Deutsche Bank Is Scared: "What Needs To Be Done" In Its Own Words

Tyler Durden's picture

It all started in mid/late 2014, when the first whispers of a Fed rate hike emerged, which in turn led to relentless increase in the value of the US dollar and the plunge in the price of oil and all commodities, unleashing the worst commodity bear market in history.

The immediate implication of these two concurrent events was missed by most, although we wrote about it and previewed the implications in November of that year in "How The Petrodollar Quietly Died, And Nobody Noticed."

The conclusion was simple: Fed tightening and the resulting plunge in commodity prices, would lead (as it did) to the collapse of the great petrodollar cycle which had worked efficiently for 18 years and which led to petrodollar nations serving as a source of demand for $10 trillion in US assets, and when finished, would result in the Quantitative Tightening which has offset all central bank attempts to inject liquidity in the markets, a tightening which has since been unleashed by not only most emerging markets and petro-exporters but most notably China, and whose impact has been to not only pressure stocks lower but bring economic growth across the entire world to a grinding halt.

The second, and just as important development, was observed in early 2015: 11 months ago we wrote that "The Global Dollar Funding Shortage Is Back With A Vengeance And "This Time It's Different" and followed up on it later in the year in "Global Dollar Funding Shortage Intensifies To Worst Level Since 2012" a problem which has manifested itself most notably in Africa where as we wrote recently, virtually every petroleum exporting nation has run out of actual physical dollars.

The point is, it all started with the rising dollar and the ensuing global dollar shortage, and thus, the Fed embarking on what may be the biggest central bank error of all time. To be sure, the consequences are wide ranging: from the collapse in crude, to the tremors and devaluations in China, to the tightening financial conditions, to the (manufacturing) recession in the U.S., and most recently, to whispers that Deutsche Bank, the bank with $60 trillion in notional derivatives, may be the next Lehman Brothers.

Which, incidentally, brings us to none other than one of Deutsche Bank's most respected credit analysts, Dominic Konstam, who clearly has an appreciation of the existential risk he finds himself in, not only career-wise, but in terms of the entire financial structure. We know this, because after reading his email blast from this morning we realize just how vast the fear, if not sheer terror, is among those who truly realize just how broken the system currently is.

We have reposted his entire letter below, because it represents the most definitive blueprint of everything that is about to be unleashed - especially since it comes from the perspective of one of the people who is currently deep inside Deutsche Bank and realizes just how close to the edge the German bank is.

What Konstam makes clear, in no uncertain terms, is that the the problem is the one we laid out back in November 2014: "It is not oil, it is not in the banks, it is a run on central bank liquidity, especially dollar based and there needs to be much more ($) liquidity."

He also makes it quite clear that investor fears about contagion are well-founded: here it is in the words of a Deutsche Banker:

The exposure issue has been downplayed but make no mistake banks are heavily exposed to Asia/MidEast and while 10% writedown might be worst case for China but too high for the whole, it is what investors shd and do worry about -- whole wd include the contagion to banking hubs in Sing/HKong

His solution? It's actually quite disturbing to all those who thought that all our warnings that cash would be outlawed were nothing but a joke. For those pressed for time jump straight to the "What needs to be done section" - it's a doozy.

So back to the  original question WHAT NEEDS TO BE DONE. Simple?

  1. Recognize the problem. It is not oil, it is not in the is a run on central bank liquidity, especially dollar based and there needs to be much more ($) liquidity. Keynes said to deal with overinvestment boom you cut you don't raise rates. QE is impractical but getting the dollar down would greatly lift dollar based liquidity. So for a starter Fed shd stop raising rates and clearly signal an extended time out.
  2. Draghi shd follow up with a one 2 punch, not to get rates down but open the refi spigot to banks and ease liquidity concerns.
  3. China needs to come clean. Devalue, stabilize reserves and then allocate 1 tn+ to short up strategically important institutions. Stop intervening in equity markets.
  4. And Basel 3 (?4) should be delayed specifically regarding leverage ratios and threat of higher. As a token move there shd be deemphasis of the SSM/bail in rules until there is clarity from the ECB on liquidity sources for stressed banks.
  5. how about some fiscal stimulus
  6. on negative rates -- instead of making them punitive on the banks allow the banks to earn the spread, make them punitive to savers.. Cash shd be charged interest -- put the micro chip in large denom notes/tax cash withdrawals.. encourage spending not saving .. mortgage rates can be negative and banks can still earn a spread. The spread is the problem not the rate.

