Deutsche Bank is a big domino

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Big enough to spark systemic risk in the global banking system, so it's not going to be allowed to fail, but it continues to make headlines for all the wrong reasons...

Deutsche Bank AG extended losses as analysts signaled that legal costs may force the German lender to raise capital even if it whittles down the U.S. demand for $14 billion over its mortgage-backed securities business.

The shares fell as much as 2.6 percent in Frankfurt trading Monday and were 0.4 percent lower at 2:03 p.m., pushing the loss for this year to 47 percent.

Germany’s biggest bank would be “significantly undercapitalized” even if the bank had sufficient provisions to cover an eventual settlement with the Justice Department, Andrew Lim, a Societe Generale analyst, said in a note to investors Monday.

Any settlement above 5.4 billion euros ($6 billion) would imply a capital increase is needed just to pay the fine, he wrote. That’s about the amount the bank had in reserve for all legal disputes at the end of the first half.

Among other cases, Deutsche Bank still has to deal with a probe of its equities business in Russia and is struggling to sell its German retail lender Deutsche Postbank AG.
Watching all these various systems and .gov orgs and too big to fail companies working at trying to either make some headway or keep it all from falling apart sometimes starts to feel like some global sized isometric exercise that while certainly expending a lot of effort, doesn't seem to accomplish much.
Nice recap/summary of the DB dilemma with some speculation on what's coming:
Deutsche is Germany’s only G-SIB (Global Systemically Important Bank). Deutsche is Germany’s financial flag carrier. It stands at the centre of Germany’s long held desire to have Frankfurt eclipse London as Europe’s financial centre. Although Germany also has Allianz as a G-SII (Global systemically Important Insurer), without Deutsche Bank Germany ceases to be a globally significant financial nation (G-SFN – OK I made that one up). Without Deutsche Germany would not sit at the top table of global finance. France would. France has three G-SIBs. The balance between France and Germany within Europe would shift. Maintaining that balance between France and Germany, at the heart of Europe, has been critical in European affairs since WWI.

Could Germany ever allow Deutsche Bank to go under?
... The important point is that in any sale of the viable parts of Germany’s only G-SIB, the brutal fact of the matter is that there is no other German financial institution that could afford to buy any of it. Commerzbank? Allianz? Letting an insurer buy a bank? So imagine the situation for Germany. They lose their seat at the top table and then they watch as France, England, American or perhaps China buy the crown of German financial might.

So I don’t think it will ever happen. Or at least it will only happen when Germany is truly out of any other options.

So if Deutsche is not going to be declared “no longer viable” what are the alternatives?

Filed in the "no shit, Sherlock!" category:
The German government will have to bail out Deutsche Bank AG if its financial situation gets bad enough, Allianz Global Investors AG Chief Investment Officer Andreas Utermann said.

“I don’t buy at all what’s coming out of Germany in terms of Germany not wanting to step in ultimately if Deutsche Bank was really in trouble ,” Utermann said Monday in a Bloomberg Television interview with Francine Lacqua and Tom Keene. “It’s too important for the German economy.”

German officials have tried to shut down talk of a potential rescue for the country’s biggest bank, with Chancellor Angela Merkel’s spokesman Steffen Seibert saying Monday there are “no grounds” for speculation over state funding for the $2 trillion-asset lender. Focus magazine reported Sunday that Merkel has ruled out any state assistance for Deutsche Bank AG as she considers whether to run for a fourth term next year.
Skimming through the PMBug News page and just about everyone is talking about DB right now. There is a lot of speculation about catastrophic failure, but much like with Lehman, I expect govco to intervene if it becomes necessary.

Rickards put out a long piece on the subject recently with an interesting twist:
... we use a method called causal inference to make forecasts about events arising in complex systems such as capital markets. ...

This is the same method we used to correctly forecast the outcome of the Brexit vote. Now we’re using it to forecast the likelihood of a Deutsche Bank stock collapse in the next few months.

The strongest signal is not coming from Germany — it’s coming from Italy. While the world is waiting for the denouement of the Deutsche Bank drama, another bank fiasco is playing out in Italy. This involves the Banca Monte dei Paschi di Siena (BMP), the world’s oldest bank still in operation, founded in 1472.

