"It All Has A Very 2008 Feel To It" - For Deutsche Bank, The News Just Keeps Getting Worse

Tyler Durden's picture

It has already been an abysmal day for Germany's biggest lender: overnight Deutsche Bank plunged to fresh all time lows on speculation whether the German government would or wouldn't provide state aid to the bank (if needed), forcing the bank to state it does not need the funds at the same time as the government urged markets that "you can't compare" Deutsche Bank and that "other" bank, Lehman Brothers, although looking at the chart, one may beg to differ.


However, while DB stock closed at session lows, over 7% lower on the day, with its market cap of $16 billion now rapidly approaching the $14 billion litigation settlement demanded by the DOJ, the bad news did not stop there.

In a report issued an hour ago by Citigroup titled "Capital, Litigation & AT1 Coupon Risks", bank analyst Andrew Coombs says that Deutsche reported an end-June CET1 ratio of 11.2% pro-forma for the HXB stake sale, but still only targets c11% by end-2016 as further litigation charges are assumed, with management expecting to resolve four of the five major outstanding litigation cases this year. To this Citi says that it "struggles" to see how Deutsche Bank can reach the fully-loaded SREP requirement of 12.25% in the medium-term.

Furthermore Coombs notes that "the leverage ratio, at 3.4%, looks even worse relative to the 4.5% company target by 2018 and an IPO of Postbank looks increasingly challenging to execute upon."

Worse, he calculates 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%.

He then observes that while "management should be reluctant to raise capital with the bank trading on only 0.3x P/TB", the only viable alternative is to further cut balance sheet, which would be even more detrimental to earnings. As a result, he says that "a rights issue looks inevitable, in our view."

The most direct implication from this is that the bank's AT1 coupon is now once again at risk: "Deutsche has confirmed the HXB stake sale and HGB 340 e/g reserves would lift Available Distributable Item (ADI) reserve capacity to €4.3bn versus c€0.4bn of annual AT1 coupon payments. Deutsche can potentially create another €1-2bn from releasing some of its Dividend Blocked Amounts."

This would explain the ongoing deterioration in the bank's "loss buffer" contingent convertible bonds.

Ironically, the longer DB waits to address the market's concerns, not to mention its untenable balance sheet, the worse it will get. Citi's conclusion is that the bank now faces two "negative feedback loops."

We highlight two feedback loops: one short-term and one long-term. Widening credit spreads can exacerbate market fears, result in negative press coverage and damage counterparty confidence. The February tender offer for senior debt, coupled with a solid funding and liquidity position, has helped to address this loop. However a longer-term feedback loop still exists. Deutsche needs to raise capital in our view. It may choose to wait until litigation issues have been resolved, but the further the share price falls, the more dilutive a capital raise becomes (and vice versa).

Naturally, all of the above assumes a slow-burn scenario for DB stock. What happens if what happens next is a more aggressive liquidation of exposure? Well, in that case we would have something that the Telegraph's Matthew Lynn would dub a "German banking crisis."

Our image of German banks, and the German economy, as completely rock solid is so strong that it takes a lot to persuade us they might be in trouble.

Maybe so, but a "German banking crisis" would certainly delight the Italians, who have been on the receiving end of Germany's stern lecturing about "sticking to the rules," not to mention Schauble's insistence not to engage in state-funded bailouts in this day and age of mandatory bail-ins, and explains why Merkel's party has been so careful not to admit that a bailout may ultimately be the endgame.

Then again, Merkel's stated position opens up a can of worms. As Lynn correctly notes, "if the German government does not stand behind the bank, then inevitably all its counter-parties – the other banks and institutions it deals with – are going to start feeling very nervous about trading with it. As we know from 2008, once confidence starts to evaporate, a bank is in big, big trouble. In fact, if Deutsche does go down, it is looking increasingly likely that it will take Merkel with it – and quite possibly the euro as well."

Even without counterparty risk rearing its ugly head, the market appears to already be pricing it in.

The damage can be seen in its share price. Last October, the shares were at 27 euros. Back in 2007, they were over 100 euros, and even in the spring of 2009, when banks were crashing all across the world, they were still trading at close on 17 euros. For most of this year they have been sliding fast. On Monday, they crashed again, down another 6pc. Its bonds have slumped as well, while the cost of credit default swaps – essentially a way of hedging against a collapse – have jumped. It all has a very 2008 feel to it.