The existential fear in Deutsche Bank's analyst is tangible, as is the implied threat: "don't do these things, and if Deutsche Bank and its $60 trillion in derivatives blow up, it will be on you."

And with that we check to the central bankers who will do precisely as instructed, because Deutsche Bank is simply too vast and too systemically important to fail: in fact its failure would be orders of magnitude more costly and more destructive for modern capital markets than Lehman.

As a result, we expect all of Konstam's suggestions, from a major China devaluation, to a halt to negative rates, to a Yellen relent (perhaps as soon as tomorrow), to negative rates being passed on to savers, to the taxing of cash withdrawals "to encourage spending not saving", and all the other bullet points. Unless, of course, someone is intent on seeing Deutsche Bank liquidate, as was the case with Lehman.

That said, Konstam's final sentence is the most ominous:

"Austria July 31 1932 was a great success; Sept 1 1933 beginning of the end (see Worgl experiment, Gesell)."

He is referring to the "Miracle of Worgl", when during 1932 - in the middle of the Great Depression - the Austrian town unleashed a monetary experiment in which "Certified Compensation Bills" were issued, a form of currency commonly known as Scrip, or Freigeld, one influenced by the monetary theories of the "hyper-Keynesian" Silvio Gesell.

Why does Konstam bring up scrip as the solution to not only Dutsche Bank's problems, but the entire problem of a run on central bank liquidity, and by implication, credibility?

Because it's coming... just to save the banks one more, final time. 

* * *

Appendix: the part from Konstam's letter not dealing with policy recommendations is below

Strategy Update: What we need....Main point is still policymakers need to recognize the problem and have a total rethink of strategy...Yellen is a detail in the grand scheme of things if its more of the same about risks to the outlook but labor mkt strong, blah blah Even Draghi has clear re-think issues.. no longer about more negative rates in the way they have been doing it but cutting thru the incipient financial crisis. All of these though are symptoms of the wider problem -- the collapse in global liquidity that  is on going in the post Fed qe phase, reflected in an overly strong dollar/loss of reserves and end user deleveraging from china to opec to credit. It picks off the weaker links and makes people think that that is the "problem".

So about 3 weeks everyone was saying if only oil would stabilize.. and "it has".. but that wasn't the solution; Now it's if only euro bank credit stabilizes, and no doubt there will be a level when that happens.. but that won't be it.. The PCA analysis from Jerome was neat becos it captures the investor base-plus running on the hampster wheel thinking it's found the problem. The very fact that the weightings have shifted from oil to euro financials doesnt mean the problem is different now then it was, it's the same problem but PCA can't find it-- by definition. (Correlation is not causality). It merely captures the menu du jour. Soon enough the "problem" will be equities generally or maybe core rates dropping "too low", these weightings invariably will rise -- and thats why its very dangerous to use the last year's correlation to determine which markets have over or under reacted to the best proxy of the problem, at any particular time. For example rates look too low in the PCA now but that's precisely becos they were almost invariant to lower oil late last year.

The refrain from the customer base last year if you recall was that rates don't rally when there's risk off.. that must be becos of loss of reserves or investor too long etc (George's QT).. But now they are moving and the correlation is becoming stronger. I would posit that instead of a low correlation dissauding investors from hedging with rates they are actually needing to get super long to make up for poor performance on risk assets becos it is they only thing that comes close to a proper hedge. So the mother of all rate rallies will be driven by investors going way over long on the either side UNLESS or UNTIL policymakers do the right thing... Our traders have been debating whether the market trades long or not with idea that there seems to be better selling.. but CoT got shorter last week and even on the open interest adjment Alex Li did, it still looks to us that the market trades short -- or not long enough..And that means we do not want to fade this move absent the policy shift,.. and that means why can't 10s test the old lows. On the euro financial issue itself.. our equity analysts have got a lot of attention around the specifics of the euro fincl issue from the concerns over exposures to commodities/china.. the inability to earn in a low for long/negative yield world to the overreach of regulation with limitations on capital raising/bail in issues.. One of the main issues we would argue is that policymakers need to be break what wd become a liquidity issue for banks in the status quo. TLTROs had poor take up becos banks were capital constrained and didn't want to lend -- that now limits their access to liquidity going forward so if the exposure/bail in concerns force banks to the ECB there better be an open door. In the xtreme the ECB cd buy the (sub) debt but the politics probably don't allow that -- better might be to simply offer cheap liquidity for alternative vehicles to do so or better yet have unconditional LTROs -- either way it is probably not the time to go deeper negative on rates.