BMP was the only top bank to fail the ECB’s recent stress tests. It is required to raise capital and has announced plans to do so. The capital raise is being led by JP Morgan and a syndicate including Goldman Sachs and some of the largest banks in China.

The syndicate was formed in July and was supposed to announce results by the end of September. We’re almost there and the news is not good. Reuters recently reported that the capital raising effort is not going well, and the syndicate expects they will delay any announcement until after important Italian elections scheduled for November.

What do the travails of BMP have to do with Deutsche Bank? Both banks are too-big-to-fail and are failing, but BMP is closer to the brink. It’s the “canary in the coal mine” for Deutsche Bank.

Italy wants to bail-out BMP with taxpayer money. That’s the standard playbook that governments used in 2008. But the rules have changed.

At the G20 Leaders’ Summit in Brisbane in 2014, it was decided that bailouts would be replaced by “bail-ins.” In a bail-in taxpayer money is not used to recapitalize the sick bank. Instead bondholders and depositors take haircuts and are involuntarily converted into equity holders.

Imagine if you had $500,000 on deposit at the bank and you got a notice in the mail that said your deposit was now $250,000 (the insured amount) and the other $250,000 had been converted into stock in a “bad bank,” which might or might not produce returns in the future. That’s what happens in a bail-in.

The German government under Angela Merkel is telling Italy that they cannot bail-out BMP; they have to use the new bail-in rules instead. But what’s sauce for the goose is sauce for the gander. If Germany forces Italy to bail-in BMP, then Italy will insist that Germany also bail-in Deutsche Bank when the time comes.

Germany won’t like that, but if they don’t bail-in Deutsche Bank, the European Union will come apart because of acrimony between Italy and Germany. Compared to this dispute, UK Brexit is a sideshow. Greece is a sideshow of a sideshow. Italy is the real deal. If Germany and Italy can’t cooperate, then there is no European Union.

This is why the BMP capital raise syndicate pushed their announcement out past November. They know that if they announced their failure today, the bail-in option would be required immediately and the government would lose the elections. If the government can get past the elections intact, the bail-in of BMP (or bail-out as the case may be) can come in December.

Markets won’t wait while German and Italian politicians tiptoe around the bail-in question. They will draw their own conclusions and start a run on Deutsche Bank. It’s already happening. That will take the stock down another 90% on top of the multiple crashes that have already occurred.

The German government will let Deutsche Bank stock fall to €2 before they intervene. That’s how existing stockholders make their “contribution” to the bail-in.

Deutsche Bank won’t fail and the stock won’t go to zero. But there’s still plenty of room to fall, and this story is far from over. The eurozone is in trouble.
It seems Rome (us) is not the only one falling. If the whole world falls along side us, do we still get to be in charge?
Already a melting ice cube struggling with an overbearing derivatives exposure and myriad legal risks, Deutsche Bank has seemingly bounced from one criminal scandal to the next since the crisis, incurring billions of dollars in fines along the way. So it's hardly surprising that the bank's shareholders let out a collective groan Thursday morning when headlines hit that German police had raided the bank's Frankfurt headquarters.

Roughly 170 police officers, tax inspector and prosecutors fanned out across Frankfurt to search a total of 6 DB buildings, according to the BBC, sending the bank's shares lower by 2% to near all-time lows amid renewed fears that DB could face a devastating, potentially bankruptcy-inducing, fine.
time to buy ?

They cannot let DB fail. It really is TBTF or they have to let the whole charade collapse.

Then how will they 'value' anything ?
I'm guessing the ECB or similar will "encourage" another banking giant to buy DB assets at pennies on the dollar euro ala The Fed/JPM/Bear Stearns.
why would any other bank take on the DB risk, including the impossibly large derivatives risk ?

Sure they would grab their assets but who would carry the liabilities ?
Well, I'm sure another bank could be persuaded to do so if they get a sweetheart deal with ECB/taxpayer backstopping. Happened here in the USA with the bank bailouts after Lehman. People got mad and had tea parties. A few politicians got voted out of office, but little really changed. Political class in Europe may feel like it's worth the risk (of public ire).
When Lehman went down it was the derivative bets that caused the problem
I believe this was the first time the committee sat and declered there was no default, because any default would have taken everything.
Monoline risk insurer AMA was obviously in default though......

