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.
Oh—meeeeh—Gaawed!
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?
7 Stages of Empire!
And as Deutsche Bank goes down like a Led Zeppelin cover band at a funeral, politicians find they have their hands tied.
Oh my, when you can write like that, Im a fan!
G’day John and readers.
Well thought out and, from what I’ve been reading all over the net, RIGHT ON THE “MARK” (pun intended).
I’ve also been reading a lot about the much propounded move to a cryptocurrencies supported international economic system.
Any thoughts anybody ?
Cryptocurrencies are defiantly on the strong side. After Bitcoin showed how it works, now Swisscoin steps up a nudge and powers to the top: http://swisscoin.eu/enviro
Onecoin missed the opportunity and lost trust in investors by leaving everyone in the dark.
But it’s all happen: from paper money to plastic money to digital money.
Hi Jon
Due to ultimate greed & lies the world economy has been balancing on a knife edge for a long long time.
The Lehmam debacle was only the “straw” catalyst causing the financial collapse in ’08 as there were many many others also rorting & manipulating the system, and nobody has learnt from the ’08 GFC
When “Banks that are too large to be allowed to fail” are actually allowed to fail I would not just be worried, I’d be panicking, as then the mums & dads of the countries will need to pay for the mess because banks have placed their savings & meager investments at great risk.
In Australia we now don’t even have a plan “B”….hell we don’t even have a plan “A” anymore.
I for one am quite worried about the world’s current financial situation.
Regards
Rudolf
but the bigger news is the elites don’t give a damn! they will profit from you and me as we support whatever bail outs are necessary. now, what of wells fargo? haven’t you heard? they just sacked over 5,000 employees for skulduggery the like of which has never been seen before. the employers(yes, the shifty buggers set up the scenario) and might as well forced the employers to do their bidding then when the shtf so to speak blamed it ALL on the employees..and the ceo got a bonus of US$123m for being a good girl (as severance pay) . she is now retired at age 55 years. oh dear the fbi is investigating all sort of things, but after the fiasco with dear hillary clinton and the chief f.b.i. honcho letting her off scot free because she ‘didn’t intend’ to wipe out over 30,000 emails off her private server as an indictment of her shady, nefarious dealings with the russians over the usa uranium mines. yes, she has sold the usa uranium mines to the russians and been paid handsomely into the clinton’s benefit fund(foundation..worth over $2bn now) and whats more pres. putin is having a piece of his minions for paying her so much for the mines..over US $500m..thats unofficial of course:-) that confidence in the f.b.i. is at an alltime low. they are now in the ‘unbelievable’ pudding with abbot and costello (australian variety). nobody can trust the f.b.i. now..and it is BIG news in u.s.a. right now as other things which you won’t see on your super dupa tv or in the comic newspapers we have here in oz. excuse me i am going to morning tea with my 89 years old pommy gf lol she survived the second ww rolling into concrete air raid shelters. the openings were about two feet high and one had to roll into them in england. oh the suffering that goes on in war. i hope we don’t have it here.
Comonnnnnn …..GFC 2017 ….banks have had it good for too long .The financial systems of the world need a reset .
Debt is insurmountable .Countries , people and businesses are drowning in it.No wonder people are not spending and driving growth and inflation ?
Disruption is part of a cycle ….its happened over and over ….1932 depression , WW1, Ww2 dot.com bubble ….GFC
2008 was mild in comparison to what is looming on the horizon …..just like a category 6 storm brewing.
The unprepared will be left crying and devastated .But we humans are resilient ….we will pick ourselves up again .?
“… a reset” ???
All that does is start the whole crap shoot all over again.
We need to come up with something a little better than that.
But we won’t. We are too powerless, too gutless, to do what needs to be done. The American Founding Fathers almost managed it, but even they couldn’t pull it off. No chance, these days.
Whatever is happening, it’s all just a mechanism whereby The Rich get richer, and The Poor get poorer. It’s all so pointless, when the meek will inherit the Earth!
Yeah, that got my attention!
My memory may be faulty, but as I recall it, it took one Helluva lot of negative press to convince the world that Fanny Mae and The Lehman Bros were worth falling into a Financial Crisis over, but they got there in the end. Maybe they learnt: Next time, make it more believable.
This one could do it…
But on the side, (haven’t done any research into this), but how did the Yanks come up with the number of $14Bn as a fine to their German mates anyway? Can’t see how it’s not the Pot calling the Kettle… But of course, that’s the American way. Not like the US economy couldn’t use a bit of a lever up…
And as the old truism goes, “If ya can’t beat ’em, cheat ’em.”
The US economy isn’t going to be doing any walking over anyone else’s unless its already dead, so what better than to kill the Deutsche Bank to get things rolling?
We’re a such a “creative” lot, we humans. Only happy, when we’re destroying stuff. The more I see, the more I believe Biblical “Prophecy” (The Last Days, Armageddon, etc) is inevitable.
The US are engaging in tit for tat politics and fining Deutsche Bank is retaliation for Europe imposing back taxes on Apple’s Ireland subsidiary.
The thing to remember is that the Deutsche Bank has been in trouble for quite a while now and are grossly undercapitalised. Their problems are not new given their enormous derivative exposure. That doesn’t happen overnight, it takes a while to build up to that amount, and other European and German banks and organisations, such as Commerzbank and Allianz are just as exposed.
The fine imposed by the US Dept. of Justice is just the latest problem for Deutsche and could be the straw that breaks the camel’s back. Or it might not.
And on a totally different subject….. Nice new logo Jon…!!
yes andrew i agree..nice pic jonno!
well guys here it is…go to whatdoesitmean website for some interesting reading. likewise ‘horn news’ and real jew news. its amazing what you might find out and take no notice of those criticising these websites. it will take you months to get the gist of it all. but happy reading. i like to dig and delve even though i guess my letters might not be of much use to anybody, certainly i am not about changing the world. but for sheer interest it beats most things i see or read.