Is Deutsche Bank Signaling A New Banking Crisis?

Secular Investor's picture

Deutsche Bank Image

The earnings season has started, and several major banks in the Eurozone have already reported on how they performed in the fourth quarter of 2015, and the entire financial year. Most results were quite boring, but unfortunately Deutsche Bank once again had some bad news.

Just one week before it wanted to release its financial results, it already issued a profit warning to the markets, and the company’s market capitalization has lost in excess of 5B EUR since the profit warning, on top of seeing an additional 18B EUR evaporate since last summer. Deutsche Bank is now trading at less than 50% of the share price it was trading at in July last year.

Deutsche Bank chart

Source: stockcharts.com

And no, the market isn’t wrong about this one. The shit is now really hitting the fan at Deutsche Bank after having to confess another multi-billion euro loss in 2015 on the back of some hefty litigation charges (which are expected to persist in the future). And to add to all the gloom and doom, even Deutsche Bank’s CEO said he didn’t really want to be there . Talk about being pessimistic!

Right after Germany’s largest bank (and one of the banks that are deemed too big to fail in the Eurozone system) surprised the market with these huge write-downs and high losses, the CDS spread  (‘Credit Default Swap’) started to increase quite sharply. Back in July of last year, when Deutsche Bank’s share price reached quite a high level, the cost to insure yourself reached a level of approximately 100, but as you can see in the next image, the CDS spread started to increase sharply since the beginning of this year. It reached a level of approximately 200  in just the past three weeks, indicating the market is becoming increasingly nervous about Deutsche’s chances to weather the current storm.

CDS Deutsche Bank

Source: Boursorama.com

Let’s now take a step back and explain why the problems at Deutsche Bank could have a huge negative impact on the world economy. Deutsche has a huge exposure to the derivatives market, and it’s impossible, and then we mean LITERALLY impossible for any government to bail out Deutsche Bank should things go terribly wrong. Keep in mind the exposure of Deutsche Bank to its derivatives portfolio is a stunning 55B EUR, which is almost 20 times (yes, twenty times) the GDP of Germany and roughly 5 times the GDP of the entire Eurozone! And to put things in perspective, the TOTAL government debt of the US government is less than 1/3rd of Deutsche Bank’s exposure.

Oops.

Indeed, oops. And the worst part of all of this, is the fact the problems at Deutsche Bank are slowly penetrating the other major financial institutions. Have a look at the CDS spread of Banco Santander (from 109 in December to 170 now).

CDS Banco Santander Deutsche Bank

Source: ibidem

And Intesa Sanpaolo? From 82 in November to 147 right now.

CDS Intesa Deutsche Bank

Source: Ibidem

Something is rumbling in Europe’s intestines, and Deutsche Bank is leading the pack towards another huge financial crisis. The CDS spreads of literally ALL major European banks have posted huge changes in the past 3-4 weeks, and if you throw in the most recent messages from Citibank, stating the world economy is trapped in a death spiral, you might want to think about protecting yourself against yet another financial meltdown.

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waterwitch's picture

Popcorn fund:  Buy DB puts! 

Bryan Roland's picture

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mototard's picture

Folks in Europe from January to June of 1914 did not know they were living in the lead up to the disaster we now call WW1.

Folks in the USA did not know that the period up to September of 1929 was the leadup to the Great Depression.

I wonder what we are missing now?  WWIII?  The Great Depression Part Two?  Peace in our Time?

(long on popcorn.......)

 

 

Insurrexion's picture

 

 

I think we need to look at the whole fucking picture.

As this author wrote last month, we are witnessing Central Bank Terrorism.

https://www.linkedin.com/pulse/global-credit-risk-john-m-cunningham?trk=...

Flying Wombat's picture

Yes!  But normalcy bias is starting to fade.  Jason and I talk about that on this week:  

Fear The Bust! Bank Carnage, Precious Metals Bull Returns? - Welcome to Dystopia #15

 

bluskyes's picture

55 B Euro? Does B mean T in Deutschland?

LynRobison's picture

You're right. Everything is fine. It's fiiine.

Tall Tom's picture

$1 Billion US = $1 MILLIARD German

 

Thus...