And now DB's derivative bets going bad would be larger than Germany or the EU bank could handle.
Printing the odd quadrilloin with no consequences ?

Do you really think the few billions that the tax payers could contribute would fix it ?

And would they all just roll over and once again give the additional money required to 'save the banks' ?
Fool me once .......

They seem a bit pissed right now with a few cents rise on diesel fuel .........
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If DB goes under, we all go under. The derivatives they hold are all intertwined with all the other derivatives the other octopuses hold, and purposefully so. They want to be sure that if one goes, we all go. That way, none will be let to fail.
What’s next?

Prosecutors have said they’ve made “very rapid and very good progress” during the raids and Deutsche Bank has said it’s cooperating “comprehensively.” Prosecutors are scheduled to meet with Deutsche Bank’s lawyers Friday for talks over their initial findings and whether more information will be needed. Still, the review of the papers collected in the raids could take several months.

The next thing to watch is the fallout for Deutsche Bank’s management board. The lender, which has also drawn scrutiny in recent weeks for its role in a dirty money scandal at Danske Bank A/S, was considering replacing Chief Regulatory Officer Sylvie Matherat even before the latest developments. It has long been in the spotlight for deficiencies in money laundering controls — which fall into a unit ultimately headed by Matherat — and the raids certainly don’t help. Deutsche Bank’s supervisory board is scheduled to meet Thursday.
Deutsche Bank shares have continued to break through successive all-time lows following news that Frankfurt prosecutors are pursuing charges against DB employees (and possibly the bank itself) over allegations that the bank's wealth management unit helped launder money for criminals and other tax cheats ...

... on Thursday, press reports added another $35 billion to that figure. According to the Financial Times, which cited an internal DB memo, Deutsche cleared a total of nearly $200 billion for Danske's Estonian branch between 2007 and 2015. This means that Deutsche Bank cleared more than 4/5ths of the purportedly suspicious funds flowing out of the Danish bank's Estonian branch. Over the eight year period, DB processed some 1 million transactions, according to the memo, and never once bothered to question the provenance of these massive sums of money, which dwarfed the annual GDP of Estonia.
So about that raid on DB headquarters in Frankfurt back in November...

Frankfurt prosecutors obtained a list of more than 900 clients from Deutsche Bank AG in a case tied to the Panama Papers, a key piece of evidence in an investigation that spurred a raid at the German lender’s headquarters in November.

The list contains the names of individuals and entities mostly located outside Germany, the people said, asking not to be identified discussing confidential information. ...

Deutsche Bank AG’s management board plans to cut the bonus pool by about 10 percent as the German lender juggles cost pressures while trying to retain key employees, according to people familiar with the matter.

Bonuses for last year will be paid more selectively in an attempt to keep top earners, the people said, asking not to be identified because the deliberations are private. The bank is likely to award less than 2 billion euros ($2.3 billion) in bonuses, down from about 2.2 billion euros in 2017, they said. The final figure could still change, depending on fourth quarter results, they said.
... Bloomberg reports that Germany's financial regulators would prefer for Deutsche Bank to merge with a European rival rather than local, and just as troubled, competitor Commerzbank, setting them apart from forces in the government keen on an all-German deal.

According to Bloomberg, the ECB is favoring a cross-border combination to drive integration in the region’s financial markets, while analysis by German regulator BaFin suggests a preference for a European deal because the two domestic banks - surprise - are currently too weak to benefit sufficiently from a merger.

In other words, merging one Too Big To Fail bank with another would only result in a teetering behemoth that will need an even greater bailout when the next financial crisis hits. And by "sharing" the combined liabilities of the combined entity - which would likely inherit Deutsche Bank's tens of trillions in gross notional derivatives - with another sovereign, would at least ensure that German taxpayers would enjoy some dilution of the upcoming bailout pain with another European nation at some point in the coming years.

This cross-border merger strategy is also more aligned with the position of Deutsche Bank CEO Christian Sewing, who has asked for patience with his turnaround plan before embarking on any deal. The European preference, meanwhile, is at odds with some German government officials who patriotically want a "national banking champion." Both banks are key partners of the companies that make up Germany’s export-oriented economy.
Deutsche Bank AG executives are worried that they’re down to the last 60 days to turn around their struggling franchise.

