Posted on 10/05/2016 10:32:51 AM PDT by Lorianne
This is getting to be a habit. Previous late summer holidays by this correspondent coincided with the run on Northern Rock, and subsequently with the failure of Lehman Brothers. So the final crawl towards the probable nationalisation of Deutsche Bank came as no particular surprise this year, but it is tiresome to relate nevertheless.
The 2015 annual report for Deutsche Bank runs to some 448 pages, so one rather doubts if even its CEO, John Cryan, has read it all, or has a complete grasp of, for example, its €42 trillion in total notional derivatives exposure.
Is Deutsche Bank technically insolvent? We’d suggest that it probably is, but we have no dog in the fight, having never either owned banks, or shorted them. And like everybody else we assume that some kind of fix will soon be in – probably one that will further vindicate exposure to gold, both as money substitute and currency substitute. Professor Kevin Dowd, asking whether Deutsche Bank ist kaputt, suggests that the bank’s derivatives exposure is difficult to assess rationally; the value of its derivatives book
“is unreliable because many of its derivatives are valued using unreliable methods. Like many banks, Deutsche uses a three-level hierarchy to report the fair values of its assets. The most reliable, Level 1, applies to traded assets and fair-values them at their market prices. Level 2 assets (such as mortgage-backed securities) are not traded on open markets and are fair-valued using models calibrated to observable inputs such as other market prices. The murkiest, Level 3, applies to the most esoteric instruments (such as the more complex/illiquid Credit Default Swaps and Collateralized Debt Obligations) that are fair-valued using models not calibrated to market data – in practice, mark-to- myth. The scope for error and abuse is too obvious to need spelling out.”
[As Compass Point’s Charles Peabody exclaims “I defy any analyst to tell me what that {derivative} portoflio is worth.”]
Watching ‘The Big Short’ again over the weekend, it seems as much like the shape of things to come as a witty, if poignant, documentary about a historic failure of common sense. Nobody learns anything. It is eight years since Lehman Brothers failed, and the financial system, especially in Europe, would seem to be in no better shape now than it was back then, going by the health of some of the region’s major banks, and also Barclays. This also means that of this correspondent’s quarter century career to date in asset management, at least a third of that period, and probably closer to a half, has seen the industry in a state of acute crisis. The universal onset of crisis fatigue amongst market participants may, then, account for the mood of general complacency that has so far accompanied Deutsche Bank’s slide towards insolvency if not yet outright irrelevance.
“Never let a good crisis go to waste,” Winston Churchill allegedly said. But Europe, for one, squandered all of those eight years. This is just one of many reasons why we voted Out. With luck the UK will manage to extricate itself from the EU chamber of horrors before the roof finally falls in.
On the fifth anniversary of Lehman Brothers’ bankruptcy, itself six months after the bail-out of Bear Stearns cited in the transcript above, Michael Lewis, author of the original ‘Big Short’, was asked in an interview with Bloomberg BusinessWeek whether he thought the company had been unfairly singled out when it was allowed to fail (given that every other investment bank would then be quickly rescued, courtesy of the US taxpayer).
His response:
“Lehman Brothers was the only one that experienced justice. They should’ve all been left to the mercy of the marketplace. I don’t feel, oh, how sad that Lehman went down. I feel, how sad that Goldman Sachs and Morgan Stanley didn’t follow. I would’ve liked to have seen the crisis play itself out more. The problem is, we would’ve all paid the price. It’s a close call, but I think the long-term effects would’ve been better.”
We happen to agree… and it appears so do the professionals… (See CDS chart above)
Unwind it then.
Any org dealing in “derivatives” should NEVER be bailed out. Hit ‘em at the waterline with full fire power.
Zu groß zum Scheitern
Maybe Greece can bail them out.....
Does anyone know the net worth of the bank’s derivatives?
5.56mm
Seems like the rest of the story is contained in the missing 218 pages. /sarc
When I was actively investing I avoided dealing with banks whenever possible. At one time I wanted to build a bond ladder so I talked to BOA.
After looking at the numbers it would have been two years before I saw a return, Fees. After that my return would have been reduced 1%, fees.
666?
Maybe they can get a loan from Greece?
Take in more radical Islamic welfare cases to strengthen the German financial sector and let us know how that worked out for you.
(all figures glimpsed somewhere on the internet - sorry not to be a better source).
The Gross Notional value of DB’s derivatives is about 70 trillion.
The amount at-risk is about 48 Billion.
The 48 Billion is (as I understand it) the amount DB could actually lose on its derivatives, and is the more realistic figure. Also: this figure may be an underestimate: the at-risk may be as high as 100B.
DB currently has a market cap of about 16 Billion. It can’t obviously afford much of a move on its derivatives (and that doesn’t take into account any other bad assets).
Note that DB is only in this mess because Baffin forces it to account properly. Certain US banks are in a similar state, but have received legal waivers allowing them to ignore GAAP rules of accounting.
normal retail banks are very useful. but very fragile things.
their business model relies on lending out other people’s money (deposit funds)
AND hoping that not TOO many of them will ask for their money back all at once
(the so-called 3 or 5 percent “reserve requirement” is intended to, hopefully, cover “normal” withdrawl requests, check=writing, etc.)
-———————so having a ‘reserve bank’ to back up the normal retail banks... makes some sense
xxxxxx
what does NOT make ANY sense at ALL is permitting normal retail banks to (vastly) increase their riskiness, their instability...by letting them “invest” or speculate in highly-risky (and highly leveraged) stocks or “derivative” vehicles, etc and etc.
when the nearly-inevitable happens and at least one or a few big banks go down the rat hole (it only takes one bad day of “investment” trading, and while huge losses CAN be suffered due to bank incompetence or malfeasance, huge losses can also be suffered due to outside (market) circumstances beyond the bank’s control
guess who gets to pick up the pieces then? (cover, pay for the losses)
banks are risky enough without letting them trade or invest or speculate in highly-volative (and highly-leveraged) things
the Glass-Steagel Act (GSA) seperated regular retail banking from “investment” banking.... GSA was correct on this subject! This provision needs (desperately) to be brought back ASAP!
(note: it was Clinton, and Phil Graham, who had GSA repealed....and exposed retail banks (and thus, our entire economy) to all this new risk...)
Thank you. You put me into the ballpark.
5.56mm
Looks like Britain got out just in time
does it add up???
Somewhere in the $48 trillion range.
Not at all surprised. With so many of the smaller European nations having crippled their economies and birthrates playing “Scandinavian socialism”, the prosperity of the continent has increasingly rested on Germany. Recently starting with Greece the dominoes have begun to fall and they cannot support dozens of broke or near-broke nations with no clue or plan to change.
Yes, it does!
As Sir Winston told the US Congress on 19 May 1943 ... The Hun is always either at your throat or at your feet.
Maybe it's one of those at-your-feet times. Time to rebalance the Hun.
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