Deutsche woes mean world is sailing close to new banking crisis

The Australian 8:57am September 30, 2016

Robert Gottliebsen

Last night on Wall Street we saw a full frontal attack not only on the shares of the giant German bank Deutsche but also on its hybrid and debt securities.

Some 10 hedge funds that clear derivatives trades with Deutsche Bank have cut their exposure by withdrawing some excess cash, and cutting positions held at the bank.

We all know what actions like that can potentially mean to a bank and the banking system. We have seen it before.

Accordingly, the world is sailing perilously close to another banking crisis. We need cool heads and decisive actions.

And in this environment if our parliamentarians are not very careful they will put the Australian banking system into the eye of the looming storm.

Frankly at any other time I would be a strong supporter of the proposed parliamentary interrogation of our top four bank CEOs. For a long time our banks have done a poor job of explaining themselves. They now have a chance to do it.

Had the inquiry been a month or even a week ago all it would have been was a domestic issue.

But when Commonwealth Bank CEO Ian Narev takes the stand on Tuesday to be followed by the other big banks on Wednesday and Thursday it could easily turn into a global event in a bank jittery world.

When earlier this week I highlighted the deep problems of Deutsche I received a call from an old friend with excellent connections to the global banking scene telling me that not only was I totally correct but I may have understated the risks. About 38 hours later Wall Street got the message and Deutsche Bank was brutally attacked. The shares fell 6.7 per cent and are down 10 per cent for the week and 62 per cent in just over 11 months.

Remember that over the last two or three years Australian banks have gone into the world debt markets and borrowed heavily to help fund our housing boom. In the years leading up to the global financial crisis they did the same thing but that time around they undertook the borrowing on a short-term basis and our banking system was put in jeopardy when the crisis erupted.

This time they have again enjoyed the lower interest rates abroad but they borrowed longer term and with different maturities. We will therefore not have the same problems. But if the world debt markets tighten our banks will need to look to local depositors. In this fear climate any remarks that indicate high Australian banking risk will be multiplied 10 fold.

And to underline what is taking place last week former UK Chancellor of the Exchequer Norman Lamont told the Institute of Directors conference that German banks could be a danger to Europe: “The biggest threat, I think, to Europe is the banking crisis. I think Italian banks are in a very serious situation; I think German banks are probably in a very serious situation, too.”

The shorters understood his message and intensified their Deutsche attack and, according to press reports, eight other European banks are now under attack, including Credit Suisse. My contact in the world-banking arena expects a British bank to be attacked.

As I have explained to readers Deutsche Bank appears to have been concealing deep problems for years. But it is fascinating that it was the US --- where the global financial crisis was triggered --- was the country that is forcing Deutsche to fight for its life.

The US Justice Department wants Deutsche to pay a $US14 billion legal settlement to close out mortgage-securities probes. That $US14bn demand is around the market capitalisation of Deutsche Bank. The bank has little hope of paying such an amount or anything like it.

Deutsche bank will almost certainly sell its asset management and perhaps other operations and may need to raise capital, with some form of backing from the German government.

For the record the bank made this statement:

“Our trading clients are amongst the world’s most sophisticated investors.

“We are confident that the vast majority of them have a full understanding of our stable financial position, the current macroeconomic environment, the litigation process in the US and the progress we are making with our strategy.”

That statement may be accurate but when markets turn against a bank words don’t have much impact.

Footnote: I hope the parliamentarians quiz Ian Narev as to why CBA raised local deposit interest rates when the Reserve Bank reduced official rates, but has since lowered some but not all of them. That issue will not cause world ripples.

Deutsche Bank’s decline reflects European weakness

The Australian 12:00am October 1, 2016

Terry McCrann

Asking whether Deutsche Bank is the next Lehman Brothers is asking precisely the wrong question. Just as Lehman was not the next Long-Term Capital Management. And in turn LTCM was not the next S&Ls, or it the preceding Continental Illinois, and so on back along meandering byzantine pathways past Tulip Manias and South Sea Bubbles all the way to real Byzantine times.