The exposure issue has been downplayed but make no mistake banks are heavily exposed to Asia/MidEast and while 10% writedown might be worst case for China but too high for the whole, it is what investors shd and do worry about -- whole wd include the contagion to banking hubs in Sing/HKong.. and for the record BIS data is as follows for countries' bank exposures -- we'll give China first, whole second.. Australia: 32bn/74bn; france 43bn/226bn; germany 28bn/120 bn; japan  70 bn/367bn; uk 169bn/657bn; US 87bn/409bn. Note according to Fed rough proxy of US bank capital is over 1.5 tn so in worst case scenario it would "only" be 3% of capital.. a lot but managable.. but that's then becomes the problem for UK, French banks in particular,,ironically not obviously Germany so much..altho Europe has the issue of earning the capital that US banks are better able to do.

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Mr.Sono's picture

Just take a gun, put it against your head and squeeze the trigger. Or just jump.

Durrmockracy's picture
Durrmockracy (not verified) Mr.Sono Feb 9, 2016 12:39 PM

Oh we are going to spend all right... just not on the stuff you were expecting!

T-NUTZ's picture

what has it got in its pocketses?

Soul Glow's picture

Interesting correlation between US and Asia, and it's simple to understand what's going on and how Asia and the US are affecting one another.  So Asia is having trouble in their equity markets and they are pulling back, strengthening their currencies, especially the yen.

This is devaluing the dollar and giving a put under US equity.  This is how US equity seems to get caught by knife edge time after time.  Always remember, the value of a currency is directly correlated with other assets.  It is economics 101 - when a currency drops exports increase because they are cheaper in other currency.

This seems like a dream for the Fed and Treasury - so what if the dollar drops 10% if it means the Dow can stay around 16k - but the problem they now face is a rise in the gold price.  They will do everything to stop the rise in the price of gold, hoping they can have their cake and eat it too.  This is the eye of the storm for the last days of the ponzi.  The world economy can not sustain US hedgemony that much longer as the policies place an extreme importance on increasing exports (and mind you "exports" means debt).  In this scenario there will be an inflection point where the world's currencies have collectively devalued so much that gold pops above its all time high.  It will happen quickly and furiously leaving no time for outside investors to get in (if anyone questions this then ask yourself if you want to be a first time home owner right now, or buy google stock, you shouldn't because of the price appreciation, and there will be a time when people, even gold bulls, will think it's overvalued and time to sell).  Look for this trend to continue for the rest of the month - falling Asian equity, a put under US equity as it drifts lower, rising pirce of yuan/yen and falling dollar.

The kicker will be bank liquidity as there is none.  So once this final phase wraps that put under US equity will break and all global banks will crash together.  DB is having problems and they will be joined by other Euro banks.  Once they break they will take US and Asian banks with them, as US and Asian banks are equally malinvested.  At this point - in March - global equity will crash 50% and the dollar will retrace back to its recent highs.  Money will also evenly flow into bonds and bullion.

Pinto Currency's picture




“encourage spending not saving”

So we need more central planning to solve the problems caused by central planners at the central banks.
Nothing about the $220 trillion debt bubble that has been blown.
We just need to force people to spend more.

Captain Debtcrash's picture
Captain Debtcrash (not verified) Pinto Currency Feb 9, 2016 12:55 PM

They are calling for a less refined E Dollar. 

