Anybody who reads my posts will know I’ve been talking about the impending demise of Deutsche Bank for several months.
I have also been intrigued to watch its demise inexorably align with the Shemitah of this Jubilee year – this weekend. It’s been like watching the death throes of a wild beast; except its thrashing tail could bring down the entire global financial system. I don’t use these words lightly. And you might have seen its parlous state make the MSM in the last 24 hours. Here’s the latest:
It is not solvency, or the lack of capital – a vague, synthetic, and usually quite arbitrary concept, determined by regulators – that kills a bank; it is – as Dick Fuld will tell anyone who bothers to listen – the loss of (access to) liquidity: cold, hard, fungible (something Jon Corzine knew all too well when he commingled and was caught) cash, that pushes a bank into its grave, usually quite rapidly: recall that it took Lehman just a few days for its stock to plunge from the high double digits to zero.
It is also liquidity, or rather concerns about it, that sent Deutsche Bank stock crashing to new all time lows earlier today: after all, the investing world already knew for nearly two weeks that its capitalization is insufficient. As we reported earlier this week, it was a report by Citigroup, among many other, that found how badly undercapitalized the German lender is, noting that DB’s “leverage ratio, at 3.4%, looks even worse relative to the 4.5% company target by 2018” and calculated that while he only models €2.9bn in litigation charges over 2H16-2017 – far less than the $14 billion settlement figure proposed by the DOJ – and includes a successful disposal of a 70% stake in Postbank at end-2017 for 0.4x book he still only reaches a CET 1 ratio of 11.6% by end-2018, meaning the bank would have a Tier 1 capital €3bn shortfall to the company target of 12.5%, and a leverage ratio of 3.9%, resulting in an €8bn shortfall to the target of 4.5%.
When Citi’s note exposing DB’s undercapitalization came out, it had precisely zero impact on the price of DB stock. Why? Because as we said above, capitalization – and solvency – tends to be a largely worthless, pro-forma concept. However, when Bloomberg reported today that select funds have withdrawn “some excess cash and positions held at the lender” the stock immediately plunged: the reason is that this had everything to do with not only DB’s suddenly crashing liquidity, but the pernicious feedback loop, where once a source of liquidity leaves, the departure tends to spook other such sources, leading to an outward bound liquidity cascade. Again: just ask Lehman (and AIG) for the details.
Which then brings us to the $64 trillion (roughly the same amount as DB’s gross notional derivative exposure) question: since DB is suddenly experiencing a sharp “liquidity event”, how much liquidity does Deutsche Bank have access to as of this moment, to offset this event? The answer would allow us to calculate how long DB may have in a worst case scenario if we knew the rate of liquidity outflow.
For the answer, we go to a just released note by Goldman Sachs, which admits that it is now facing “crisis” questions from clients, among which “can a large European bank face a liquidity event” to wit”
Deutsche Bank stands at the center of the European financial system – it is a major counterpart of all relevant European banks, and broader. Recent reports of potential litigation hits have compounded capital concerns, and raised the overall level of market anxiety. “Crisis” questions are being asked: “is there risk of a financial crisis re-run” and “can a large European bank face a liquidity event”?
So what is the answer: how much liquidity does Deutsche Bank have access to? The answer is two fold, with the first part focusing on central bank, in this case ECB, backstops in both $ and €.
End of quote.
In line with that Chinese proverb; we live in interesting times.
In the light of all of this, you might want to watch Jim Rickards and Egon von Greyerz discuss 10000 gold.
Richard
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