 

$1 Trillion US = $1 Billion German,

 

as

 

1000 Milliards German = 1 Billion German

 

Look that up.

 

http://mathworld.wolfram.com/Milliard.html

 

It just serves to demonstrate the inherent INNUMERACY of the people who comment on this "financial" website, which, leads everybody to believe that it was a typo...when it was not.

zippedydoodah's picture

Are you serious Tom?

What about the other two amounts quoted? Did they really see market cap fall by five trillion euros, and did they see an additional eighteen trillion euros evaporate since last summer?

I suggest it was indeed a typo.

 

"Just one week before it wanted to release its financial results, it already issued a profit warning to the markets, and the company’s market capitalization has lost in excess of 5B EUR since the profit warning, on top of seeing an additional 18B EUR evaporate since last summer." 

PaperTaperFakerCaper's picture

The Deutsche and Saudi will depeg -- any day now.  Different reasons, same season.  

Lets Buy The Dip's picture

i think this could happen, only time will tell. The stock market is paper thin, and zero hedgers are getting their crash, but is it just a dip, before more up or is this the start of a HUGE CRASH. its too early to tell I think. 

There are other reasons right now for the stock market crashing, here is a good read ==> why did the stock market drop today

lakecity55's picture

NY Globex just opened, waiting for the hammer down....1730 hrs EST.....

Dark Daze's picture
Dark Daze (not verified) Feb 7, 2016 3:20 PM

Why does everyone hate Europe so much?

JamaicaJim's picture

THE biggest reason is something you can answer/ponder....and here's the question;

Quick...name ONE "good" leader of a country in Europe in the last 30 years.......

..................slim pickins....if any....

THEN there is everything else.....

Check the CURRENT "leaders"....

................................eeeeeeeeeeeeeeeeeeeeeeeeeee yeah

Berspankme's picture

Euros are weaklings., Tit suckers for life. Collectivists. 

lakecity55's picture

Just the Rapefugees.

Europeans are pissed off that they now have to put their goats and sheep in burkas.

peddling-fiction's picture

And 10 year old boys need burka´s too.

Piger Argentarius's picture

Counting the entire derivative exposure as one big risk is inaccurate. In reality, the derivative portfolio contains many items that offset each other. An airline may bet on expensive oil while a drilling company has a derivative bet on cheap oil, both are protecting their revenue but in opposite directions. Small depositors will get their money, any significant commercial client who doesn't spread their capital around different banks to limit their risk exposure is just dumb and they will pay for it.

Holding all cash in Euro is equally stupid, there are still enough currency markets in Europe, Pounds, Swiss Franc, Kroner etc. to spread currency risk within that market.

J Jason Djfmam's picture

A person should create their own SDR.

That being said, dumb is in style.

graspAU's picture

Financial Derivatives Explained:

The most basic of derivatives could be considered to be simple puts and calls (stock options).  They get more exotic and complicated (by a lot) from there.

I'm a drag racer (my hobby).  So I'll try to make a quick (imperfect) analogy.  If you have a race car and you enter a drag race competition you hope to win the trophy and perhaps a cash prize by beating the other racers.  You have skin in the game- your car, your fuel, your health, your reputation.  That's like owning something (stocks) and hope you will make a profit on it.  

But up in the stands, among the spectators (where the big money is, just to let you know), there are all kinds of side-bets going on.  Who's going to beat who, by how much, who's going to turn low ET, who's going to turn the highest MPH, etc.  THOSE ARE DERIVATIVES CONTRACTS.  Those betting have no direct skin in the game, but can profit on certain outcomes.  And if some of those betting are doing so with borrowed money, that's a leveraged derivative. – NoDebt Thu, 09/25/2014 - 21:44 | 5258293 – zerohedge

 

So what happens when a person in the chain decides to not pay their bet loss? You see massive amounts of people freeze up and not honor commitments or trust each other. When things freeze up, things go out of business, people lose jobs, etc., etc. What a lot of people don't know is that before Lehman and Bear in 2008 was Aug. 2007 when the private label MBS market (a huge portion of the bond market) completely locked up, and no sales were made. There were huge derivative bets on that market, but the primary participants did not even trust each other to trade. So in the analogy above, it would be like everyone showing up for the drag racing event, all the folks in the stands making tremendous bets, and then no one with skin in the game would even race each other. Bear and Lehman were a symptom of that Aug 2007 lockup, and going back further in time there was a pretty big bubble that got so big it popped, and only certain people noticed at first. One of them was not Ben Bernanke :) You can argue root causes, but in the end the results were devistating, and the chain of events continues to this day.

