Jerry Della Femina was a very good marketing man in his time. His unique and unusual approaches were legendary to say the least. One outrageous campaign showed a world war two Japanese soldier in his uniform, samari sword, and holding small portable television set. The caption was: “From those wonderful people who brought you world war two…” The client, who may have been Sony Corporation did not believe the ad was a great seller. I suppose that if Jerry were alive today he might layout a similar campaign for Deutsche Bank. “From those wonderful people who brought you blitzkrieg warfare, Deutsche Bank now brings you blitzkrieg bank failures.” Note the plural on failures. People, if Lehman Brothers brought the American people the worst never ending recession (and don’t kid yourself, it never really stopped if you are willing to look at all the real data) that is ushering in a long depression and never ending useless Federal Reserve Bank intervention, Deutsche Bank is about to welcome Europe the a great depression. Yes, it sounds like doom and gloom, but we must look at the facts.
Europe is awash is never ending debt, debt from social programs, from world wide expansion of sales of goods and services (Germany exports most of her GDP by lending the means to pay for her exports, wow, shades of Japan in the eighties and nineties and where are the Japanese now). When Greece, Spain, Italy, Ireland, and Portugal were admitted into the European Monetary Union they has significant debt, both public and private. Their currencies were worth far less that the new Euro and so these PIIGS gained the economic benefit of greater purchasing power. But they also found borrowing money was far easier than it has been when they had their own currency. Greece only owes 320 billion euros, not all that much considering what the US Government spends and wastes. Hell, I suppose the Clinton Foundation might ever be able to pay that off with the income for speeches and favors Bill and Hillary command (yes, I said favors and I meant corruption. If a thief is present at one robbery but nothing is found on his person we may believe that his presence is merely coincidence. But if he is present at twenty or more robberies the matter is no longer coincidence, we can draw the conclusion that the thief took part in the robberies. That is the Clinton connection.) One needs only to take a look at the government debt of over half the EU countries and see that many of those countries are operation at close to 100 percent debt to GDP if not more. Well, surely all those governments are good for it, right? I mean they can already raise more tax. Well, maybe not. The Value Added Tax in the EU is running about 20 to 22 percent. Americans, imagine if you went to the store and that ten dollar item cost you two additional dollars in tax. What about that twenty thousand dollar car, now it would cost twenty four thousand dollars. And that house, you found one for two hundred thousand and the government wants forty thousand more for the tax on the sale? There is a reason why those who sell firewood in France want to be paid in cash. |No VAT to collect and no income to report. And with official unemployment in Europe as a whole running over ten percent and some countries that rate is twenty five percent, just how much more tax will any government collect?
But the European banks are in really bad shape for they have been authorized to lend to the gills and take as much risk as they can stand. In Spain, they no longer attempt to foreclose on most properties, both residential and commercial because there are very few buyers ready to pay cash. Europe is waiting for the spark that touches off the explosions. First the little ones and then the bigger ones. But it may not be a little explosion from some minor cache of explosives. It just may be a big one that starts first. True, it looks like Greece may get booted out of the EMU, certainly Germany wants them gone. And the German GDP is 2.7 trillion, what’s 320 billion to them? Chump change. But it is not the amount of the Greek debt that may be defaulted that really matters. Oh what a tangled financial web we weave when first we try to deceive the risk using by using derivatives. And it wouldn’t be so staggeringly bad if just one derivative was issued per one bond customer. Unlike the American insurance industry, only the owner of an asset may take out an insurance policy. Imagine if you took out fire insurance policies are over your city and you didn’t own the property. A fire burns down the building and both you and the owner get paid the same full cost of the asset. Insurance companies would soon go out of business. So why do banks issue derivatives against the same bonds but to multiple parties? Hell, the bank issuing you the derivative against some government defaulting on the bonds you hold may, and usually does, turn around and buy a derivative against their having to pay out on the one they sold to you. And so the daisy chain goes, growing ever larger.
Well, why should we worry about Deutsche Bank? Because they have issued almost 55 trillion euros worth of derivatives, or about twenty times Germany’s GDP. And we aren’t even counting all the loans outstanding, quite a few are under performing or non performing (meaning dead beat loans). Well, even if the Greeks may cost them a trillion in derivative losses, so what, a drop in the bucket. For a bank whose own bonds have bee downgraded to BBB+, just two pegs above junk, a trillion euro loss ain’t chicken feed. Here, take a look at this part of an article on ZeroHedge.
Here’s a re-cap of what’s happened at Deutsche Bank over the past 15 months:
- In April of 2014, Deutsche Bank was forced to raise an additional 1.5 Billion of Tier 1 capital to support it’s capital structure. Why?
- 1 month later in May of 2014, the scramble for liquidity continued as DB announced the selling of 8 billion euros worth of stock – at up to a 30% discount. Why again? It was a move which raised eyebrows across the financial media. The calm outward image of Deutsche Bank did not seem to reflect their rushed efforts to raise liquidity. Something was decidedly rotten behind the curtain.
- Fast forwarding to March of this year: Deutsche Bank fails the banking industry’s “stress tests” and is given a stern warning to shore up it’s capital structure.
- In April, Deutsche Bank confirms it’s agreement to a joint settlement with the US and UK regarding the manipulation of LIBOR. The bank is saddled with a massive $2.1 billion payment to the DOJ. (Still, a small fraction of their winnings from the crime).
- In May, one of Deutsche Bank’s CEOs, Anshu Jain is given an enormous amount of new authority by the board of directors. We guess that this is a “crisis move”. In times of crisis the power of the executive is often increased.
- June 5: Greece misses it’s payment to the IMF. The risk of default across all of it’s debt is now considered acute. This has massive implications for Deutsche Bank.
- June 6/7: (A Saturday/Sunday, and immediately following Greece’s missed payment to the IMF) Deutsche Bank’s two CEO’s announce their surprise departure from the company. (Just one month after Jain is given his new expanded powers). Anshu Jain will step down first at the end of June. Jürgen Fitschen will step down next May.
- June 9: S&P lowers the rating of Deutsche Bank to BBB+ Just three notches above “junk”. (Incidentally, BBB+ is even lower than Lehman’s downgrade – which preceded it’s collapse by just 3 months)
Deutsche Bank is in critical condition according to any standard of financial operations measurement. It is not a question of if they fail, it is a question of when. Or course with half the French owned banks in bad financial shape, they merely become the dominoes that fall once disturbed. You see, once the EU creditors push Greece out of the EU, Greece defaults on its debt. That is the first push, the first domino that falls. And if Greece goes, so will Portugal and then Spain. And if that happens, Italy better make it a trio. When will Deutsche Bank start its fall? My guess would be by the end of the year, perhaps September at the earliest. Oh I could be wrong, but the the economies of the individual EU countries and the collective EU are very weak with no relief in sight. Don’t be fooled with the quantitative easing the ECB is doing, that is merely adding fuel to the fire, encouraging more debt and higher risk premiums. And if asked will China or Europe fall into depression in the race to the bottom, I’ve got to say that it is a dead heat on a merry-go-round.