Trying to find the next Lehman is the proverbial search for the key under the street light, rather than where the key might actually be. That key is the understanding that financial collapses are like Tolstoy’s happy and his unhappy families rolled into one: they are all exactly the same at core but always completely different in structure, in the triggering and in the consequences.

A far more interesting question to me, with challenging sub-questions that ripple out in so many directions and on so many layers, is why Deutsche? Why is the biggest bank in what is undoubtedly Europe’s and arguably the world’s strongest major economy the epicentre of global fear and loathing?

Is it something about Germany? About Europe? The European project? The European Central Bank? The cabal of globally significant central banks and what they have wrought? The GFC as lingering, suppurating wound, patched over but never properly dealt with? And perhaps a dozen more.

Yes, I suggest, to all of the above, not that there’s the slightest prospect of any of the architects, managers and manipulators of policy ever engaging in even the most minimal self-assessment. They will all go doggedly on, confident in their blinkered lack of any self-awareness, comfortable in their directly taxpayer-funded or consumer-levied sinecures.

I do think it is particularly delicious and instructive that Deutsche Bank’s decline and possibly inevitable fall has come in the wake of the abandonment of the currency that bore its name.

The old, post-war, pre-unified Germany of the European Community was built on the twin foundations of a strong currency and a strong banking system. At the very pillar of that financial system and at the absolute foundation of that economy was Deutsche Bank.

Today’s Deutsche, capitalised at a figure not much higher than its looming US malpractice fine, would have been beyond unthinkable two decades or more ago, capturing how far it has declined.

The new Germany of the European Union traded a strong currency and bank for easy money for both the economy and the institution, which came from a weak transnational currency, but seemingly also unavoidably, as part of the dynamics of the trade, a weak banking system.

Bluntly, if politically incorrectly, would a German Bundesbanker have overseen monetary policy like a French and even more an Italian ECBanker have done? Would that proverbial Bundesbanker have embraced the ECB’s (and Fed’s and BoJ’s) financial alchemy of seeming to turn copper into gold, an alchemy which merely postponed and amplified the disastrous inevitable?

Similar sets of bank-specific questions can be posed in relation to former and more contemporary Deutsche bankers.

There are of course two big questions about Deutsche Bank which provide some parallel to Lehman. Just how bad are its assets: is it a zombie bank? And how significant and how vulnerable are its investment banking-type linkages — derivatives and cross-party exposure and the like?

There is also one very specific question: what happens if it pays the $US14 billion ambit claim from the US Department of Justice? How does it finance it? What does the payment and/or the financing specifically trigger, both narrowly in relation to Deutsche and across the European banking system? What would the German government do? What would the ECB do?

That could trigger a broader implosion. In that sense, Deutsche could prove to be the next Lehman.

There are two linked reasons why I am wary of this too-specific focus.

First, the history of financial implosions makes it clear that this history never repeats itself.

Yes, as I noted, the core is always the same: broadly, greed and seeming easy money — some variation of the alchemy we all seek: borrowing at, say, 3 per cent and risklessly investing at 6 per cent, with more and more in geometric expansion joining the free lunch.

But politically incorrectly again, the fat lady never sings the same aria. Apart from anything else, like generals fighting the last war, we have probably barred the regulatory gates against a replay.

The second reason is broader. We need to pull our gaze back from searching for the next Lehman — even more so, when we think we’ve identified it — to look more broadly at exactly what has developed in not just the global financial system overall but indeed the world’s real economy.

Rather simply, we need to try to pre-empt the next disaster, not guarantee we can avert the last one again.

It gets worse when you look at what the troika of major central banks have done. I would argue the combination of zero interest rates and QE has actually been a recipe for creating the next implosion.

There’s wide concern that the combination has led to very obvious bad behaviour — the bubble in debt-financed asset values.

Just how exactly you address the problem of too-much leverage by deliberately encouraging even more leverage defies the most uneducated common sense.

Janet Yellen and Mario Draghi have clearly never been to an AA meeting; as virtual reality teetotallers, they are utterly incapable of understanding the disastrous consequences of their pouring 100 proof hooch into the global monetary punch bowl. One of yesteryear’s Bundesbankers would have been snatching the bowl away.