 

PlayMoney's picture

when a few start to not pay off its not inaccurate. their derivate exposure is higher than the gdp of the whole eurozone. if a counterparty to one can't pay it offsets nothing and it will snowball as all the banks are connected

Tall Tom's picture

Lehman Bros. times 1000.

 

Credit Freeze II...the Final Act.

 

Nobody will be able to restore any confidence this time around.

 

How sweet it is.

 

With the China outflow numbers this collapse may happen tomorrow. It may not.

 

Depends...How much exposure does DB have to China?

new game's picture

TT, it is really is about china! 32 trillion of debt, 3.5 x gdp and rising. collapsing fundamentals, ect. on and on. not good...

CarpetShag's picture

Yeah right, the 55 trillion in derivative exposure all nets out to about 10000 euros.

ah-ooog-ah's picture

the counterparties will all be there to pay at settlement day, no problemo

 

yeah right

 

Motorhead's picture

Fuck, with Deutsche Bank all fucked up and Germany's immigration policy (disaster), Germany might be in for some fucked up times here pretty soon.

PaperTaperFakerCaper's picture

Fukkin A right, man.  

They be fukked.  All jakked up.  "Can you superfukk me?".  

J Jason Djfmam's picture

Karma's catching up with them.

 

 

Chandos's picture

«Karma's catching up with them.»

 

And karma for what again?....Please do enlighten us with your History Channel  Weltanschauung...

J Jason Djfmam's picture

Well.... A few months back, Germany was all over Greeces shit about their money problems.

Ya dig?

old naughty's picture

their master smoothed out (read:avoided) the "universal balance sheet"

by getting "acceptance" from us...

so no karma to the chosen few.

new game's picture

yup, they fucked of euro with the euro, and now it is tyme to pay. wish it hadn't happened, not to mention the worldwide ripple effect! and then there is china! wtf he says as this mess become worldwide contasian...

storeman0913's picture

Glad you changed to trillion.  Had me really scratching my head on Germany's GDP.

adonisdemilo's picture

Easy solution;

Exit the Euro, stage left, go back to the DMark.

The Euro can be exchanged for the DMark with the Euro down to it's real value, say 4, yes FOUR cents.

The numpties who thought the Euro was a good idea will get a very large dose of reality.

Dark Daze's picture
Dark Daze (not verified) adonisdemilo Feb 7, 2016 3:18 PM

And what magic hole did you pull the figure of 4 cents out of, your arse?

RaceToTheBottom's picture

Didn't DB have the worst Derivative exposure?  Even back with the beginning of the crisis in 2007?

If memory serves me correctly, WS banks were laughing how much crap DB was buying without even recognizing the crap they were buying...

BD and most of the TBTF should have failed in 2007.  

We have mortgaged our future in order to give TBTF banks 8 years of live and their CEO banksters millions in compensation....

12357111317's picture

I think the book "The Big Short" spoke about that.  Can't remember what, but sort of what you're saying.

lakecity55's picture

"Don't cry, Mr Cryan, I have your back."
"Th-thanks, Mr Yellen."
"Here, use my hankie."

. . . _ _ _ . . .'s picture

I think that $55B should have read $55T.

No way out for DoucheBank.

. . . _ _ _ . . .'s picture

Good point, but,

"Just one week before it wanted to release its financial results, it already issued a profit warning to the markets, and the company’s market capitalization has lost in excess of 5B EUR since the profit warning, on top of seeing an additional 18B EUR evaporate since last summer. Deutsche Bank is now trading at less than 50% of the share price it was trading at in July last year."

So I agree with your premise, but not in this case. Just a typo.

KnuckleDragger-X's picture

Tsk, using real numbers is racist.....

christiangustafson's picture

$DB is fine.  They have been around for years and years.  Michael Lewis used to sell them bonds back in the 80s.

Nothing to see here.