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Deutsche Bank May Take More Heat From Regulators This Summer: DealBook Briefing

Credit...Daniel Roland/Agence France-Presse — Getty Images

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Here’s what we’re watching:

• How Warren Buffett failed to grab a $3 billion slice of Uber.

• White House will impose metal tariffs on Europe, Canada and Mexico.

• More headaches for Deutsche Bank.

• Why C.E.O.s should pay attention to the way Dick’s weathered its gun-sales ban.

• The reasons Italy is now calm after its storm.

Deutsche Bank’s difficulties with United States regulators could become even worse in the coming weeks.

The giant German lender, which has a significant presence in the U.S., has run afoul of both the Federal Reserve and the Federal Deposit Insurance Corp., according to news reports. The Fed, according to The Wall Street Journal, last year judged Deutsche Bank’s U.S. operations to be in a “troubled condition.” Also on Thursday, The Financial Times reported that the bank was on the F.D.I.C.’s list of “problem banks.”

The Fed’s censure, according to the Journal, stemmed from concerns about Deutsche Bank’s procedures for measuring its exposure to its clients and for valuing the collateral backing its loans. Regulators require efficient and accurate controls so that banks can assess their financial strength and the risks they face, especially through difficult times in the economy.

Subpar controls could hamper Deutsche Bank’s ability to pass two crucial upcoming tests in the U.S.

The first is the Fed’s stress tests, which are used to determine whether large banks can survive a severe economic downturn. Until now, only Deutsche Bank’s small U.S. trust bank had gone through the tests – and even that failed. Commenting on the 2016 test, the Fed slammed the subsidiary for continuing “to have material unresolved supervisory issues that critically undermine its capital planning process.” The entity did not get tested last year because of a rule change.

But this year, effectively all of Deutsche Bank’s operations in the U.S., including its substantial Wall Street operations, will be subject to a public stress test (the operations went through a confidential test last year.) If the issues with controls that afflicted the small trust bank exist in the trading business, Deutsche Bank could fall short on the test.

Banks can also effectively fail the stress tests if they cannot make it through the hypothetical turbulence with adequate equity capital. Regulatory filings show that, at the end of last year, Deutsche’s U.S. operations had $7.3 billion of equity supporting $148 billion of assets. The stress tests, scheduled for next month, will reveal if that equity is sufficient for the storm.

But Deutsche Bank, along with several other large foreign banks, faces another tough challenge. By July 1, the banks have to file a detailed plan with regulators that lays out how they would wind themselves down in a bankruptcy-type scenario. Regulators require such plans because they want to be able to shut down troubled banks while minimizing the chaos and confusion that characterized the 2008 financial crisis. These plans can be difficult to get right, particularly for banks with shoddy controls.

What if Deutsche Bank fares badly in these tests? Pressure would mount on the bank’s management to take bold steps to offload unprofitable operations and assets, which in turn could force the bank to recognize stinging losses. But investors appear to be bracing for the pain. Deutsche Bank’s shares are down more than 40 percent this year and trade at less than a third of the bank’s book value per share.

- Peter Eavis

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Masa Son, the founder of SoftBank.Credit...Kazuhiro Nogi/Agence France-Presse — Getty Images

Masayoshi Son’s grand plan for SoftBank’s $100 billion Vision Fund was audacious: Own pieces of all the companies in a wide range of sectors — transportation, food, work, medicine and finance — that may underpin the global shifts brought on by artificial intelligence.

So far many of the biggest wagers have been on transportation.

The fund announced plans Thursday to invest $2.25 billion in General Motors’ driverless-technology division to help the automaker ramp up a ride-hailing service and other new businesses.

The investment in G.M. Cruise is just the latest in the companies and technologies rapidly transforming the auto industry.

Before GM Cruise, its last investment directly into an autonomous driving start-up was last year, when it co-led a financing round for Nauto, a maker of sensors for autonomous vehicles.

So far ride-hailing has been a major focus. SoftBank and the Vision Fund have poured money into Uber and its rivals, like Didi Chuxing in China and Ola in India. SoftBank has also invested in Brazil’s 99 and Singapore’s Grab.

The investments go beyond just ride-hailing start-ups. SoftBank also bought ARM and invested in Nvidia, semiconductor companies that are making chips for self-driving cars.

There have also been investments in Auto1, a German car dealer service, and Mapbox, a mapping start-up.

