How can Deustche Bank destroty the EU? Capital fight and exteme, involuntary deleveraging. DB is closing nearly 200 German bank branches. Not a big deal, right? DB’s depositor base is 111% of German GDP…
…not to mention a major (the major) funding source for DB’s massive derivative positions.
Current news events don’t portend a positive outcome for Germany’s largest bank either. Bloomberg reports: NordLB Boosts Shipping Provisions Five-Fold, Warns of High Loss
Norddeutsche Landesbank boosted provisions for bad loans nearly fivefold to 1 billion euros ($1.1 billion), as Germany’s biggest shipping lender prepares for its first full-year loss since 2009.
NordLB, controlled by the state of Lower Saxony, posted a loss of 406 million euros in the first half as it battles a prolonged slump in maritime markets, including eight years of crisis in the container segment. That compares with a profit of 290 million euros in the same period last year.
“The shipping crisis, which further intensified in the first half of the year, has necessitated impairments that were higher than planned,” Chief Executive Officer Gunter Dunkel said in a statement. The bank lowered its outlook for the year, now anticipating a “significant” loss. It had projected a “negative result” in the spring.
… NordLB’s pessimistic view highlights risks at other German banks, which hold roughly one-quarter of the about 400 billion euros in global shipping loans. Under pressure to unwind sour legacy maritime assets, banks including HSH Nordbank AG and Commerzbank AG are also trying to shrink their loan books.
What does this have to do with Deutsch Bank? A lot! Because everybody wants to sell these assets that aren’t considered very desirable, and all at hte same time, we’ve made a bad situation worse – precisely when DB can’t afford it.
Then there’s the issue of DB’s somewhat questionable assumptions and characteristics in its financial reporting. Deustche Bank addendums are quoted as saying:
“The credit risk on the securities purchased under resale agreements and securities borrowed designated under the fair value option is mitigated by the holding of collateral. The valuation of these instruments takes into account the credit enhancement in the form of the collateral received. As such there is no material movement during the year or cumulatively due to movements in counterparty credit risk on these instruments.”
What???!!! So, the value of collateral doesn’t move now? Not only does the value of collateral move, it tends to move in the exact same direction as the value of the loan, borrowing or underlying, often at an exagerrated pace in the beginning (it’s markets are the first to know of turmoil). Reference my podcast interview with Max Keiser at the 2:40 marker. Want some more? Read this page from our EU banking report a couple of quarters ago…
For those who don’t believe me, I med this call in early 2008 – twice. Once for Bear Stearns (Is this the Breaking of the Bear?) and once for Lehman Brothers (Is Lehman really a lemming in disguise? Thursday, February 21st, 2008 | Web chatter on Lehman Brothers Sunday, March 16th, 2008). Was I right? Of course, that was then and this is now, so the banks are better prepared, right? Of course. The graphic below was taken from our Banco Popular report (click here for more iinfo), not from 8 years ago, but from a quarter ago – yes, 2016! Hey, there’s more…
Now, just imagine that Italy’s Banco Popular is the entity that DB used to hedge it’s expoure, and Banco Popular (obviously) can’t pay up on every(any?)thing. DB’s gross exposure become’s DB’s net exposure as DB’s notion value and market value converge near instantaneously if (or when) market shoots off in one direction (you can likely guess what direction that would be for stakeholders, and this time around that includes depositors and bondholders, not just shareholders).
German banks act as the focal point and epicenter in European finance. What happens when the biggest one cracks???
What does this all mean? Well, we went through this in expclicit detail and have identified no less than 6 (and we’re still actively looking) financial institutions that may have passed the EBA stress tests, but have miserbly failed our examination – and that’s without adding in the bank contagion factor!
To partake in this knowledge, join Veritaseum University and access the intereactive research asset called “European Bank Contagion Assessment, Forensic Analysis & Valuation“.
As a refrersher, for those who don’t recall my accuracy with big bank failure calls;:
The collapse of Bear Stearns in January 2008 (2 months before Bear Stearns fell, while trading in the $100s and still had buy ratings and investment grade AA or better from the ratings agencies): Is this the Breaking of the Bear? | After the collapse, a prudent bullish call as well… Joe Lewis on the Bear Stearns buyout Monday, March 17th, 2008: “The problem with the deal is that it is too low, and too favorable for Morgan. It is literally guaranteed to drive angst from the other side. Whenever you do a deal, you always make sure the other side gets to walk away with something. If you don’t you always risk the deal falling though unnecessarily. $2 is a slap in the face to employees who have lost a life savings and have the power to block the deal. At the very least, by the building at market price and get the company for free!” | BSC calls are almost free and the JP Morgan Deal is not signed in stone Monday, March 17th, 2008 | This is going to be an exciting, and scary morning Monday, March 17th, 2008 | As I anticipated, Bear Stearns is not a done deal Tuesday, March 18th, 2008 [Bear Stearns stock goes from $1 and change to $10, front month calls literally explode from pennies to several dollars]
- The warning of Lehman Brothers before anyone had a clue!!! (February through May 2008): Is Lehman really a lemming in disguise? Thursday, February 21st, 2008 | Web chatter on Lehman Brothers Sunday, March 16th, 2008 (It would appear that Lehman’s hedges are paying off for them. The have the most CMBS and RMBS as a percent of tangible equity on the street following BSC. The question is, “Can they monetize those hedges?”. I’m curious to see how the options on Lehman will be priced tomorrow. I really don’t have enough. Goes to show you how stingy I am. I bought them before Lehman was on anybody’s radar and I was still to cheap to gorge. Now, all of the alarms have sounded and I’ll have to pay up to participate or go in short. There is too much attention focused on Lehman right now.) | I just got this email on Lehman from my clearing desk Monday, March 17th, 2008 by Reggie Middleton | Lehman stock, rumors and anti-rumors that support the rumors Friday, March 28th, 2008 | It appears that I should have dug deeper into Lehman! May 2008
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