The main media over the last 24 hours have been promoting the idea that Deutsche Bank went into Intensive Care because of a US Justice Department fine. But the fine was merely a catalyst: a saving of €9 billion euros doesn’t come close to solving the Bank’s problem. The Slog interrogates the numbers.
And with one mighty bound, Deutsche Bank fired itself into the air and escaped the circling sharks.
Well, not really. There are two questions to address to those naïve enough to buy into a predictable Friday afternoon rebound that gave Deutsche some breathing-space:
Um, where is the confirmation of this Justice Department deal?
Is Deutsche’s problem really about one fine, and saving $9 billion?
Step forward, Department of Justice…..
….or not, as the case may be. These are the actual words at CNBC that recorded the Monty Pythonic “we are saved, it is a sign” hysteria yesterday (my italics):
‘Shares of Deutsche Bank jumped 15 percent Friday in New York after AFP, citing a source, reported that the bank may be near a $5.4 billion settlement with the U.S. Department of Justice. CNBC has not independently confirmed the report, but if accurate, that settlement would be well below the reported $14 billion opening bid by the DOJ in its talks with Deutsche.
Deutsche Bank is not publicly commenting on the supposed $5.4-billion figure. The DOJ did not reply to a CNBC request for comment. The German Finance Ministry declined to comment on media reports of a settlement.’
Let’s face it, this would not have been enough to delay Ben Bradlee’s departure for lunch after a morning spent at the Washington Post.
On the other hand, no other news agency or media site has come balls-out and said, for example, ‘Duane Sniffle at the Department of Justice dismissed the report as “the ravings of a desperate eurozone Establishment”‘. To which, of course, the obvious riposte is – with so much at stake – “he wouldn’t say that, would he?’
None of us know what it all means, but this is my hunch based on two conversations last night (Friday CET): by the closing bell, several seasoned traders were getting a bit tetchy about the lack of DoJ confirmation….noses were wrinkling, and there was a soupçon of doubt in the air. This weekend is a three-day bank holiday in Germany: a contact in Spain described it as “highly convenient”.
Let’s just say there’s a trace of underlying suspicion about the DoJ story.
Is a $9 billion cut in the fine going to change the game anyway?
A very good question. The alleged answer depends on who you talk to. Let’s start with that Murdoch-owned Establishment bastion The Wall St Journal.
The WSJ’s take yesterday was that, whereas a few years back DB’s leveraging level was an insane 69 times, today that number is “only” 27.
‘Only’ is a relative term: in the late 1980s, too many listed companies at 25-30 leverage levels led to a massive negative correction in the stock markets.
Today, Deutsche’s capital ratio stands at 10.8%. I have been saying since 2011 that such percentages are far too low: Lehman, for example, went down with a ratio of 13.2%. Just a week ago, former Federal Reserve Chairman Alan Greenspan said ratios should be at 20-30%. Wrinkly Al is not what you’d call a Leftie Democrat: he’s a conservative in all things.
What the Journal’s verdict also politely ignored was the still unknown size of DB’s derivative bets exposure. Derivatives all up are over ten times the entire global gdp. This unknown x-factor in the Deutsche equation could urinate on a $9bn saving and drown it within seconds.
An exaggeration? Hardly: Deutsche has €2.4 trillion in assets – that’s nearly 60% of Germany’s GDP – and is in the top five globally epidemiological banks. It has, gross, a notional derivatives exposure of €46 trillion.
DB’s line is that, after ‘netting’ win and lose bets, that exposure is really only (there’s that word again) €46 billion. Which is, um, five times the DoJ fine saving….if it ever materialises.
Two more things to consider here. First, I’ve never believed any of the back-of-envelope crap about derivative ‘netting’: frankly, nobody knows what unstable isotopes are in there as yet undiscovered. And second, the bank accountancy use of the word “assets” has always been the sickest joke of the last half century. Randomly priced rubbish and obvious NPLs are in there – and just as radioactive as the pulsating un-netted derivatives.
The bottom line
Looking ahead a few days, my conclusions would be as follows:
If the DoJ confirms a deal, you can be sure that US Presidential Election politics are seriously in play. The White House has already pressured Jamie Dimon to intervene as a White Knight in Italy: Clinton pressure on the Justice Department to “help” DB should be assumed. The only winner from signs that the existing systemic norms are a fiction will be Donald Trump.
If the DoJ rebuffs the claims of a deal, then silly Deutsche spin becomes the all-time hostage to fortune, and the eurozone descends into meltdown. (I doubt this will happen, but with these clowns, you never know).
A DB reprieve still won’t answer serious questions about Commerzbank, three Italian banks, two Spanish banks, a French Bank, and RBS. (Reporting restrictions here in the eurozone force me to remain vague).
An attempt is being made here to suggest to the gullible that one fine-deal between Deutsche Bank and the US Department of Justice is ‘problem solved’. It patently obviously isn’t. The Eunatics cannot rely on an endless stream of US quick fixes to muddy the already murky waters: the problems are – as always – debt masquerading as assets, and the idiotic idea that a bailin is in any way politically possible.
The severely dented can has seen thirteen years of the Can-Can kicking. The next kick will take it over the cliff. What follies shall be revealed in that moment.
Also at The Slog: a growing crisis of confidence
Filed under: Deutsche Bank still on Life Support, Uncategorized Tagged: Alan Greenspan, Deutsche apologists full of shit, DoJ Deutsche fine a red herring, US electoral politics 