Deutsche Bank shares have collapsed to lows deep under crisis lows and collapse of Lehman in the Great Financial Crisis. What’s going on?
An investigation of Deutsche Bank’s “Passion to Perform” balance sheet provides the clues.
The above clip from Deutsche Bank’s First Quarter 2016 Statement.
Details in red from page 61 (PDF page 63) of the 126 page report.
- €559 billion deposits
- €562 billion negative derivatives
- €151 billion long term debt
World’s Most Systemically Dangerous Bank
Zero Hedge commented on the World’s Most Systemically Dangerous Bank.
Here’s the key chart.
Deutsche Bank Share Price
What Went Wrong?
Deutsche Bank’s price to book value is 0.251.
Effectively the market suggests Deutsche Bank is worth 75% less than book value. Why?
- Is it derivatives?
- Are bank assets over-inflated?
- Other assets prices inflated?
- Liabilities understated?
- What about Brexit?
Brexit is the easiest explanation to throw out. Share prices started collapsing a second time starting at the beginning of 2014.
The bank has always been heavy in derivatives. Although recent activity may have led to losses or more scrutiny, it’s relatively easily to discard that as the primary answer.
Banking Sector Malaise
Instead of pondering the obvious problems, what about other things?
- Target2 imbalances starting to matter
- Italian banking woes starting to matter
- Rising chance that Eurosceptic leaders take control of Italy.
- What if Eurozone intrabank balances are in question?
My best guess is that Deutsche Bank share prices reflect all of the above but something in the second set of reasons, or something we still do not fully understand is the primary reason behind the collapse.
- Italy’s Zombie Banks on Death Bed, Bail-Ins Coming?
- Italy Openly Fighting With EU and Germany; Country on Brink of Questioning Euro
- Is the ECB Bailing Out Italian Banks on the Sly?
- Target2 Imbalances Grow: ECB Overtakes Greece as Third Largest Debtor
Mike “Mish” Shedlock
Excellent analysis. When will depositors wake up in Europe? Looks like a new € 150 bn lifeline in Italy will be established to avoid bank runs.
A few years ago the word exit was written occasionally but has now disappeared completely from the vocabulary of central bankers. For a good reason. How do you reverse this situation?
Mish, please comment on Soros’ long speech to the European Parliament yesterday.
One source for it is
His bottom lines:
“Throughout history, governments have issued bonds in response to national emergencies. When should the triple-A credit of the EU be put to use if not at a moment when the European Union is in mortal danger?”
I wonder what the Cypriots think of this 150B lifeline that Italy has been granted. After the Cypriots were thrown under the bus they will want to see consistency in treatment across the EU.
How about this: Deutsche is insolvent, & it has never been cleaned up in the nine years since 2008.
& its ‘fumes of an oily rag’ capitalisation is even more dire as its equity capital has been obliterated over the last week.
Avoid like the plague.
Troy Ounce said:
“Avoid like the plague”
That’s the problem. DB cannot be avoided. The global financial industry is so intertwined that DB is a systemic risk. Your last sentence should therefore imo read: “Take your money out of the system and buy physical gold or silver”.
‘DB cannot be avoided’
It can if you are a depositor and close your account!
Luca Rivera said:
I appreciate all the drama and disection od DB. However, between the Fed., BIS, ECB, and IMF, DB is going to get all the liquidity it needs.
You are mistaking liquidity for solvency.
They are two completely different things.
Luca Rivera International said:
This is great intellectual stimulus, that is absorbing the DB drama. However, between the FED., ECB, BIS, IMF, and orher direct government actions DB will get all the liquidity it needs.
The German culture is risk averse. German managers rather not play in a market unless they can control a market. To that end bribes are tax deductible under German law. Germans do not hold a diversified stock portfolio. Rather the banks hold stocks and Germans buy bank stocks. Word is out that Deutsche Bank made bad bets on Greece, Cyprus, Italy, Russia, Ukraine, China, et.al. Germans are selling Deutsche Bank.
Stuki Moi said:
It’s more systemic than simply “bad bets.” Germany seen as a whole, has spent the post Euro, post unification era growing massively, but largely on the back of financing their customers.
Everybody wants German stuff, but the Germans don’t want any of the “inferior” stuff the others have to offer in return. So, instead, the rest have paid with promises to get better at it and pay back in something the Germans value. Sometime in the future.
And Germans have worked their buts off (when they’re not on their 10 week vacations at a nudist beach 🙂 ). Believing 100% in these promises,. Since they are Germans, and in Germany,, a promise is non negotiable and virtually sacred. No matter how absurd.
But now, the only way these Germans can get paid what they per contract is technically owed, is for the children (and grand children and great grandchildren….) of the people who made the promises, to spend their lives working as slaves. Which those now grownup and unemployed children are about to say “screw that” to. Causing a devaluation of all peripheral, non German assets, which is inevitably, no matter how clever and multilayered the obfuscation, piled up on the balance sheets of German banks.