Indeed, but what is Merkel to do: admit that all the posturing about a stable banking system was just a lie, and the demands for Italy to get its house in order were sheer hypocrisy... or do what Allianz admitted that ultimately Deutsche Bank will have to be bailed out?

As Lynn points out, "there is something to be said for a hard-line position. It is hard to be sure the massive bank bail-outs of 2008 were such a great idea. Perhaps we would be better off now if a few had been allowed to fail. That said, Merkel is surely playing with fire. In the markets, investors, along with other financial institutions, have rightly or wrongly come to assume that major banks are, as the saying has it, ‘too big to fail’. You didn’t really have to worry about how solid they were, because if the crunch came the state would always ride to the rescue."

In Germany, that appears not to be the case – certainly for Deutsche, and possibly for its next biggest player, Commerzbank, which is hardly looking much healthier. Would you want to trade a few billion with Deutsche right now, and would you feel sure you’d get paid next month? Nope, thought not. The risk is that confidence evaporates – and as we know, once that is gone a bank is not long for this world.

To be sure, the politics of a Deutsche rescue would be terrible. Germany, with is Chancellor taking the lead, has set itself up as the guardian of financial responsibility within the euro-zone. Two years ago, it casually let the Greek bank system go to the wall, allowing the cash machines to be closed down as a way of whipping the rebellious Syriza government back into line. This year, there has been an unfolding Italian crisis, as bad debts mount, and yet Germany has insisted on enforcing euro-zone rules that say depositors have to shoulder some of the losses when a bank is in trouble.

And this is why Merkel is cornered: "for Germany to then turn around and say, actually we are bailing out our own bank, while letting everyone else’s fail, looks, to put it mildly, just a little inconsistent. Heck, a few people might even start to wonder if there was one rule for Germany, and another one for the rest. In truth, it would become impossible to maintain a hard-line in Italy, and probably in Greece as well."

"And yet" Lynn adds, "if Deutsche Bank went down, and the German Government didn’t step in with a rescue, that would be a huge blow to Europe’s largest economy – and the global financial system. No one really knows where the losses would end up, or what the knock-on impact would be. It would almost certainly land a fatal blow to the Italian banking system, and the French and Spanish banks would be next. Even worse, the euro-zone economy, with France and Italy already back at zero growth, and still struggling with the impact of Brexit, is hardly in any shape to withstand a shock of that magnitude."

What we do know is that if some €42 trillion in derivatives - some three times more than the GDP of the European Union - were to suddenly lose their counterparty, the systemic damage would be unprecedented.


And just like that, Germany finds itself in the same position the Fed and US Government were in September 2008: let the bank fail and deal with the devastating consequences, or inject a few more billion and keep the bank alive for a few more quarters. Indeed, "the politics of a rescue are terrible, but the economics of a collapse are even worse. By ruling out a rescue, she may well have solved the immediate political problem. Yet when the crisis gets worse, as it may do at any moment, it is impossible to believe she will stick to that line. A bailout of some sort will be cobbled together – even if the damage to Merkel’s already fraying reputation for competence will be catastrophic."

Lynn's conclusion is spot on:

Merkel is playing a very dangerous game with Deutsche – and one that could easily go badly wrong. If her refusal to sanction a bail-out is responsible for a Deutsche collapse that could easily end her Chancellorship. But if she rescues it, the euro might start to unravel. It is hardly surprising that the markets are watching the relentless decline in its share price with mounting horror.

In retrospect, the irony is delightful: for so many years the markets erroneously focusing only on the periphery as the source of potential banking contagion, when the biggest ticking time bomb in Europe's banking sector was smack in the middle of what was considered the safest and most stable country, until now.... or as we put it in 2014: "The Elephant In The Room: Deutsche Bank's $75 Trillion In Derivatives Is 20 Times Greater Than German GDP"

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hedgeless_horseman's picture


If Cramer says that DB is fine, then we are in the twilight zone.

bamawatson's picture

my girlfriend says NPR told her it was radicl fear mongering

Looney's picture


It’s time for Deutsche Bank to change its Ticker Symbol to DBW (Dead Bank Walking).

By the way, the symbol is available – it hasn’t been taken, yet.   ;-)


Ghost of PartysOver's picture

What will be more entertaining, the Presidental Debates or the DB PR work.   I need to start hoarding Popcorn.

Manthong's picture

the cheesy pops are tastier....

