Deustche Bank is the largest bank in Europe and by some scales, the world.
It grew significantly after the 2008 recession after the arrival of new executives that particularly focused on accumulating exactly the kind of high risk derivatives (essential lottery tickets) that led to the 2008 recession. Many of these were illegalised after that recession, however DB has been found to be trading in them non-the-less and was fined for doing so in 2015: www.theguardian.com/business/2015/apr/23/deutsche-bank-hit-by-record-25bn-libor-rigging-fine
This triggers further investigations into what, by accounting rules, of DBs dealings can investigated (the true risk of their derivative holdings is kept secret). One month later two major CEOs at the bank unexpectedly resign. www.wsj.com/articles/deutsche-bank-co-ceos-to-announce-resignations-1433674815
Now we see history start to repeat itself. The initial trigger for the 2008 global banking crisis was the collapse of Lehman Brothers’ high risk derivatives holdings. Financial speculation requires the party line of “everything is fine” to be maintained until the very last minute before unstoppable collapse has already begun but one of the warning signs back then was the downrating of their holdings from AAA – months later they were bankrupt.
On June 9th 2015, Deutsche Banks holdings were downrated to BBB+, even lower than Lehman immediately prior to their collapse.
And what makes all this so scary? Deutsche Bank’s derivatives holdings are the largest in the history of the planet. Even larger than JP Morgan’s by $5 trillion. We are talking $75 trillion, that is 20 times more than the entire GDP of Germany.
In other words, any major loss of confidence in the global stock market to which DB is exposed could result in an even larger recession than 2008. Given the fact that the % of GDp made up by this kind of financial speculation is even higher than pre-2008 in most western countries, it could result in global economic collapse.
Deutsche Death Watch
A write-down of this magnitude would imply that DB has a NEGATIVE net worth of 238 billion euros.
In other words, DB is technically insolvent.
Deutsche Bank stock has popped 6% today and the move was attributed to an announcement in the Financial Times that DB was looking at buying back several billion in senior bonds in the market at a discount – Financial Times
Before I get to the bond buyback farce, it’s safe to say the jump in DB’s stock is fully attributed to the rumor floated in Europe that the ECB was going to consider buying big bank stocks in an effort to shore up the appearance of a “healthy” banking system.
Furthermore, DB has been relentlessly sold and shorted since the beginning of 2016, down 31% in 25 trading days. It was due for a technically-driven, dead-cat, short-covering bounce. Central Bank intervention rumors being the perfect catalyst to frighten hedge fund computers into covering shorts and moronic perma-bulls into buying the dip.
Let’s first examine this notion of a bond buyback. The first item that will be pointed out by Wall Street puppets is that a bond buyback would enable DB to book accounting gains, thereby padding net income and book value. But the idiocy of this logic is that gains recognized from buying back bonds at a discount are 100% non-revenue, non-cash generating events. In fact, a bond buyback is a use cash – it further erodes the liquidity of the entity buying back bonds or stock.
Global financial crisis 2.0? Bear Market descends on global stocks, even stronger lenders can’t escape a global selloff of risky bank debt… DoubleLine’s Gundlach says Gold likely to hit $1400
All banks are at risk now. The $600 trillion or so in derivatives will take down all the major banks should the dominoes begin to fall.
While broad-based contagion from Deustche Bank’s disintegration is clear in European, US, and Asian bank risk, there isanother major financial institution whose counterparty risk concerns just went vertical…
With the stock at 27-year lows, it appears investors are seriously questioning Chief Executive Officer Tidjane Thiam’s restructuring plans.
1000x Systemic Leverage: $600 Trillion In Gross Derivatives “Backed” By $600 Billion In Collateral
There is much debate whether when it comes to the total notional size of outstanding derivatives, it is the gross notional that matters (roughly $600 trillion), or the amount which takes out biletaral netting and other offsetting positions (much lower). We explained previously how gross is irrelevant… until it is, i.e. until there is a breach in the counterparty chain and suddenly all net becomes gross (as in the case of the Lehman bankruptcy), such as during a financial crisis, i.e., the only time when gross derivative exposure becomes material (er, by definition). But a bigger question is what is the actual collateral backing this gargantuan market which is about 10 times greater than the world’s combined GDP, because as the “derivative” name implies all this exposure is backed on some dedicated, real assets, somewhere. Luckily, the IMF recently released a discussion note titled “Shadow Banking: Economics and Policy” where quietly hidden in one of the appendices it answers precisely this critical question. The bottom line: $600 trillion in gross notional derivatives backed by a tiny $600 billion in real assets: awhopping 0.1% margin requirement! Surely nothing can possibly go wrong with this amount of unprecedented 1000x systemic leverage.
From the IMF:
Over-the-counter (OTC) derivatives markets straddle regulated systemically important financial institutions and the shadow banking world. Recent regulatory efforts focus on moving OTC derivatives contracts to central counterparties (CCPs). A CCP will be collecting collateral and netting bilateral positions. While CCPs do not have explicit taxpayer backing, they may be supported in times of stress. For example, the U.S. Dodd-Frank Act allows the Federal Reserve to lend to key financial market infrastructures during times of crises. Incentives to move OTC contracts could come from increasing bank capital charges on OTC positions that are not moved to CCP (BCBS, 2012).
The notional value of OTC contracts is about $600 trillion, but while much cited, that number overstates the still very sizable risks. A better estimate may be based on adding “in-the-money” (or gross positive value) and “out-of-the money” (or gross negative value) derivative positions (to obtain total exposures), further reduced by the “netting” of related positions. Once these are taken into account, the resulting exposures are currently about $3 trillion, down from $5 trillion (see table below; see also BIS, 2012, and Singh, 2010).
Another important metric is the under-collateralization of the OTC market. The Bank for International Settlements estimates that the volume of collateral supporting the OTC market is about $1.8 trillion, thus roughly only half of exposures. Assuming a collateral reuse rate between 2.5-3.0, the dedicated collateral is some $600 – $700 billion. Some counterparties (e.g., sovereigns, quasi-sovereigns, large pension funds and insurers, and AAA corporations) are often not required to post collateral. The remaining exposures will have to be collateralized when moved to CCP to avoid creating puts to the safety net. As such, there is likely to an increased demand for collateral worldwide.
Bank Failure Contagion – Deutsche Bank & Precious Metals Price
The BANKS are collapsing the market to get negative interest rates to steal your money!