I’m in Awe of How Fast Deutsche Bank is Falling Apart, by Wolf Richter

Deutsche Bank is circling the drain. If it doesn’t get a government back-up, it probably will not survive. From Wolf Richter at wolfstreet.com:

Counterparties lose confidence, withdraw cash.

Deutsche Bank, with $2 trillion in assets, amounting to 58% of Germany’s GDP, one of the most globally interwoven banks, with gross notional derivatives exposure of €46 trillion, right at the top along with JP Morgan (booked as €41 billion in derivative trading assets after netting and collateral) – this creature of risk and malfeasance, is finally starting to scare its counterparties.

This is how Lehman came unglued. Slowly and then all of a sudden.

Bloomberg News today:

[S]ome funds that use the bank’s prime brokerage service have moved part of their listed derivatives holdings to other firms this week, according to an internal bank document seen by Bloomberg News. Millennium Partners, Capula Investment Management, and Rokos Capital Management are among about 10 hedge funds that have cut their exposure, said a person familiar with the situation….

So far, these are just the first of Deutsche Bank’s 200 hedge-fund clients that use it to clear their derivatives transactions. Banking is a confidence game. When confidence sags, the whole construct comes tumbling down. And the first movers have a big advantage in getting their cash out in in time. Bloomberg:

Clients review their exposure to counterparties to avoid situations like the 2008 collapse of Lehman Brothers Holdings Inc. and MF Global’s 2011 bankruptcy when hedge funds had billions of dollars of assets frozen until the resolution of lengthy legal proceedings.

As the leak ricocheted around the world, Deutsche Bank shares plunged 6.6% in late trading today in Frankfurt to €10.25, having been down 8% at one point earlier. Shares are at the lowest level since they started trading on the Xetra exchange in 1992. They’re down 68% from April 2015. Just before the financial Crisis, they briefly traded at over €100 a share. By that measure, they’re down over 90%!

This comes after a 7.6% plunge on Monday. That rout was initiated Friday afternoon when Aunt Merkel, fretting about the general elections in the fall of 2017, informed voters via a leak that she had told CEO John Cryan in a “confidential meeting” that state aid was “categorically” out of the question.

Merkel’s popularity has recently taken a hit, and a big, immensely unpopular taxpayer bailout of bank stockholders and bondholders could cost her the election. The onslaught of contradictory denials that this episode has produced was a sight to behold.

So Tuesday, shares took a breath; Wednesday, they rose 2%; and today by mid-afternoon, they rose another 1% to €10.87, as falling knife-catchers were grabbing what they could, before all heck broke loose again.

Deutsche Bank’s market capitalization has shriveled to €14 billion ($15.7 billion), a few bad trading days away from the $14 billion in fines that the US Department of Justice wants in order to settle the allegations surrounding Deutsche Bank’s residential mortgage-backed securities that blew up during the Financial Crisis.

Deutsche Bank isn’t getting singled out. US Banks have already settled their RMBS allegations: Bank of America for $16.7 billion, JP Morgan for $9 billion, Citigroup for $7 billion, Goldman Sachs for $5 billion, and so on. They all settled for less than the original amount. Deutsche Bank will be able to settle for less as well. But its problem isn’t just the Department of Justice.

To continue reading: I’m in Awe of How Fast Deutsche Bank is Falling Apart

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