..and  at least Douche Bank owes the rest of the world trillions of douche euros…

That means they have power... for now.


nope-1004's picture

DB been dead for years.  The continuation of ruinous central bank intervention, which has been essentially creating false money / digits / values across all banking platforms out of thin air, is the reason why they haven't formally defaulted.

It's obvious that the banksters are doing everything they can to cover up the insolvent banking sector.  Since Lehman, we've had no other bankruptcies, yet the world "was on the brink of collapse" at that time.  So how is only one financial institution, who has since been absorbed, solely responsible for "brink of collapse" and no others?

Entire financial system is a fraud.  This isn't just DB, although they are the soup of the day.


Paul Kersey's picture

That was a good article, as far as it went, so let's go a little farther. In 2008:

"As one of the largest counterparties of failed insurer AIG, Deutsche Bank received $11.8 billion of the funds used to bail out AIG.

The Federal Reserve made emergency low-cost funds widely available to foreign as well as US member institutions through its discount window. Deutsche Bank was the second heaviest user of such funds, borrowing more than $2 billion.

The Federal Reserve also created a program known as the Term Asset-Backed Securities Lending Facility, which allowed banks to use their assets, including troubled or hard-to-value assets, as collateral for short term loans. Deutsche Bank was the largest user of the program, sending the Fed more than $290 billion worth of mortgage securities.

Yep, it certainly can be 2008 again

UndergroundPost's picture

How did DB go from €56 Trillion in derivatives in 2014 to €42T today - a 25% reduction in less than 3 years? A 25% difference here may mean it is really much worse than the disaster it already is

Sirius Wonderblast's picture

Many years of dealing with European financial institutions taught me that their account s are invariably a shambles and a fraud.

max2205's picture

No problem  $db is green today 

HedgeJunkie's picture

Can't stand popcorn but I've got a shit ton of pistachios.

This will be epic.

Manthong's picture

I gotta’ go out and some before the debate…

But speaking of shit ton…..


WillyGroper's picture

"I've got a shit ton of pistachios. This will be epic."

I'll take loose bowels for $1000 Alex.  :D

RaceToTheBottom's picture

Nationalise the banks and then sell the assets at .0001% face value to the newly formed reality TV show hosted by Trump titled:  "I coulda been a Bankster"

Al Gophilia's picture

The article links a 2014 report by ZH to a $75 trillion derivitives book and yet they report a $42 Trillion position today. Can the Zh team please explain how the $33 Trillion was unwound without causing market mayhem and can they please identify the absence of the army of accountants and lawyers which would be required to unravel the complex web of counterparty entanglements regarding who gets paid? Where is the trigger event for this gargantuan reversal? Have these figures just been pulled out of some banker's or bloggers ass?

I'm perplexed.

all-priced-in's picture

A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, index or security. Common underlying instruments include: bonds, commodities, currencies, interest rates, market indexes and stocks.


The bank is the intermediary - they get a fee for hooking the two parties up - but they are not responsible for paying anything - unless one of the parties can't pay.


So normally when a derivative expires the two (or more) parties settle up and go on their way.


The only time a bank will get hurt is when the party making the wrong bet can't pay the loss.

Most derivities settle without the bank taking a loss.


 In a SHTF financial crisis you can bet that a large number of derivitie contracts will not be able to be paid - so the bank will be on the hook.




GUS100CORRINA's picture


cognitive dissident's picture

or perhaps, "Dead Bank WANKING"

gotta hand it to the Krauts (I am 7/8ths too), creative extermination is rarely done better...

BennyBoy's picture


When the fraud of DB explodes it will instantly take down europe and dozens of other countries.

The US would take a few more minutes after everyone tries to stuff the US with its cash but then realize the derivatives here are just as bad.



dmger14's picture

... which is precisely why Germany and the ECB will do whatever they can to keep DB from going under.  If it does go under, it will be despite the best efforts of TPTB.  They learned their lesson from Lehman, and the banks know there is no limit to the moral hazard of privatizing gains and socializing losses.  We're all gamblers now!

TsyFox's picture

Everytime ZH runs a DB story I keep having to post corrections to all posters who think that this is somehow primarily an ECB problem, when in fact it is a FED PROBLEM.

The German govt will follow EU rules and bailin all of the large depositors, bondholders, and stockholders, most of whom are foreign.

They will BAILOUT the SMALL DEPOSITORS, most of whom are German, with some Italians, Greeks, Poles.

