re: Deutsche Bank Litigation / Bailout Watch

quote:

---

Long story short, an argument the low interest we think we need to help the economy is going to slowly kill it in the long run

---

Could you expound on this, please? What did the research suggest/conclude would happen? I can see asset prices reaching unjustified levels, an increase in bad/non-producing loans, negative effects on Social Security's Treasurys' yields and thus concerns to its sustainability, and perhaps generally opening the door to a credit crisis. I'm intrigued as to what the research said.

The more I read about this, the more it looks like it is a case of regulator-induced financial distress. See today's WSJ: " Who’s the Systemic Risk Now?"

quote:

---

The German bank’s share price has fallen as much as 20% since a Sept. 15 Journal report that the U.S. Justice Department is seeking a fine of up to $14 billion for selling mortgage-backed securities between 2005 and 2007. That is well beyond Deutsche Bank’s ability to pay, given its $18 billion market capitalization before the story broke.

Deutsche Bank says it “has no intent to settle these potential civil claims anywhere near the number cited.” Markets are spooked anyway. A fine much above $3 billion would strain an institution that faces potential payouts in other regulatory cases, and the bank has already settled claims for billions of dollars for the likes of alleged interest-rate rigging. That includes Deutsche’s Bank’s $1.9 billion share of the 2013 settlement of the bizarre U.S. claim that numerous banks somehow deceived the sharks at Fannie Mae and Freddie Mac.

So it’s not crazy to think this fiasco could become a systemic crisis. With a €1.8 trillion ($2.022 trillion) balance sheet often criticized for its opacity, Deutsche Bank would struggle to replenish capital at today’s share price. Trouble at one of the European Union’s largest banks could trigger a new round of market fears over counterparty risk and political uncertainty.

---

quote:

---

The new imponderable is the U.S. settlement raid that’s among the largest it has demanded. The huge fines rest on a dubious theory that government prosecutors know better than investors how assets ought to have been priced in a market mania 10 years ago. And with a handful of exceptions (none at Deutsche Bank), regulators haven’t found individual bank employees who committed prosecutable crimes in the mortgage mess. These bank robberies are political.

Some Europeans think the Deutsche Bank raid is American retaliation for the EU’s August ruling that Apple owes back taxes of €13 billion in Europe.

---

So there are problems with balance sheet opacity and poor risk management controls, but overall, this looks like something based more on politics rather than ordinary business mistakes. In a way, that's good for Deutsche Bank, because that means the end result will likely boil down to a legal settlement that will be negotiated with input from both Obama and Merkel.

It's not as if the Obama Administration wants to see a new banking crisis, so the incentives here would seem to preference calling off the dogs, while trying to leverage some waning influence to prevent more EU tax cases like what happened to Apple. The wildcard in all of this, of course, is that the Obama Administration doesn't want to say any of this publicly, because it would enrage the Bernie Sanders / Elizabeth Warren wing of his own party.

I was wondering why stocks went down so much today. Last day of the quarter tomorrow. Will be interesting to see if anything saves this drumming. Only bright spot this week has been the OPEC deal.

Commerzbank in Germany announced 10k layoffs which means that there must be more issues in the banking environment than just DB

Hot damn! What a day!

CNBC: " Deutsche Bank shares drop after report that some hedge funds have reduced exposure"
Business Insider: " Deutsche Bank got slammed again"
Bloomberg: " U.S. Stocks Retreat as Deutsche Bank Woes Hit Financial Shares"
Bloomberg: " Some Deutsche Bank Clients Reduce Collateral on Trades"

And it's not just Deutsche Bank... the news keeps piling on Wells Fargo as well...

Bloomberg: " Wells Fargo Troubles Mount With Penalty for Soldiers’ Loans"
Bloomberg: " Fines, Withdrawals, Job Cuts. It Was an Ugly Day for Global Banks"

quote:

---

Even before the opening bell in New York, Thursday looked like a grim day for some of the giants of global banking.

But few expected the barrage of bad news that soon hit on both sides of the Atlantic -- a rat-a-tat-tat of job cuts, scandal and financial worry that sent bank shares tumbling and left many investors wondering just where or when the pain would end.

It began in Germany, where long-struggling Commerzbank AG unveiled yet another plan to regain its footing, this time by cutting one in five of its employees. In Washington, came still more blistering attacks on John Stumpf, whose grip atop embattled Wells Fargo & Co., the largest U.S. mortgage lender, remains tenuous amid the uproar over a scandal involving unauthorized accounts.

And then, back in Germany, came the bombshell: revelations that some hedge funds were moving to reduce their financial exposure to Deutsche Bank, now the biggest worry in global finance. Before Stumpf left the U.S. House chambers after more than four hours of grilling, news broke his bank would be hit with more penalties after improperly repossessing cars owned by U.S. soldiers.

---

quote:

---

The 38-company Bloomberg Europe Banks and Financial Services Index has tumbled 24 percent this year, while the KBW Bank Index of 24 U.S. lenders has slid 4.6 percent, led by Wells Fargo’s 18 percent decline.

