Deutsche Bank's Future Is More Fannie Mae Than Lehman

Authored by Aaron Brown, op-ed via Bloomberg.com,

The lender is probably more important to the German economy than the GSEs were to the U.S.

It's hard to recall the last time there was good news out of Deutsche Bank AG. Record fines and criminal charges. Restructuring plans with layoffs and write-offs, that don't seem to work. Losses. Senior management infightingCredit-rating downgrades and new lows for the stock price.  Added to a U.S. list of troubled lenders.   Only three of the 33 equity analysts following the German lender are positive on the stock, according to data compiled by Bloomberg.

It's no wonder that there's a heightened fear that some bad event will completely destroy faith in Deutsche Bank, leading to its collapse and a 2008-style financial crisis, just as Lehman Brothers Holdings Inc.'s bankruptcy ignited a global financial conflagration.

But Deutsche Bank is no Lehman. Lehman's core problems were bad long-term investments and insecure funding. The recent downgrades of Deutsche Bank's credit rating weren't due to asset impairment, but because it's losing money and has no clear path to profitability. Unlike Lehman, Deutsche Bank has a stable and diversified funding base. Any asset shock that threatened Deutsche Bank solvency would take down most other major banks before the firm. The cost to insure Lehman's debt was 580 basis points six months before it defaulted. Its only 150 basis points for Deutsche Bank.

[ZH: judging by short-dated CDS, the bank's counterparties are not taking any chances]

Deutsche Bank's role in the next financial crisis could be more like Fannie Mae or Freddie Mac. In July 2008, a few months before Lehman fell, the U.S. began the process that would eventually result in a takeover of the two government-sponsored enterprises. The companies, which guaranteed mortgages, suffered losses as mortgage default rates rose and recovery rates fell. The losses caused their stock prices to fall, leading investors to distrust the GSE guarantees. This made it harder to write mortgages, which meant house prices fell, which made everything worse. The government took over the GSEs to restore faith in their guarantees. It was almost three years from the emergence of serious problems at the GSEs to their bailouts.

Like the GSEs, any Deutsche Bank collapse will likely be in slow motion. It holds 124 billion euros ($145 billion) of “total loss absorbing capital,” or TLAC, which is basically stock and bond securities that the firm has the right to convert to equity in a crisis. The amount is about 50 percent above the regulatory minimum. But the market value of these securities is far lower, and probably somewhat below the regulatory minimum. That's not an immediate problem since regulatory minimum isn’t based on market value.

But over time, losses will erode the TLAC, as will maturing debt. Regulatory minimums are scheduled to increase. As Deutsche Bank's TLAC gets closer to its regulatory limit, the market value of TLAC securities falls, because converting the debt to equity would likely wipe out the equity and severely impair the value of the debt.

Deutsche Bank can try to escape by issuing new equity and TLAC debt, but it will have trouble finding buyers. It can start generating profits, but it seems to be having trouble doing that. Or, it could sell assets, but the more troubled it gets, the lower the fire-sale prices it will get for those assets, and losses on asset sales erode capital.

The German government has denied that it would bail out Deutsche Bank, but I don't know anyone who believes that. The lender is probably more important to the German economy than the GSEs were to the U.S. Moreover, it would be an irresistible financial deal. After wiping out the TLAC investors and using the cash on the Deutsche Bank's balance sheet, the government would acquire the lender's businesses and long-term assets at a small fraction of their book value. Without the investor fears of a holding company collapse and the heavy burden of bank regulation, those assets could likely be sold for a profit of several hundred million euros.

German government credit would not be strained by a bailout of Deutsche Bank, but it would make it difficult to prevent other euro zone countries from bailing out their banks, or for Germany to extend the support the European Central Bank would need to prevent euro zone sovereign debt defaults.

And if the German government did let Deutsche Bank fail, the repercussions could be even more severe.

Deutsche Bank will not be the spark that turns the next financial downturn into a full-blown crisis, but unless it can start delivering more good news than bad to investors, it's a very big pile of deadwood to add to a conflagration started elsewhere.

*  *  *

And if any of this reassures dip-buying shareholders in the once 'most systemically dangerous bank in the world', these charts should help.

Don't worry, it's not Lehman...

It's Fannie Mae...

Comments

hedgeless_horseman Thu, 06/07/2018 - 11:18 Permalink

 

more important to the German economy than the GSEs were to the U.S...

Were?

We learned from Jaye's excellent insider talk in Marfa last week that the GSEs are currently socializing/nationalizing essentially 100% of the US residential mortgage market, after the industry players take their cut.

He explained how Fannie Mae is the largest hedge fund in the world.

We are all bag holders, now, and you can thank Dodd-Frank for this.