On the eve of fourth-quarter results that are likely to reflect its troubles, the bank’s ability to avoid a government-brokered merger with Commerzbank AG could rest on its performance in the first quarter of 2019, according to people briefed on the thinking of its top executives.


DB is in deep doo doo.
I'm pretty sure they've been in deep for some time 'Bug. Look at a five year graph of their stock. As their legal woes have come to light, and their balance sheet hi jinks have become public, the world has taken notice. All the CDS in the world won't cover their ass on this mess.
German financial watchdog Bafin has extended the mandate of its monitor at Deutsche Bank over the bank's role in a money laundering scandal involving Danske Bank.
Board member Karl von Rohr said last week that it had so far not made any provisions for possible Danske-related legal costs.

In 2017, the Fed was among regulators that fined Deutsche Bank nearly $700 million (£546 million) for weak controls that allowed money laundering from Russia. A U.S. Department of Justice investigation into the case is still ongoing.

Deutsche Bank said it has done enough to get its investment bank back on track as Chief Executive Christian Sewing came under renewed pressure from top investors.
"There are those who are calling for a merger with Commerzbank, others who would prefer to split up the bank and another that wants a managed downsizing, which would include a shrinking of the U.S. investment bank," the person said.
The top executives of Deutsche Bank AG and Commerzbank AG have resumed discussions on a possible merger of the two lenders, the German magazine Focus reported, citing unidentified people familiar with the matter.

Deutsche Bank Chief Executive Officer Christian Sewing has been in intense talks with Commerzbank CEO Martin Zielke for some days, after receiving a mandate from their management and supervisory boards, according to Focus.
Germany has come up with a solution to the deep troubles at one of the world’s largest banks: make it part of an even bigger one. The people who oversee Europe’s financial system had better be ready for the consequences if this doesn’t end well.

The Frankfurt-based Deutsche Bank is in talks to merge with crosstown rival Commerzbank — a move that Germany’s finance ministry has favored for months. The result would be a behemoth with assets of about 1.8 trillion euros, equivalent to more than half of Germany’s annual economic output; the merged bank would be Europe’s third biggest after the U.K.’s HSBC and France’s BNP Paribas.

The deal is a short-term answer to a politically fraught question — what to do about a struggling and systemically important institution. After a series of unsuccessful turnaround efforts, Deutsche Bank has been in what its own chief financial officer described as “a vicious circle of declining revenues, sticky expenses, lowered ratings and rising funding costs,” exacerbated by numerous international money-laundering probes. The proposed merger will provide a brief respite, but is unlikely to solve the underlying problems.


I'm surprised that Bloomberg acknowledged the truth about this issue. I say unwind the thing. Take the lumps and move on. The bad deals and unperforming assets belong to the stock and bondholders. Why the desperate motivations to save them? This theory that these banks are too big to fail is bullshit. Let one fail, then the others will see that they should exercise more caution and boom....we will have banks that don't do stupid shit.
Pretty sure it's because the rest of the banking system in Europe would face tremendous stress (ie. cascading bank failures) if DB went through bankruptcy.
I read in some learned article that Germany would be embarrassed if DB were seen to fail.

I found myself wondering how potential embarrassment could justify the bailing out of such a corrupt institution ?
And at such a huge cost to the people, who had no part in the failure.

The concept of too big to fail ( until it all fails ) would seem to be the driver here.
Pretty sure it's because the rest of the banking system in Europe would face tremendous stress (ie. cascading bank failures) if DB went through bankruptcy.

Perhaps that would [finally] be a good thing? Sort of like a debt jubilee of sorts. Fuck 'em and feed 'em fish heads I say. Let's get rid of all this paper crap and get back to some traditional banking. Let it all unwind. The planet won't catch fire, and after some time, good money will chase out the bad. Sure, there will be mass casualties, but it for damn sure will clear out the snowflakes and pussies.
... Deutsche Bank and Commerzbank announced on Thursday that they have abandoned the negotiations after executives from both troubled lenders said the deal wouldn't have created sufficient benefits to offset to 'execution risks', capital costs and restructuring costs.
Other Commerzbank suitors have been circling, with Italy's UniCredit and Dutch Bank ING rumored to be interested in buying Commerzbank. UBS and Deutsche have also reportedly pursued talks for Deutsche's majority owned DWS asset management business to buy UBS's asset-management business.
May 30:
After setting an historic intraday low of $6.82 yesterday on the New York Stock Exchange, shares of Deutsche Bank mustered a tiny rally in the last half hour of trading today to eke out a close of $6.91. Just 12 years ago, this was a $120 stock. The bank now has a market capitalization of $14.18 billion supporting assets of $1.6 trillion. (Perhaps “supporting” is not the right word. Lordy!)