There’s really no way out for Germans. Building the greatest things on earth is fine and good. But because of fiat money and financialization, they never really got the proper market signals that would have told them there are no customers out there able to pay for all these great things. Something they would have, if the payment and monetary systems were hard and real. instead of simply an obfuscation racket designed for the benefit of net negative middlemen and other expendable leeches.
Tony Bennett said:
The EU was doomed to fail from the outset without a fiscal union (countries more or less living within their means). BUT a fiscal union would have crimped growth of Germany (and others) for the past 17 years. The retrenchment for Germany will be painful (lower exports, lower growth + bank bailouts).
“€559 billion deposits”
Referring back to previous article on Italian banks: “…depositors were wiped out at four regional banks late last year. They were classified as junior bondholders…” Simply freeze all the deposits by decree and make them worthless junior bonds that are “bailed-in” when the bank reopens and the €562 billion negative derivatives is balanced out by the €559 billion in former deposits that are confiscated. Leaving only the €151 billion long term debt among the key liabilities. Seems simple enough to convert the liability into an asset. Those with a grudge against Germany will love the irony of seeing them go the way of Greek and Cyprus banks.
Of course, the bank stock becomes radioactive. So selling ahead of the event makes sense. Warren Buffett can than scoop up a troubled bank at fire sale prices and combine it with Wells Fargo, and all will be well again, except for the now poor savers (suckers) who unwittingly bought those risky junior bonds.
21st Century finance in the EUSSR. Downright medieval. Machiavelli would have been right at home in the EU. Brexit looking more and more like the right call, and not a moment too soon.
JPMorgan has far more risk than Deutche Bank, but it already got two bailouts since 2008.
And George Soros announced he shorted Deutche, which means several Warren Buffett companies have too — while Goldman Sachs alum control the US treasury and the ECB… so Deutche won’t get the same bailout.
Its a rigged economy, and those not part of the crime syndicate are going to get screwed.
meanwhile, the banking industry is structured to exist in a Paul Volcker monetary system (sound money and positive term spreads in government yield curves) — but all G7 banks are operating in a Italian Lira / Greek Drachma monetary system
Lending out real money today, with a politicians promise (aka “lie”) that they will pay you monopoly money tomorrow is not a functioning business model.
I hear a distant rumbling and rattling. I think it is sticks, catapults, and the world famous guillotine.
casino capitalism said:
In 1995-96, DB gave the keys to the balance sheet to investment bankers. That lead to massive expansion in derivatives exposure over the subsequent years up to 2008. This exposure is too much relative to the core banking business and the bank can’t sustain carrying it.
That’s the problem with DB.
Austria election overturned, to be rerun. MSM barely touched on the theme, the only way to follow this in English was alt. media.
Would appear you cannot insure against this Bank’s default…unlike Lehman et al which were in fact insured via a CDS contract that ciost the US taxpayer 85 billion to make good on. “Chump change” once the price everything else the Government pays for goes through the roof.
Nothing says a War more than “you gotta pay for that.” And so far that payment remains vastly depreciated dollars…no matter how “War” gets redefined I might add.
Basically “war” has now become simply “Moar” and DB the latest iteration.
DB… what goes there… from a completely unstudied impression… is like some ice cool technically detailed construct which you don’t question. It sits there shining its perpetual fusion based light, unanswerable, while around it silent cut throat battles and extensive filaments of resolution attempt repair of its web of power.
The public watch, and ask now, before they throw their hard earned fuel into its quiet furnace :
‘ Is this really fusion, or has it just become one more overstretched company poorly hacked into someone else’s grid? ‘
A relatively sound model that tries to take on and apply itself to one that isn’t will fail by its own weakness – false expectation.
Tony Bennett said:
“My best guess is that Deutsche Bank share prices reflect all of the above but something in the second set of reasons, or something we still do not fully understand is the primary reason behind the collapse.”
Rumsfeld’s known unknown
Maybe now that they can’t rig the markets so that they win their derivative bets, the derivatives are taking them down. AIG was all about the derivatives. Derivatives are indeed weapons of mass financial destruction.
Banks will never be safe until they are forbidden from issuing derivatives. It will be endless bank bailouts as long as derivatives are on their books.
Interesting how just about everyone on this board is a doomsayer and they can’t find a reason why db trades at this level. Yet they think somehow it makes sense. Not one person suggested it is cheap
Makes me think
Put your money where your mouth is!
IMO, DB’s difficulties stem from an unfortunate unanticipated positive feedback loop involving the credit option implicit in all of those OTC contracts.
As the downgrades roll in, DB’s counterparties have the option of terminating their contracts.
Some will. DB should get/receive ‘fair value’ as at the effective date of termination, but that cash sum is of little value if people are unprepared to deal with DB for the size and tenor of the contracts that need to be replaced.
So there will be ever-increasing strains: either within the DB balance sheet, becoming more mismatched (because replacement contracts couldn’t be bought), or
through P&L, from forced sales (at correspondingly poor prices) of the OTC’s that ‘matched’ the ones that were terminated by DB’s counterparties.
The second possibility does shrink the balance sheet, but may not be followed if the P&L hit is considered too big.
Anyway, the strains get picked up by the credit analysts, so another credit downgrade follows…