Friday, September 30, 2016

Will Deutsche Bank be strike three?

If I haven't mentioned it before my previous employers on Wall St. included:

* AIG - a company that should have failed during the 2008 crisis.
* Lehman Brothers - a company that did fail during the 2008 crisis

and......

* Deutsche Bank - a company that seems to be following the Lehman playbook word for word. 

 I won't bore you with all of the details so we can focus on what is happening right now.  The market is not sure if DB will survive and they are cutting back their exposures (trading, deposits, counterparty activities) to DB.  This has a snowball effect of weakening DB further, causing more speculation about their future, etc, etc.

The EU seems very divided on the issue of saving DB (who has a the largest derivatives exposure of any bank in the world) and it's my hunch that this will get worse before it gets better.  Ultimately, I believe Germany would step in to save them but I don't believe the broader EU will offer much support.

So why do I care about some German bank?
Well, they are the largest investment bank in Europe, they have $1.8 trillion in assets, they have ties to every major bank around the world which makes them perhaps the most systemically important bank and they have notional derivatives exposure of somewhere around $51 trillion (yeah, with a T - that's real money).

The markets are clearly concerned about DB right now but the broader EU banking industry is in trouble.  I have serious concerns about the health of some Italian and Spanish banks and DB's issues might be the catalyst that starts a wave of banking issues across the EU. 

It will be interesting to watch this play out and much like in 2008, every headline about a bailout or non-bailout may swing the markets substantially.

Cheers!

** Update - after being down nearly 9% DB shares are now up slightly on the day after a series of twitter rumors started gaining steam.  The rumor is that the Dept of Justice in the US would be willing to negotiate a lower settlement over fraud allegations ($5.4 bil vs. $14 bil) to help stabilize DB.

Well, if we've learned anything it's that we must save the banks at all costs, right?

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