The Loophole for Deutsche Bank’s Bailout: Game almost Over? by Don Quijones

SLL agrees with the premise of this article: the powers that be in Germany and Europe are frantically looking for a legal loophole that will allow the German government to bail out Deutsche Bank and it’s almost a foregone conclusion that they’ll find one. From Don Quijones at wolfstreet.com:

Everyone is denying everything.

Judging by the slow-motion meltdown of a growing number of large banks in Europe, including Deutsche Bank (in the IMF’s words, the “world’s most important net contributor to systemic risks”), confidence in their solvency is evaporating. And the denial and blame games have begun.

Deutsche Bank CEO John Cryan denied any need to raise capital or ask for a bailout. That was followed by furious denials from Mario Draghi that the ECB’s low rates are partly responsible for Deutsche Bank’s current woes. Roughly half of all of Deutsche’s profits have traditionally come from loan interest; now, thanks to the madcap negative-interest-rate policies, that source of income is disappearing.

But the bank’s spectacular fall from grace — it has lost 90% of its market value since 2007 — is primarily owed to woeful, often criminal mismanagement. Hence, all the fines. As the WSJ’s Paul J Davies writes:

The bank faces all the problems that plague its peers, but it has most of them worse than rivals. Its costs are among the highest, its balance sheet among the most bloated and its longer-term profitability one of the least attractive.

Lies, Damned Lies and Contradictions

Things are so serious and the denials are flowing so thick and fast that many of the main players are contradicting each other — and sometimes even themselves — at just about every turn.

According to Draghi, Deutsche Bank is no longer “systemically important,” despite being assigned that exact same label by the BIS Financial Stability Board, the shadowy group of international financial bodies, finance ministries and central bankers that compiles the list of global systemically important financial institutions (G-SIFIs), in the process enshrining failure as the cornerstone of financial industry success. Its first ever list, which included Deutsche Bank, was published in November 2011, when the board’s chairman was… Mario Draghi.

As for the head of the IMF, Christine Lagarde, she proffered a wildly different take, telling CNBC that Deutsche Bank is a systemic important player in the global financial system, but “is on a solid base currently, and we are not at a stage in which I see the need for a government intervention.”

You can expect that opinion to change significantly in the coming days or weeks, as will Merkel’s dogged insistence that the EU’s Bank Recovery and Resolution Directive (BRRD) — which requires an 8% bail-in of a bank’s creditors, including very large foreign banks and hedge funds — be applied before taxpayers get put on the hook.

This was the line she held to steadfastly throughout the early months of Italy’s banking meltdown. In a recent interview she ruled out any state assistance for Deutsche Bank. A state-financed rescue could be a political liability for Ms. Merkel should she decide to run again in next year’s general election. But with Deutsche Bank’s assets amounting to 58% of Germany’s GDP, Merkel will not allow the bank to collapse. The damage to the German economy would be too enormous.

To continue reading: The Loophole for Deutsche Bank’s Bailout: Game almost Over?

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