About Me

My photo
An Investor and counsellor in Financial Market

Tuesday, September 27, 2016

Could Germany Ever Allow Deutsche Bank To Go Under?

Deutsche Bank, one of Europe’s behemoths, is in very deep trouble having lost 90% 0f its share price value since 2007, has been falling sharply all this last year (48% loss this year) and, with its $42 Trillion in Derivatives exposure was singled out by the IMF, as the bank which ,
“appears to be the most important net contributor to systemic risks…”
Of course Deutsche agues the standard ‘derivatives-aren’t-a-problem’ line, that this 42 trillion all nets out and their real exposure is a fraction of that vast figure. Which is fine as long as you think that in the event of Deutsche coming unstuck, 42 trillions-worth of derivatives contracts can be held in abeyance for the time it would take for all those contracts to be netted out.  As I’ve said before netting out is akin to getting a rowing boat full of people to all change places  without the boat overturning.
And now Deutsche has been threatened by the US DoJ with a $14 billion fine for its crimes for selling knowingly over-valued RMBS (Residential Mortgage Backed Securities) in the build up to the financial crash of 2007.
Deutsche cannot pay $14 billion without raising a great deal of cash. Deutsche has put aside $5.5 billion for paying fines. A mere 9 billion short. So could Deutsche go down? Financially yes it could. But politically, I doubt it. And it’s the tension between these two answers, between the parlous financial state and the huge political significance of Deutsche, that I find interesting.
Deutsche is Germany’s only G-SIB (Global Systemically Important Bank).
http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2016/09/20/20160920_DBCDS_0.jpg
Deutsche is Germany’s financial flag carrier. It stands at the centre of Germany’s long held desire to have Frankfurt eclipse London as Europe’s financial centre. Although Germany also has Allianz as a G-SII (Global systemically Important Insurer), without Deutsche Bank Germany ceases to be a globally significant financial nation (G-SFN – OK I made that one up). Without Deutsche Germany would not sit at the top table of global finance. France would. France has three G-SIBs. The balance between France and Germany within Europe would shift. Maintaining that balance between France and Germany, at the heart of Europe, has been critical in European affairs since WWI.
Could Germany ever allow Deutsche Bank to go under?
Officially the global framework for G-SIFI resolution in bankruptcy has been laid down by the FSB and agreed by all. And interestingly, though they are touted as the result of new thinking since the financial crisis, they are not. I recently received an EU document marked ‘Secret’, entitled  “Overview of Financial Stability Resolution Issues” and dated Feb 2008 which describes pretty much what the FSB has now settled upon now. I mention this because almost every word in it was completely ignored once the crisis hit and each country viewed the imminent demise of their major, flag-carrying banks. Which leads me to wonder why I should believe it would be any different next time? I think this question is particularly critical to Germany because Deutsche is its only G-SIB. In the next massive implosion of debts, France could afford to let one of its G-SIBs go down and still have two seats at the top table. England could do the same.
How will G-SIBs  be wound down?
Resolution should be initiated when a firm is no longer viable or likely to be no longer viable, and has no reasonable prospect of becoming so.
But no one has wanted to state exactly what the trigger is, for deciding that a bank is no longer viable. Except to say the global regulators will leave it to national regulatory authorities to decide. So Germany will decide when Deutsche is no longer viable. Sure, that’ll be grand.
Should an authority take the fatal stop of admitting one of their G-SIBs is no longer viable then things are supposed to move with wonderful efficiency. Resolution of netting out is to be speedily concluded (in as little as two days!) No sniggering please. And then as the gruesome business of sorting the living from the dead parts of the bank gets going  the authorities must definitely NOT rely
…on public solvency support and not create an expectation that such support will be available;
Instead the dead parts will inflict losses first on share holders and then on bond holders in the time honoured order of unsecured first. And then those parts which are not completely dead and might be cut away to live again in a different body, are to be sold off by means of sale or merger.
1.       As a last resort and for the overarching purpose of maintaining financial stability, some countries may decide to have a power to place the firm under temporary public ownership and control in order to continue critical operations, while seeking to arrange a permanent solution such as a sale or merger with a commercial private sector purchaser.
So public bail outs are supposed to be strictly temporary. No holding 80% of RBS for most of a decade. Really? But that’s not the point which is important for Deutsche Bank. The important point is that in any sale of the viable parts of Germany’s only G-SIB, the brutal fact of the matter is that there is no other German financial institution that could afford to buy any of it. Commerzbank? Allianz? Letting an insurer buy a bank? So imagine the situation for Germany. They lose their seat at the top table and then they watch as France, England, American or perhaps China buy the crown of German financial might.
So I don’t think it will ever happen.  Or at least it will only happen when Germany is truly out of any other options.
So if Deutsche is not going to be declared “no longer viable” what are the alternatives?
One option is the UniCredit route. UniCredit was a trillion euro bank. It was Italy’s flag carrier. It had bought Bavaria’s banks and some of Austria’s as well. And yet it’s share price was always   paltry.  Just 7.6 Euros at the market top in May ’07.  And since then it has been a hollow and enfeebled giant. Lumbering and ineffectual. It has been the laughing stock of European banks. But Italy doesn’t seem to mind. They seem content to let UniCredit be the quintessential Zombie bank. Would Germany be as sanguine to leave Deutsche to go the same way?  This would, I suggest, be almost  as injurious to German pride and industrial policy as letting Deutsche go down completely.
But if Germany decided it could not face the financial consequences of obeying the letter of the resolution law nor leave the bank to be a bloated and useless zombie then the alternatives bring in their train even greater political upheavals.  Imagine the German government decides that not bailing out Deutsche just inflicts too much damage on Germany – potentially reducing Germany from the front rank of globally significant nations to  something lesser. It becomes a matter of national pride if not of survival.
http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2016/09/20/20160920_GERMANCDS_0.jpg
So Germany ignores all the FSB rules and regulations and bails Deutsche bringing it into government ownership/protection –  call it what you like. In so doing it demolishes the entirety of European policy regarding bail outs, government debts and austerity. Where then all the German insistence on fiscal discipline it has forced upon Greece, Ireland, Portugal, Spain and Italy? The Bundesbank, Berlin and the ECB would have no authority at all. Every country would have a green light to do the same for their flag carriers.
It would be the end the European experiment. Or the European system would have to try to continue without Germany. And that could only happen if all debts to Germany were repudiated.
I realise all this is speculation. But Deutsche has lost 90% of its value. Only RBS has lost more.  Deutsche has 7000 legal cases against it. Frau Merkel is losing her grip, Brexit rocked the complacent rulers of Euroland and  Madame Marine Le Pen would like to push France to do the same.
And on top of it all NOTHING has been fixed financially at all. There is more debt more leverage, more and more liquidity achieving less and less, interest rates are negative, pensions  are going nowhere, insurers are grasping for risk even as they fear what it will do to them when the next crisis hits and governments are all, every one of them, preparing their armed forces for widespread civil unrest.

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.