"Privatize the gains, and socialize the losses." - Your Banker's Credo

 

Rapunzal hedgeless_horseman Thu, 06/07/2018 - 11:57 Permalink

Deutsche Bank was chosen by the banksters as “The Bank” that will steal the largest savings in the world. The German middle class has the largest saving levels in the world. The inbred banksters found an easy solution. Dump useless derivatives on Deutsche Bank and drain the wealth of just another middle class. The Germans don’t even know what’s gonna happen to them.

In reply to by hedgeless_horseman

Balance-Sheet hedgeless_horseman Thu, 06/07/2018 - 13:20 Permalink

This is an important point. If the politicians secretly direct the bureaucracy to maintain the flow of cheap sub-prime loans they will do so or risk their jobs and pensions. The political demand from the relatively poor is for *free money* and if that is not possible then *cheap loans* they do not qualify for and which many will dishonor partly or entirely. In this way cash flows into congressional districts tp fund their re election machines. Maxine Waters being among the worst abusers. This results in the loan portfolio imploding so the 'troubled assets' are sold up to the Central Bank. Once the lava cooled gradually after 2008/09 we simply repeat!

In reply to by hedgeless_horseman

Everybodys All… Thu, 06/07/2018 - 11:22 Permalink

Fannie Mae collapse led to Lehman. Take your pick with the chicken or the egg. It all will boil down to counter party risks and how long it takes Germany or the EU to eat that crap sandwich.

Watson Thu, 06/07/2018 - 11:32 Permalink

By eye, to me, correlation looks better to Lehman than Fannie Mae...

Actually, not relevant to try to find out where the blow will come from that sends DB flying.
The real point is that DB is far too levered to be safe,
and seems to be impossible to get that leverage down.

Watson

stefan-coast Thu, 06/07/2018 - 12:04 Permalink

It would be nice to know what the "reset" is going to look like, because I see it coming, more every day.

1. In the "no leader is eternal" article here on ZH, it confirms my suspicions. I have said here many times, that countries are just going for "pecking" order for when the rest happens.  China and Russia are buying precious metals and trying to get along for the most part.  China and Russia know that precious metals will put them into lead.

2. I also heard an interview with some major Trump supporter, that Trump is setting up the U.S. so that the U.S. wont take the blunt of the reset..who knows.  With tarriffs and balanced trade things going on maybe.

3. keep stacking.

4. Food, water and defense.

5. Try to get out of debt. 

The "no leader eternal" ended all my suspisions, and a reset is coming soon...They may use crypto currency, but I doubt it will be bitcoin etc. All these cryptos out there were nothing more than a "test".  My litecoin will probably disappear.  Glad I only bought a little and it was fun so its ok.

marcel tjoeng Thu, 06/07/2018 - 12:55 Permalink

 

 

Wait till the German car makers get in ever more trouble because the US and now Trump obviously is waging economic terrorism on this German Jewel in the Crown.

The German government will bail these banks out because every German needs to take one führer the Heimat.

Of course, what ...

 

Zhaupka Thu, 06/07/2018 - 13:05 Permalink

PSYOPS: "Added to a U.S. list of [troubled lenders, no fly citizens, wanted Chinese's Citizens, wanted Russian Citizens, Iranian Citizens, (insert yours here), etc.]

The United States keeps lists of humans who are numbered for easy identification.

And the Jews keep these United States Government(s) lists as Jews did in Germany against German Citizens.

Balance-Sheet Thu, 06/07/2018 - 13:11 Permalink

Presumably the ECB would buy troubled assets from DB at a modest discount with freshly issue Euros. If you check the past 118 years you see that Germans are politically insane from point to point as the personal repression boils over so maintain situational awareness!

Spectre Thu, 06/07/2018 - 15:04 Permalink

If about 50(out of several thousand) of their derivative positions implode, counter party risk will blow up most all EU Banks.  Merkel is so full of shit  Party over !  Let's get it on !

Superlat Thu, 06/07/2018 - 19:01 Permalink

It's no accident that the Germans are being hollowed out and disciplined in every way possible. The Germans learned a valuable less in 2009 that Wall Street is more than happy to screw them over. Most of the reason DB is in trouble is it was suckered by the Kushners on Wall St.

The last thing the ziowasps want is Germany any stronger than it is, and they especially don't want them allying with Russia and Eastern Europe, which would be a natural fit at this point in history. Germans, if they have any brains, would put a timeline on NATO and US bases. Then again, they have gotten a free ride not having to spend money on defense. Germany is the natural leader of Europe, not the zionist-infiltrated USA. One day, maybe they'll wake up and see that. All of Europe needs to wake up that the zioagenda is doing nothing but costing them money and blood both on the banking side, and the foreign policy side. Europe really needs to put the USA in its place and soon, but the people are rising up anyway.