KesselRunin12Parsecs's picture
KesselRunin12Parsecs (not verified) Captain Debtcrash Feb 9, 2016 1:04 PM

How about if you curtail your practice of hiring employees whose dicks were gnawed on by rabbi's before they were even old enough to count or get influenced by propaganda & shit?

knukles's picture

So says DB:  It's not my fault!  It's the lack of CB liquidity's fault.

The blame game starts.  Betcha Wolfie and DB are either on the phone of meeting face to face about now, along with the Bundesbank and ECB.  

                                                      Too many cooks spoil the stew, kids! 

thesonandheir's picture

Yep, the dirty bankster lists 6 ways OTHER people could bail them out when only 1 way is needed.



macholatte's picture

Interesting that none of the fixes proposed by the banker were

– break-up the TBTF into at least 5 banks each
– reinstate Glass-Steagal

BlindMonkey's picture

Please add making bids good for a minimum of 10 seconds on your wishlist.  The HFT frankenstein needs to be killed.

ufos8mycow's picture

He forgot to include how successful Deutsche Bank was from the years 1939-1945. All those gold teeth kept the bank in the black. Maybe he sent the recommendation for more gooberment dentists in another email.

McCormick No. 9's picture

"Encourage spending not saving."

You can call it anything you want, but its name is INFLATION. As in Hype R. Inflation.

Pleased to meet you...

Stuck on Zero's picture

Deutsche Bank's problems will soon be over when it becomes the "Deutsche Islamic Bank" and subject to Sharia law.

Squid-puppets a-go-go's picture

and here we are, AGAIN. Whole nations will be thrown under the bus to save banks from their own reckless greed.

Pssst, DB. re proposing people spend more? WITH FUCKING WHAT?

forexskin's picture

say it with me now...


boooyaaaah's picture

Please read & comment on the Lords of Finance

Betwee WW1. AND  WW2 was a great deflation

Caused by


The debt created to finance WW1


They could never get out from under the debt

glenlloyd's picture

These people never see what they've done, or what CB's did in the past as being the reason we're here today. All they see is how more of the same failed things done since 2009 are not enough...we need bigger better faster newer and definitely MOAR!!!

This is what you get when idiots start flailing about because they really are worried about losing their job.

DB = Douche Bags

TuPhat's picture

So I should buy more gold before the price goes to the moon.  But, can someone tell me what I will do with it when they ban cash.  If I sell it at the coin shop what will the coin shop give me, cash?  Since I won't be allowed to use the cash what will I do with that.  Should I just meet someone in a dark alley to barter the gold for stolen valuables and then leave the gold and run for my life when they pull out a gun.  Or, should I pull out my gun and find out who shoots the best and quickest?  I think I want to avoid all that.  My gold will have to meet the bottom of a lake in a boating accident.  I think I finally understand why ZHers say that.

Not My Real Name's picture

You're right ... don't buy any gold.

FIAT CON's picture

Banning Cash will be one of the Banksters biggest mistakes ever.

 How fast can you say black market everything without taxes being paid?

Bannig cash will be the fastest way to collapse all the .gov's and the Ponzi zombies banks, then maybe we can start all over with a sound monetary system.

Squid-puppets a-go-go's picture

they ban cash, ill go straight to a spread of 5 digitl currencies. (I wont trust bitcoin or any one digital currency with all my spendings)

curbjob's picture



Bye bye Miss  German strudel pie

Drove my Volkswagen to the tar sands pit but liquidity ran dry

Them good ole tribesmen were drinking Manischewitz wine

Singing this will be the day Deutsche Bank dies

This will be the day Deutsche Bank dies ...

nmewn's picture

So the Executive Summary is, basically, keep doing the same shit that got them into the shit.

Got it! Moving on ;-)

FreeMoney's picture

because Keynes said so.

Einsteins definition of insanity comes to mind.

Calmyourself's picture

"mortgage rates can be negative and banks can still earn a spread."

EARN - that word does not mean what you bankers think it means, ya damned jackasses

thesonandheir's picture

Yep, the dirty bankster lists 6 ways OTHER people could bail them out when only 1 way is needed.



Abitcoinbrain's picture the pension managers 300 are trying to hold but no avail!

Give them nothing but take everything!!!!!

Mr.Sono's picture

"The European banks have a plan. The government has a plan," said Cramer. "This is not 2008, because they learned from 2008."