The Japanese tech company is using money from its Vision Fund to grab a slice of the driverless car firm GM Cruise. As part of the deal, G.M. will also invest a further $1.1 billion into its driverless car unit when the transaction is complete. G.M. acquired Cruise in March 2016.

Michael Ronen, managing partner at SoftBank Investment Advisers, said in a statement that he was “very impressed by the advances made by the Cruise and G.M. teams.” He also said, “the G.M. Cruise approach of a fully integrated hardware and software stack gives it a unique competitive advantage.”

While G.M. Cruise’s cars make the headlines less frequently than those belonging to Waymo and Uber, the unit is well ahead of most other companies when it comes to testing vehicles — at least in California, where organizations are required to provide statistics about their self-driving car trials. In the state, G.M. Cruise is second to Waymo in terms of miles driven last year; last year, it clocked up around 130,000 autonomous miles, while Waymo covered around 350,000 miles.

It also appears to be second in the state in terms of performance, based on the number of times a driver had to take over from the robotic vehicle. G.M. Cruise drivers had to take control once every 1,300 miles, while Waymo’s drivers intervened just once every 5,600.

The question: Is second place to Waymo good enough to seize a respectable slice of the autonomous car market?

— Jamie Condliffe

The Trump administration announced a 25 percent tariff on steel and a 10 percent tariff on aluminum from the European Union, Canada and Mexico, which supply nearly half of America’s imported metal, will go into effect at midnight Thursday.

Those countries had secured temporary exemptions to the initial metal tariffs, which were announced in late March. Wilbur Ross, the commerce secretary, said that while discussions with the Europeans had been ongoing, the progress had not warranted either another temporary exemption or a permanent exemption.

More from Ana Swanson of the NYT:

The tariffs are meant to make good on President Trump’s longstanding promises to protect American industry. But they have prompted a fierce response from allies, who have already readied lists of American products they plan to tax in return, as well as American businesses that use steel and aluminum, which are seeing their costs rise as a result of the measure.

Opposition from an unusual source

The tariffs drew the opposition of the Koch brothers’ political network, one of the most powerful in conservative politics. Though known for its advocacy of conservative causes, the Kochs’ approach has generally tended toward more libertarian, deregulatory ends — and tariffs run counter to that.

From a statement by a Koch spokesman to CNBC:

Trade wars hurt everyone. They trigger retaliatory tariffs from our trade partners and that raises prices on American families who need affordable access to household goods. We urge the Trump administration to abandon these tariffs

It wasn’t just President Trump’s plan to slap tariffs on metal imported from the E.U., Canada and Mexico. While the White House has considered putting tariffs on imported cars, a report from a German business magazine suggested that the president wanted to go much further.

According to WirtschaftesWoche, Mr. Trump reportedly told President Emmanuel Macron of France that he intended to push German car imports out of the U.S. What that actually means isn’t clear; WirtschaftesWoche reported that Mr. Trump said he didn’t want Mercedes Benz cars rolling down Fifth Avenue.

What has been previously reported is that the Trump administration is weighing a 25 percent tariff on imported cars, citing national security concerns. Such a move could affect Germany’s auto industry in particular, given that it’s the biggest European exporter of cars to the U.S. (Both Daimler and Volkswagen have big factories in the U.S. as well.)

Whether the report is accurate, shares in Daimler and Volkswagen fell after the magazine article went up on Thursday, declining about 2 percent.

Federal prosecutors charged a vice president at Goldman Sachs with six counts of securities fraud and one count of conspiracy to commit securities fraud on Thursday.

Prosecutors said Woojae “Steve” Jung — who is Korean and attended Seoul National University before moving to the United States, according to his LinkedIn profile — made the trades in a brokerage account opened at Interactive Brokers in the name of a friend in South Korea.

Prosecutors said he earned illicit profits of just over $130,000.

Mr. Jung specialized in technology, media and telecommunications deals, according to his LinkedIn profile. The trades he allegedly made were in the shares of companies involved in deals that Goldman was working on, such as Western Digital’s 2015 acquisition of hardware company SanDisk.

Shares of Germany’s biggest bank are down 5 percent after reports from the WSJ and the FT that regulators have concerns about Deutsche Bank’s U.S. business.

The Federal Reserve designated Deutsche Bank’s U.S. subsidiary in “troubled condition” a year ago, the WSJ reported. The Fed’s action caused the Federal Deposit Insurance Corp. to recently downgrade Deutsche Bank Trust Company Americas, the bank’s F.D.I.C. insured business, to its “Problem Banks” list.