According to the bank’s 2018 annual report, it also has a derivatives book of $49 trillion notional (face amount). Deutsche Bank’s derivatives book was of such a concern to the International Monetary Fund that it issued a 2016 report which found that Deutsche Bank was heavily interconnected to JPMorgan Chase, Citigroup, Goldman Sachs, Morgan Stanley and Bank of America as well as other mega banks in Europe. The IMF wrote that Deutsche Bank posed a greater threat to global financial stability than any other bank as a result of these interconnections – and that was at a time when its market capitalization was tens of billions of dollars larger than it is today.
The biggest question right now in the markets is what kind of contagion Deutsche Bank might spread to the other global banks that are counterparties to its derivative trades. ...
I read 'The bank now has a market capitalization of $14.18 billion ......'

as 'a market capitulation' dunno why (-;
Hey its all sorted -

phew ........

At some point there will be the biggest baddest bank ever.
It will be called 'the fiat bank' and will contain all the fiat based debt as all but the few cents borrowed by the peons becomes unpayable.
Then everything will be fine again except perhaps for the few peons who foolishly borrowed an amount that they could service or even repay.

So we can look forward to the reset or the great debt forgiveness for those who borrwed hugely, as a series of bad bank creations that are in effect the reset in a subltle way ?
Deutsche Bank investors will press Chief Executive Christian Sewing on how he will deliver on revenue growth targets during a global roadshow to win backing for his 7.4 billion euro ($8.4 billion) ‘reinvention’ plan.

Shares in Germany’s biggest bank rose by 2.1% on Wednesday, recouping some of a near 10% drop, the biggest two-day drop in almost three years, since it detailed a sweeping overhaul involving 18,000 job cuts on Sunday.

The revamp also includes the creation of a ‘bad bank’ to house billions of euros of costly trading positions and relieve pressure on Deutsche Bank’s stretched balance sheet.

Some investors told Reuters they doubted these moves, along with scrapping Deutsche Bank’s global equities division, would be enough to turn around its flagging fortunes in the face of intense competition and low interest rates.
The bank is quitting its entire presence in some Asian markets but has so far kept the finer details of layoffs in the United States, Germany and other parts of Europe under wraps.
questions about the viability of Deutsche Bank are swirling - yes, it won't be insolvent overnight, but like the world's biggest melting ice cube, there is simply no equity value there any more - everyone else has decided to cut their counterparty risk with the bank with the €45 trillion in derivatives, and according to Bloomberg Deutsche Bank clients, mostly hedge funds, have started a "bank run" which has culminated with about $1 billion per day being pulled from the bank.

As a result of the modern version of this "bank run", where it's not depositors but counterparties that are pulling their liquid exposure from DB on fears another Lehman-style lock up could freeze their funds indefinitely, Deutsche Bank is considering how to transfer some €150 billion ($168 billion) of balances held in it prime-brokerage unit - along with technology and potentially hundreds of staff - to French banking giant BNP Paribas.
Sounds like the bleeding is accelerating. :popcorn:
From a few days ago:
Deutsche Bank AG has hit bottom, again.

Two months after rebounding from its previous low, buoyed by optimism about Chief Executive Officer Christian Sewing’s strategy reboot, Germany’s largest lender fell to a fresh record in Frankfurt trading. The stock is now down 94% from its peak in 2007.
Germany's largest bank hit a new record low, extending a long decline

But while there’s plenty of blame to go around the German lender’s boardroom for its past performance, the former investment banking giant is hardly alone in Europe in this latest rout. From Spain’s Bankia SA and Banco de Sabadell SA to Italy’s UniCredit SpA, lenders across Europe are trading at or near their historic lows. Commerzbank AG hit a new one, showing the depth of the challenge for CEO Martin Zielke in his fourth year leading the embattled German lender.

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