Here is the link

Confirmed by Cramer, collapse is on.

Goldbugger's picture

Whoops did he just say that out loud?

Mr.Sono's picture

Oh yes he did, he has no shame.

MsCreant's picture

He thinks we are stupid and our memories are short.

Lurk Skywatcher's picture

The vast majority are stupid and do have short memories.

janus's picture

bail-ins may be part of the plan...but something occured to janus as he was reading through DB's pleas.

granted, i'm not some quant with a phd in applied mathematics like some of you egg-heads that contribute around here.  no, the bulbousness of my head is more elliptical than eggish; and jauns is an auto-didacticated asker of difficult questions, not a classically trained quant.  i say all that because i've either hit upon a brilliant insight; or i'm about to say something idiotic -- it truly is one of those two in this situation.  but, the more i consider this possibility, the more i'm inclined to think it a clever insight.

anyway, there is a chance that rates have been raised (and will be raised into the future) in anticipation of the massive glut of dollars about to hit from china.  perhaps the normalization of rates was (and is) a strategy for absorbing all the USD reserves about to be burned by various CBs -- most notably china -- and that the percentage of normalized rate increases are calibrated to track the rate of USD flow out of china and off-set its effects.

again, either brilliant or idiotic -- the story of my life.


carlnpa's picture


Not the worst idea.

I think they are burning up the dollars pre hyperinflation though in a controlled manner through the fall in the stock markets.

Maybe in anticipation of dollars coming home, recycle them into bubble stocks again.

MsCreant's picture

My head is not egg shaped for this, but what an interesting theory. I would love to hear others comment on it. 

Not idiotic at all. Maybe satanic as in "Boi, I say, Boi, you have satanic potential! Come work for us at GS!" Possibly genius. Don't know babe, but you do have me curious.

forexskin's picture

china's $ holdings in this sense are a threat; like damocles sword. once the thread is cut, new game.

WillyGroper's picture


with the whole world dumping them, what better way to introduce either digital or the shise dolla?

the new bills & "coins" are not the result of counterfitting.  this has been in the works for awhile.

that lil stripe on the new bennie inkjet can be tracked all over the planet.

i too, think they'll continue to raise...controlled demo.

Bananamerican's picture

"everybody has a plan until they get punched in the face" - Tyson

MsCreant's picture

Sideways the commentators suggested another "solution" for this fucker's list: NO SHORTING ALLOWED!!

QuiteVoiceFromRussia's picture

He doesn't look like someone who actually beleives in what he says

QuiteVoiceFromRussia's picture

He doesn't look like someone who actually beleives in what he says

Whoa Dammit's picture

Never trust the smartest ass in the room, i.e. a Keynesian economist.  Spend more , yeah right. Who has money to spend? And moar government spending will fix things right up.

NEOSERF's picture

Banks of all ilks have spent the last 25 years encouraging everyone and their brother to take on debt (smart debt) and now that wages and growth have stagnated and is clear to all those with debt that you can't spend your way to prosperity and are trying to pay it down, the banks want everyone to spend more.  There are no "savings" and why bother with interest at zero or below?  There are no additional incomes year after year in a stagnated economy...only worry that this might be the year you lose your job so after a boomer feeding frenzy, there is no more growth.  And with that comes no more loans and no more spending...just paying down debt and putting your few shekels under the mattress for that really dark day that everyone can see on the horizon.

FIAT CON's picture

Absolutly, Bankers live in a land of Unicorns, where else in the world do you get a huge bonus for almost collapsing the worlds banking system.

As the countries slaves go further and further into debt, bringing home less $ with less PP the bankers state we should save less and spend more tp protect them and their bonuses!

I must be having a nightmare, this cannot be real.


MasterControl's picture

Maybe the politicians can save us from the bankers....

True Blue's picture

“encourage spending not saving”

Okay; I'll close out my whole account and buy GOLD and one nice, big, repo-sale priced Caterpillar powered Wood Chipper that can suck down a telephone pole like Angela Merkel will be hoovering down rapefugee **** on a streetcorner after the next election -how'd you like zem apfeln mein herr?

Going to punish us, eh?

We'll just see about that...