The news comes as Deutsche Bank shakes up its business to move past the turmoil that has plagued the lender. In April, Deutsche Bank named Christian Sewing C.E.O., the fourth person in four years to hold the title of chief executive or co-chief executive. Since taking over, Mr. Sewing has said the bank will focus on Europe and shrink its operations in the U.S. and Asia. He also has said the bank will cut 7,000 jobs and “significantly reshape” its sales and trading business.

As the embattled retailer continues to struggle with its turnaround efforts, its first-quarter results show that its financial picture is getting cloudier — and that Eddie Lampert, the company’s C.E.O., has less room to maneuver.

The main points

• The company lost $3.93 per share in the quarter ended May 5, compared to a $2.28 per-share profit a year ago. Revenue slid to $2.9 billion in the quarter.

• Same-store sales, a widely used retailer metric, fell 11.9 percent.

• It will close another 72 underperforming stores.

• The company had $466 million in cash and roughly $641 million in available credit as of May 5.

The big issue

Sears has a precarious cash position. While the company repaid some of its debt due next year, it still has more debt coming due in October of 2019. And overall it still has $3.8 billion in long-term debt that it must settle at some point.

Sears has already said that it will explore several strategic options, including potentially selling — sorry, “exploring third-party partnerships involving” — businesses like its Kenmore appliances brand and its home services unit. (Mr. Lampert has already offered to buy them.) The company has also pointed to some business initiatives, including business partnerships with Citigroup (a revised, co-branded credit card) and Amazon.com (tire installation) that are expected to bring in more cash.

But such efforts seem unlikely to counter its debts, and Thursday’s results are unlikely to silence the whisperings of more financial troubles ahead.

— Michael de la Merced

The Fed has proposed relaxing the Volcker Rule, which restricts the risks banks can take when trading. They will no longer have to show how each of their trades would benefit customers or hedge risks, reopening a wider range of bets on derivatives and other financial products.

It’s part of a slow but steady removal of Obama-era limits placed on Wall Street — and a move that bank C.E.O.s like JPMorgan Chase’s Jamie Dimon had long pushed for. But critics like Senator Elizabeth Warren have warned that it could reintroduce a Wild West mentality on Wall Street, and potentially leave taxpayers on the hook if banks make poor decisions.

Paul Volcker himself has supported simplifying the rule — so long as the basic principle of no public bailouts for banks’ risky trades remained.

Peter Eavis’s take: The public can only hope that the people overseeing the big banks are up to their jobs.

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Warren BuffettCredit...Rick Wilking/Reuters

Berkshire Hathaway offered a financial lifeline to the ride-hailing company earlier this year, according to Bloomberg. More from Eric Newcomer and Olivia Zaleski:

Buffett would have effectively lent Uber his sterling reputation, along with some capital, in exchange for cushy deal terms. Under the proposed agreement, Berkshire Hathaway would have provided a convertible loan to Uber that would have protected Buffett’s investment should Uber hit financial straits, while providing significant upside if Uber continued to grow in value.

Uber’s C.E.O., Dara Khosrowshahi, reportedly suggested a smaller $2 billion deal, but the two sides couldn’t agree on terms.

Andrew’s take: It’s hard to see how the two could have ever reached a deal. Mr. Buffett would only make an investment that came with a lot of strings to guarantee himself an outsized return. Uber may be desperate, but it isn’t that desperate — at least not yet.

More Uber news: The company says it’s on track for a 2019 I.P.O. And it’s trying to convince Waymo to add its autonomous cars to the Uber network.

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Credit...Robyn Beck/Agence France-Presse — Getty Images

The retailer’s first-quarter sales far exceeded expectations, after it stopped offering assault-style rifles earlier this year.

Its success didn’t just arise from that decision: gun sales were always a small part of revenues, short sellers were forced to cover their bets, and Dick’s improved its overall business. But the C.E.O. said that gun-control advocates who decided to buy more from its stores had undoubtedly helped.

Andrew’s take: C.E.O.s around the country waiting to take a stance on guns, but worried that it might hurt their bottom line, should take note.

• President Trump said drug companies would voluntarily cut prices next month. The industry seemed surprised. (Politico)

• The financier Glenn Hutchins has gone from Silicon Valley investor to central banking power player. (Bloomberg)

• California’s Senate approved a bill to reinstate net neutrality. (The Verge)

• Brussels plans a multibillion-euro bailout fund to help E.U. countries weather shocks. (FT)

• Lawyers for Michael Cohen have two weeks to review evidence seized by a federal raid on his office and hotel room. (NYT)

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Credit...Lukas Schulze/Getty Images

The Trump administration failed to negotiate permanent exemptions on imported metal tariffs for the E.U., Canada and Mexico. So now the president is ready to slap levies on their steel and aluminum, as soon as tomorrow. (The White House had hoped the threat of tariffs would bring trade concessions, but it only hardened allies’ opposition.)

