Is this the trigger for the next GFC?
Remember when Lehman Brothers Bank collapsed in the US, started the GFC, and almost derailed the entire economy?
Yeah? Well if you missed it you might get a second chance to enjoy the spectacle. German giant Deutsche Bank looks like it’s about to go under.
Deutsche is one of the largest investment banks in the world, and much larger and more global than Lehman ever was.
And they’re in trouble.
Even though the ECB is giving away free money (see Tuesday’s blog), their profits have been hammered. It’s one of the quirky things about negative interest rates – it plays havoc with bank’s margins.
And so Deutsche shares have been on the skids as profitability takes a hammering.
To make matters worse, the US Justice Department just made a $14 billion dollar claim for damages around the GFC. Deutsche played a lead role in the sub-prime mortgage crisis.
$14 billion sure sounds like a lot, but is it?
Yes. Yes it is.
Given Deutsche’s market capitalisation is only $18bn, it’s huge.
And what’s worse, it’s a lot more than anyone was expecting, especially Deutsche Bank. So far their adamant they won’t be giving the yanks anything like that much money, but it’s enough to give investors the jitters and hammer the share price….
… to the lowest level in over twenty years…
And following a pattern and play sheet that has eerie similarities with Lehman Bros.
If this isn’t making you shift nervously in your seat, it should. Deutsche isn’t some pissant developing economy bank. This is one of the most established and largest banks in the world. It is also the corner stone of German’s economy – which is pretty much the only European economy that’s got any spark to it.
It’s balance sheet is equal to 58% of German’s GDP. It lost almost $7bn last year. What’s worse, as the subprime crisis showed us, it’s no stranger to creative accounting and the derivatives market.
Zero Hedge estimate that Deutsche’s derivative position (which have to have a counter-party somewhere) is worth about 42 trillion euros. Yes, that’s trillion with a ‘t’.
To put that in perspective, this chart compares that 42 trillion with German GDP and Euro Union GDP.
And seriously, who knows where those losses go. Deutsche is a global bank. I’d be watching Aussie banks nervously if Deutsche goes over.
And as Deutsche Bank goes down like a Led Zeppelin cover band at a funeral, politicians find they have their hands tied.
Deutsche executives are waving their hands like mad, begging for a lifeline, but the political establishment have totally wedged themselves.
Last weekend, German Chancellor Angela Merkel waded into the mess, announcing in a briefing that there could be no government bail-out of the bank.
It’s tough talk. It’s what people want to hear. Unless those people are investors or people considering trading with the bank in the near future. In that case, it’s positively frightening.
So Deutsche Bank would be thrilled with that announcement, just as they’re battling a confidence crisis.
And given a Deutsche failure would probably bring down the euro, the European union, and Merkel’s government, you have to wonder if she’s thought it through. But senior officials are on the record as saying that the German Chancellor was adamant that bank would not be rescued. There could be no state assistance if the bank was unable to raise the capital it needs to stay afloat, and she was not planning to intervene to get the American fine reduced. If it was in trouble, it was on its own.
And really, what choice has she got? The politics are terrible.
Germany, with their Chancellor leading the charge, have set themselves up as the hard-arsed financial responsibility Terminator in the euro-zone. Two years ago, it happily let the Greek bank system go to the wall. It let ATM’s freeze and close as a way of whipping the feisty Syriza government back into line.
And this year, through an unfolding Italian crisis, Germany has insisted on enforcing euro-zone rules that say depositors – that is, ordinary people – have to shoulder some of the losses when a bank is in trouble.
So they can hardly turn around now and so, oh, no, it’s different now. Deutsche is a German bank so they get special treatment.
There’d be riots from Athens to Milan.
But then can they really unleash a shock of that magnitude on the country? On the world?
It’d be a massive body-blow to Germany, but Europe pretty much relies on Germany to drive growth these days. France and Italy are already at zero growth, and Britain was doing ok but now it’s heading for the exits.
And the financial system is complex and interconnected. There’s no telling where the losses would wash up. You could probably kiss a whole bunch of troubled Italian banks goodbye, and with that, a few French and Spanish banks.
And hello GFC-2016.
It’d be a very courageous decision to let Deutsche go to the wall. But then what kind of message would that send. The rules of global finance are very strict, unless you happen to be huge and embedded firmly into the arse of the global economy. In that case, you can do what you want.
This is an ugly, ugly business. If you’re taking more defensive positions with your portfolios these days, I wouldn’t blame you.
Speaking of which, apparently the share of stocks on the ASX rated as a “buy’ is at the lowest level in years.
I’m just going to leave that there.
Is this enough to cause another GFC? Is it going to wash up here?