In the past 10 days, Stumpf has agreed to forgo $41 million in compensation, and an adviser to Turkish President Recep Tayyip Erdogan glibly suggested on Twitter that Turkey buy Deutsche Bank as its market value fell by more than half this year. The German lender is now barely worth more than the $14 billion settlement the U.S. Department of Justice would like to extract in a long-running investigation of the bank’s mortgage securities business.

---

quote:

---

Commerzbank Chief Executive Officer Martin Zielke announced plans Thursday to eliminate 9,600 jobs, leaving it no bigger than it was before its 2008 acquisition of Dresdner Bank. The Frankfurt-based bank has lost about 39 percent of its market value this year.

“Germany is still overbanked, and it’s tough to have Germany as your home base when you want to compete with French, Spanish or American peers that operate in less fragmented home markets,” said Klaus Fleischer, a professor of finance at the University of Applied Sciences in Munich.

---

When the day started this morning, I was thinking that I had overreacted earlier this week, and that perhaps everything would be fine. Today seems to have swung things back in the other direction.

Sharks are circling around the smell of blood in the financial waters.

There were a boatload of articles about Deutsche Bank today, but the most important story was captured by this one: " Deutsche Bank Jumps on Report of $5.4 Billion DOJ Settlement."

As of now, the $5.4 billion appears to still be rumor of a confidential disclosure. However, it's not 100% certain that such an amount would end DB's troubles.

quote:

---

Analysts at JPMorgan Chase & Co. wrote in a note to clients earlier this month that a U.S. settlement of $3 billion to $3.5 billion would leave the German lender room to settle other legal issues. Any additional $1 billion in litigation charges would erode capital by 24 basis points. The bank’s common equity Tier 1 ratio stood at 10.8 percent at the end of June.

---

An article prior to market open listed " Ten People Who Will Be Key in Deciding Deutsche Bank’s Future", and only one of them was an American.

quote:

---

BILL BAER. The U.S. Justice Department’s No. 3 official is calling the shots in the Deutsche Bank talks.

---

But you can bet your arse (1) that his decision will be by far the most determinative of Deutsche Bank's immediate outcome, and (2) that he's not doing this in isolation. Heat from the White House, whether directly or indirectly, has got to be influencing him.

I was a buyer at $17 and I'm happy to keep buying now. Shares are on sale

Yeah. Everybody, from Merkel to Obama to Draghi to Yellen to Lynch to Bear, has an incentive to play a game of kick-the-can-down-the-road for at least another month. China's already in another debt bubble. Japan is showing signs of strain and starting to sink under its own weight. European banks are struggling. Everywhere the story is the same--no growth, but higher multiple valuations. All with super low interest rates and deflationary pressures leaving no room for traditional policy responses to a pending collapse.

A bad storm is brewing. It reminds me of that scene with Shooter McGavin as the weatherman in The Perfect Storm: LINK.

If banks are the first indicator, how does oil react and play into all of this? Does the price of oil rise?

Sunday Update: Deutsche Bank is not out of the woods yet (see the Bloomberg article), but it's a pretty good bet that it won't collapse like Lehman did (see the Barron's article).

Bloomberg: " Germany’s Business Chiefs Back Deutsche Bank Amid Mounting Woes"

quote:

---

Leaders of Germany’s biggest companies rallied behind Deutsche Bank AG, saying in newspaper interviews that the lender now facing a hefty U.S. fine and a court fight in Italy is crucial for the country and its businesses in a globalized world.

In interviews with Frankfurter Allgemeine Sonntagszeitung, leaders of DAX corporations, including Daimler AG, Munich Re, Siemens AG and Deutsche Boerse AG, underscored that nationality still plays an important role when it comes to the choice of lenders.

"The German industry needs a German bank that accompanies us out into the world," BASF SE Chairman Juergen Hambrecht told the newspaper. "The power games out there in the market aren’t transparent, but they’re there."

---

Why else would they continue saying this, unless they thought that DB might still need some government help?


Barron's: " Is Deutsche Bank Really the Next Lehman?"

quote:

---

By contrast, adds Mackintosh, “Deutsche is different. It has a far more diversified client base, sourced from German retail banking and multiple institutional business lines. It has a lot more liquidity, amounting to €220 billion ($246.8 billion) at the end of June, equal to 12% of assets, against the $45 billion Lehman had a month before its downfall, 7.5% of assets.”

Mackintosh concedes that Deutsche has a weak capital position made worse by weak profitability, “but its problems aren’t as critical as Lehman’s, where losses amounted to more than a tenth of shareholder equity in each of the final two quarters of its life.

“Most important, Deutsche has access to the European Central Bank as its house pawnbroker, meaning it can turn even fairly hard-to-sell assets into cash if it needs to,” Mackintosh adds. “Lehman was refused extra credit by the U.S. Federal Reserve on the basis that it didn’t have enough reliable assets to post at the bank.”

---

But DB will mostly certainly get government help if it needs it, whether from Draghi at the ECB, or from Merkel courtesy of the German taxpayers.

quote:

---

Shooter McGavin as the weatherman in The Perfect Storm

---