Then the world's largest derivatives book will be netted out. Since most of their big trades were with US banks, the FED will be forced to make emergency liquidity available to those US banks, to the tune of TRILLIONS OF $$$.

Since this calamity will be the result of a failure and liquidation of a private sector institution, this event will in no way effect the Bunderbank gold holdings at NY Fed.

I hope my short explanation sets it all straight.

Ditch's picture

Would you consider that a financial or monetary double-tap?

Kabissa's picture

The blast sound power'll hit many "db"s...

booboo's picture

Official denials.......start running now!

Captain Chlamydia's picture

DB the first step, the euro is next. 

Germany can not rescue DB, so if it fails, the customers will bleed. A faillure of DB will have some (grave) repercussions in the financial world and for the euro. 

So Please, FAIL! 

BetaGap's picture

Deutch Bank will soon be called Defaulted Bank

JackT's picture

I think the world is likely beyond the "If it fails" point...it's failing and will soon be failed.

// //
jewish_master's picture

DB will no fail. EU however....

merkel cantsay she will bail them out. the minute she says so italy deafults an ask for a bailout, or EU is gone

BennyBoy's picture


€42 trillion in derivatives.

I bet a Nobel prize winner came up with the fraud that derivatives are.



RiderOnTheStorm's picture

I don't know that everyone is so worried about.  All DB has to do is go on ebay and buy a few 100 Trillion Dollar Zimbabwe notes and just pay everybody off and still have enough left to party on!!!! Hey DB . . . here is the link!!!


Antifaschistische's picture

"once confidence starts to evaporate, a bank is in big, big trouble"

LOL...you're killing me...it should say "once the reality of ponzi banking receives a hint of illumination... a bank is in big trouble"

DieselChadron's picture

Actually, the problem is easy to solve in a few easy steps:

-get blow. Lots of it.

-get lots and lots of hookers

-wait.  What's the problem again?

38BWD22's picture



I would be looking at the TED Spread ($TED at stockcharts.com) and the price of gold to move big.  If so, then we know the end is near...


nibiru's picture

20x German GDP. 


10x whole EU's GDP.


It is un-bail-out-able. It took a lot to finally wake up German people and kick Angie out (my worry is the next Chancellor will be Martin Schulz!). Let the dominoes fall.


walküre's picture

Martin Schultz is an asshole who has been instrumental in selling Germany out to the EU ops of NWO.

Frauke Petry is our Jean D'Arc and I'm afraid even her fate is already clear. But she will lead Germany to freedom.

lakecity55's picture

Honey, what's all that noise outside?
Everything has collapsed! People are burning, looting and shooting! We must hide!
I'm listening to NPR. They say it's just a rumor. Someone is peddling fiction!

Jim in MN's picture

If DB issues their own scrip (a capital offering) and the central bank folks all buy in, isn't that a stealth bailout? 

Seems like the most likely course, except they haven't done it yet--why not?

Just more froth on the balance sheets at the Fed/BOJ/ECB.   Whatever.

Muppet's picture

Exactly, a more sophisicated bailout will be done.   Like derivitives themselves.   Failure is not an option.

Kabissa's picture

DB will quench Draghi's crave for those lacking junk papers.

tncaver's picture

Thank You for telling me that. Now I'm not so worried about my staawks.

balz's picture

The Jews Just Keeps Getting Worse? 

CPL's picture

No they aren't that creative so they programmed the economy on a seven year loop.  They shuffle the actors a little but the people that actually have great ideas don't work for them so they also recycle the news.  Instead of hiring real people to do it, they have bots write the news.


Blackfox's picture

Wanna freak yourself out by that number 7?

Find the date of the 2008 crash - Sept. 29, 2008

enter it into this date calculator - https://www.timeanddate.com/date/dateadd.html

enter 7 years 7 months 7 weeks 7 days - and guess what date you are left with? The fucking Brexit crash.... June 24th 2016.

Have a nice day Goyim....

lakecity55's picture

Oh noes! The Mystical Talmud Numbers again!

Yukon Cornholius's picture

I thought it was all about a debt jubilee or something. DB is the piñata.

Belrev's picture

It will be bailed out and take EU down with it. They will say that, for instance, that EUR 10 Billion loand was extended to DB from ECB. In reality under the table they will print hundreds of billions and give it to DB. No one will ever find out.