More from William Mauldin, Bojan Pancevski and Vivian Salama of the WSJ:

European officials have said they plan to swiftly impose levies against as much as €2.8 billion ($3.3 billion) in U.S. exports under a rule at the World Trade Organization that allows members to punish a country immediately for inappropriately seeking a “safeguard” against their exports.

Critics’ corner: Greg Ip of the WSJ says President Trump is doing protectionism wrong. Karl Rove urged the White House to play a longer game on trade.

Elsewhere in trade

• The White House’s trade negotiators with China continued their public arguments.

Beijing proposed loosening trade restrictions ahead of further talks.

• Toyota’s best-selling model in the U.S., the RAV4, is vulnerable to potential tariffs on imported cars.

The next big financial crisis apparently didn’t last long. Stock markets and the euro largely returned to normal yesterday, as the threat of Italian political turmoil, including new elections, seemed to abate.

What gives? James Mackintosh of the WSJ has three explanations: Europe’s economies are more resilient than when the Greek crisis hit in 2012; investors elsewhere thought the risks weren’t that big; or, most troublesome, investors are complacent about the dangers Italy poses.

The bottom line: UBS Wealth Management’s chief economist Paul Donovan has some sage advice: “Take a deep breath and calm down.”

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Shari RedstoneCredit...Mike Cohen for The New York Times

• The Redstones’ ultimate goal in pushing for a merger of CBS and Viacom: selling the combined company. (Heard on the Street)

• Disney and Fox investors will vote on their $52.4 billion deal on July 10. Lex says Rupert Murdoch is making a shrewd bet.

• Allergan plans to sell its women’s health and infectious disease units, to appease restless shareholders. (WSJ)

• Tencent has hired Goldman Sachs, Morgan Stanley and Bank of America Merrill Lynch to lead the I.P.O. of its music business. (FT)

• Goldman is said to be developing an app to help clients assess how vulnerable they are to activist investors. (Bloomberg)

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Brian Chesky, Airbnb’s C.E.O.Credit...Adam Jourdan/Reuters

The company had planned to merge its China operations with a local rival, Tujia. Then its C.E.O., Brian Chesky, decided it would do better going on alone. More details from Bloomberg:

It was Chesky who pulled the plug, these people say. He worried that Airbnb would lose control of its carefully curated brand, they say. One investor likened Chesky’s attitude to someone who couldn’t commit to a long-term relationship.

Investors are still unhappy about the move, as it means Airbnb continues to burn cash in China.

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Crown Prince Mohammed bin Salman of Saudi Arabia, center.Credit...Tasneem Alsultan for The New York Times

• Cambridge Analytica’s parent company helped shape Saudi Arabia’s reform movement. (NYT)

• Commerce Secretary Wilbur Ross says the E.U.’s new G.D.P.R. data privacy laws could hurt trade. How about an American alternative?

• Tesla sent out a software fix to improve its Model 3’s braking. It worked. (NYT)

• China now has nine of the world’s biggest internet companies, according to the venture capitalist Mary Meeker. (Kleiner Perkins)

• A shift to electric vehicles could lead to a global fuel tax shortfall of $92 billion. (FT)

• Bank of America’s hedge-fund services unit has lost at least six employees. (FT)

• Former Republican congressman Charlie Dent is joining the law firm DLA Piper as a senior policy adviser. (Politico)

• The P.R. firm Sard Verbinnen has hired Miriam Sapiro, a former U.S. deputy trade representative, and Bruce Haynes, a veteran Washington communications executive, to lead its new Washington practice. (Sard Verbinnen)

• Bill Gross is having a no good, very bad year. (NYT)

• Walmart said it would pay for its workers to earn college degrees. (NYT)

• It’s getting more expensive for corporations to say, “I’m sorry.” (WSJ)

• Stockton, Calif., looks set to be the first U.S. city to test a universal basic income. (NYT)

• Deutsche Bank insists that it’s committed to the U.S., even as it plans huge staff cuts there. (Bloomberg)

We’d love your feedback. Please email thoughts and suggestions to bizday@nytimes.com.

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