance."
Complicating the calculus are new EU bail-in rules meant to shield taxpayers from shouldering the cost of failing banks. Germany pushed hard for rules that say investors and creditors representing 8 pc] of a bank's balance sheet must be tapped before there can be any government support.
As the German government considers its next moves, officials say that a number of previous cases involving European firms and US authorities are shaping its approach.
In pushing for a settlement with the US DOJ, Berlin is opting for a discreet approach, in part because it saw how France's aggressive public lobbying several years ago against a $9bn fine imposed on BNP Paribas for violating US sanctions against Iran, Cuba and Sudan seemed to backfire.
The lessons of the Volkswagen diesel emissions scandal have also left their mark. The Wolfsburg-based carmaker initially tried to resolve the costly dispute by dispatching lower level officials to negotiate with the United States.
When VW CEO Matthias Mueller finally addressed the issue during a visit to the Detroit car show in January, he stumbled during an English-language interview with NPR, attributing the scandal to a "technical problem" and denying the company had deliberately deceived.
The ensuing storm forced him into an embarrassing backtrack.
"I think it has been understood after the VW case, that you can't send third-level people. The chief must go himself," said the senior government official, referring to Deutsche CEO John Cryan, a Briton who will also be in Washington this week.
"The advantage in this instance is that he's a native speaker. This could help resolve this despite all the challenges," the official added. "VW gave the impression they weren't taking it seriously."
For Merkel, the case of German carmaker Opel, may also be influencing her thinking.
Back in 2009, in the months before she would run for a second term, she took the lead in trying to cobble together a controversial rescue of the Germany-based unit of US giant General Motors, only for it to later unravel. The lesson from that case: avoid government intervention unless it is absolutely necessary.