Could Germany Ever Allow Deutsche Bank To Go Under?

Tyler Durden's picture

Via Golem XIV blog,

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).

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?

The not-so-new rules for how a G-SIB should be wound down begin by stating that,

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.

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.


Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
pathosattrition's picture

German, Japanese, and the American monetary systems must all fail to give rise to a global economic power under a single currency, ostensibly because the competitive devaluations broke the global financial systems. Of course, this is all scripted and bullshit.

Captain Chlamydia's picture

Let DB fall. Please let it fall! 

Manthong's picture

As I snack on my jelly donut, I am just glad that I am not a Berliner with a stake in Douchebank.

Ralph Spoilsport's picture

Saw what you did there. lol!

wildbad's picture

greece can bail them out.  we're all brothers here, pulling on different oars in the same gallion , no? RAMMING SPEED!

Voice of insanity's picture

"Today, I am a jelly donut" - JFK, 1961.

O Tempora O Morons's picture

Sooo ECB's swansong will be to pay Douchebank (bail ins are for lazy savage southerners, purlease) before Germany cashes in the Euro chips and everyone goes back to national currencies? Mario - Wolfie 0-1?

King Tut's picture
King Tut (not verified) micmac Sep 21, 2016 2:27 AM

Deutsche Bank Über Alles!

gregga777's picture

All banking gangsters are organized criminal crony capitalist conporations engaged in massive frauds and other crimes. I hope that they all go belly up. Then we hang all of the banking gangsters, totally outlaw fractional reserve banking on pain of immediate death and also outlaw central banks. Banks are a putrid dead albatross wrapped around the neck of humanity. A pox on them all!!!

Mustafa Kemal's picture

"I hope that they all go belly up."


This would be a good start.

Ralph Spoilsport's picture

What they really need to worry about is the Black Swan which forces them to unwind that godawful yuuuge ball of derivatives in a big fucking hurry. I doubt it will all "net out" on any time frame. 

richCat's picture

German finance minister Schäuble is stuck with a credibility problem if taxpayers dosh is used to sort out DeutscheBank; it will tout the austerity laden Greeks with forks and spears at the Gauleiter. EU rules stipulate no taxpayers dosh is to used to bailout banks. How are they going to get around that,ONLY a handout bythe fiat ECB ? Raising cash from futures and shareholders if they are any left will only be a drop water on a hot stone. Jerry has a BIG problem.

Catalonia's picture

You said it. ECB will print directly into the banks' coffers.

wildbad's picture

"How will they get around THAT"  Please.

This gummint does what it wants and breaks contracts regularly.  I simple announcement is how they raised the national retirement age in one sweep.  Its how they announced their illegal refugee policies.  Its how they do everything.

Here in europe one only has to invoke "the larger good" argument.  The "Individual" is subordinate in ALL questions.

If you ask people here whether they know about the "new" bail-in rules they wont have a clue what you're talking about.  This will be sweet talked on ADR, ZDF, DLF as the only option left to avoid a collapse.

Germans iwll shake their heads and think that "maybe in four years I'll vote green."

Liberty and personal freedom are foereign and dangerous concepts in Germany...just like the leaders wanted it after WWII

GreatUncle's picture

+1 Bail-in for the common good - ROFL. (malinvesmtent = bad debt).

After any bail-in solution you are then supporting the bad malinvestment and in the ever increasing debt system all stimulus grows this malinvestment that can never be sold off to clear. Total value = 0.

The real economy loses at that point because it is prioritised for investment even lower in the common good to support the malinvestment as they chase the support.

Each go round the level of supported malinvestment grows, if you use a billion to support it then the malinvestment becomes +billion.

Little old economy that could have got you out of the situation can never support the total level of debt now.

Repeat enough times like Japan the real economy is a sideshow to the CTRL-P mechanism with Abe's grand master plan to support the malinvestment to the point you bypass the economy completely.

You only ever had one way out of that economic trap, remove the malinvestment.

Hence reckon Carney was gagging for BREXIT it allowed him to go for a CTRL-P of £50 billion or so, just to prop up the debt a little longer. He should have been challenged on how he was going to pay of this debt because there is already £375 billion of asset purchases by the BOE that can never be unwound. That makes it £425 billion that is never going to be paid = malinvestment.

Sweet Cheeks's picture

What you subsidize, you get more of. Bail-ins subsidize poor banking decisions based on greed of the 1% at the expense of the middle classes.

richCat's picture

Only a aprocryphal potion of various home-made funds will get DB out of the mess. I live in Germany and no-one wants to hear DB anymore. Maybe that's the solution.

USofAzzDownWeGo's picture

HUH???? You are wondering how the cb's or gov't can get around something? Well, how in the FUCK did they get away with dropping a bunch of sand niggers into their country??? Ya know, the rapefugees????? 

Sandmann's picture

Sort out DB ? What is the problem with DB? Can you define it exactly or are you the type to light a candle in a black hole ?

fajensen's picture

Well, they could make all the migrants partners in DB, then when it goest titstup they can prosecute them and kick the out of the country,  solving two problems in one go.

Yen Cross's picture

   Yeah, I think it's possible. There's absolutely no way Joe LaVorgna can cover all those derivative contracts.

JailBanksters's picture

If Doosh makes it to 2017, then it implies that NO Bank can fail or do any wrong

Doosh represents EVERYTHING that is wrong with the Banking System all under one roof



Yen Cross's picture

 Wells Farcego is running a close second???

Ralph Spoilsport's picture

I had an account with Farcego because Delaware Trust got bought up by First Union which got bought up by Wachovia which was bought up by Wells Fungus. They started their shit right away by pushing "products" and playing games with deposit credit dates. I was reading ZH by then so I knew they were crooks. I soon moved to a credit union and haven't looked back.

delacroix's picture

wells fargo was nibbling accounts 20 years ago. first it was $1.78   then it was $3.66   when it went over $7 I closed the account. there's only so much time you can spend trying to reconcile such small amounts, before moving on.

GreatUncle's picture

Kind of a non leveraged banking system. Problem is they use the FIAT $ ...

For fucks sake people, it is still the FIAT $ exchange and if the FED uses CTRL-P to dilute the $ any $ anywhereare also diluted because you did not get a cut.

A credit union is only as sound as the CB that controls the currency it is using.

Panic Mode's picture

Would Merkel ever publicly admit her open border policy is a complete fuck up??

USofAzzDownWeGo's picture

You're not understanding "her" policy. Her policy was an order from zionists to destroy the white race in germany. DUH!!!! Wake up dude. 

beijing expat's picture

There's no white race. A goym is a goym is a goym.

beijing expat's picture

There's no white race. A goym is a goym is a goym.

beijing expat's picture

Let it burn. The banking model is dead now anyway. It was fine when it's hub was to funnel savings into productive investments but now the model is fraud. People still need banking services, but they can be run out of the post office.

Yen Cross's picture

  I suggested several weeks ago, that going short corporate debt was reasonable.

  I also expressed concern, that the counterparty would pay off.  [suffice it to say, we're running into liquidity issues]

USofAzzDownWeGo's picture

Saw this thing of beauty on the side of the road today. Just had to get a picture of this.

MiniCooper's picture

This will be dealt with under German bank accountng rules.

Fundamentally the European banking system does not agree with the Anglo American philosophical concept of mark to market and has a very fluid concept of what is a loan and what is an equity shareholding. Not countng derivative losses and transforming defaulted loans into equity shareholdings at the original face value of the loan is how France, Italy and Germany have run their banking system for many years. Its how Germany apparently has such a successful 'Mittlestant' of small and medium sized industrial companies. Often loans to companies and how banks operate and to whom they make capital available is deeply embedded in local politics and not governed by wholly economic criteria. Its just how it is. Japan had a similar mdel for any years and it worked well until it suddenly didnt. 

If mark to market losses on derivatives are not recognised until maturity and defaulted loans are counted as equity shareholdings then a bank can remain 'solvent' for as long as there is a central bank willing to fund it.

This is essentially how the financal crisis was and still is being  dealt with in the European banking system. Losses were just rolled forward in the hope that opening liquidity spigots via QE and recognising derivative losses only at maturity and refinancing some loss making loan portfolios would provide banks with enough time to cover losses with profits over a number of years. It hasnt happened, the losses clog the system and banks remain zombified. As I say, see Japan for details of the how the future lost decades that Europe faces will look like. 

King Tut's picture
King Tut (not verified) MiniCooper Sep 21, 2016 2:33 AM

Germany tried to escape from the "Anglo-American Banking System" about 80 years ago but that didn't work out like they had hoped it would 

Sandmann's picture

Not true. It was the US decision to withdraw short term capital that forced a drive for liquidity and insolvency. The kind of thing Bernanke ranted on about

USofAzzDownWeGo's picture

When Hitler freed his country from the bankers who bankrupted them, they became a powerhouse with a great economy. 

Offthebeach's picture

AH was borrowing hand over fist dollars and pounds. He couldn't make the interest payments and defaulted mid 30' Oops. Terms in other currencies became harsh ( think Hugo Chavez). So no longer able to pay with borrowed money, he took what he needed. ( Had to drive a bit, some ruckus involved )

Cryoprase the Troll's picture

'Mittlestand' has nothing at all to do with an 800lb gorilla bank. It's about family firms making investments that are sensible for the long term, but which may not pay off in the ultra-short time frames of an external equity investor who doesn't have any real commitment to a company. In that respect, Germany would be better off losing DB altogether, and letting dull bricks and mortar utility banking flourish: a service traditionally provided by local Sparkasse per Bundesländer or city. I used to moan about the cost of running a simple current account at these small banks, but it was peanuts if you offset those few DEM every month against the costs tax payers have swallowed bailing out the mega banks every decade or so.

Sandmann's picture

What you write is nonsense. You conflate too many distinct issues. Debt/Equity Swaps are the basis of every LBO Workout. They are not how global banks on IFRS are treated. You also have to understand Equity in German business is not flexible as in Anglo-Saxon countries and is virtually impossible to extract

Sweet Cheeks's picture

If equity can't be extracted, why would any bank make loans?

Sandmann's picture

It loans against ASSETS such as Receivables. EQUITY is a Liability. Can you read a Balance Sheet ?

THE DORK OF CORK's picture

Could Deutsch Bank ever allow Germany to fail? 

Looks likely now........