3441 The Fall of Deutsche Bank. Prepare Yourself Accordingly.
After a slow-motion disaster of almost 10 years, the fate of one of Europe’s most important financial institutions appears to be sealed. Deutsche Bank started the year by announcing a record-setting loss in 2015 of €6.8 billion. Scandals, bad decisions, and unfortunate events – now Frankfurt-based Deutsche Bank shares are down -48% on the year to $12.60, a record-setting low.With only $15.8 billion in market capitalization, shares of the 147-year-old company now trade for only 8% of its peak price in May 2007. The bank is currently cutting 9,000 employees and shuttering operations in 10 countries. The International Monetary Fund has stated that DBK is now the most dangerous bank in the world.Sources: http://www.fdrurl.com/deutschebankFreedomain Radio is 100% funded by viewers like you. Please support the show by signing up for a monthly subscription or making a one time donation at: http://www.freedomainradio.com/donate
Hi everybody, Stefan Molyneux from Freedomain Radio.
I hope you're doing well.
We're going to take a hop, skip and a jump across the pond today to survey the potential financial crater that is opening up over one of Europe's most wanted and fundamental and foundational financial entities, the Deutsche Bank, because it's going through rather an exciting time at the moment, which I think bears some examination.
So after a slow-motion disaster spanning almost 10 years, the fate of one of Europe's most important financial institutions may appear to be sealed.
Deutsche Bank started the year this year by announcing a record-setting loss in 2015 of 6.8 billion euros.
A combination of pending litigation, scandals, bad decisions, and some unfortunate events.
And now the Frankfurt-based Deutsche Bank shares are down 48% on the year to $12.60, which is a record-setting low.
It has only $15.8 billion in market capitalization, so shares of the 147-year-old company are now trading for only 8%.
Of its peak price in May 2007, because, you know, 7%, well that would be really bad.
The bank is currently cutting 9,000 employees and shuttering operations in 10 countries.
The International Monetary Fund has stated recently that Deutsche Bank is now the most dangerous bank in the world.
The Fed failed Deutsche Bank in its annual stress test for the second straight year in June, reporting that its capital planning had, quote, Let's just take a moment to enjoy the spectacle of the Federal Reserve complaining that another bank or another financial institution has broad and substantial weaknesses.
We'll get back to that another time.
So just so you get a sense of the kind of octopus at the center of Deutsche Bank, so the interconnectedness between Deutsche Bank and global systematically important banks, this is from the IMF, is quite complicated.
As you can see, it's a bit of a cat's cradle from hell, and should Deutsche Bank go the way of the dodo, it seems like there might be a giant sucking sound pulling in a few other institutions as well.
So I just wanted to give you a sense of the centrality of Deutsche Bank to the financial system.
Now, of course, when banks come across hard times, they reach for the government pocketbook, i.e.
your pocketbook.
And the question of a bailout is quite important.
Larry McDonald, head of global strategy at ACG Analytics, said on CNBC's Power Lunch, After being there, I'm literally sitting here with chills coming down my spine because we're in a very similar dynamic.
Deutsche Bank is not Lehman in terms of the overall global risk, but the political situation is almost identical.
The politicians in Germany aren't in position Right now to do anything ahead of the election, he added.
The beast in the market, the serpent in the market, knows this.
And the market will push and push and push until they break the politicians in Germany to come up with public funds to bail out the bank, I would assume.
So, let's compare Deutsche Bank to Lehman.
Of course, Lehman was one of the great triggers of the 2007-2008 financial crash.
This is the price, of course, of the stock.
Lehman and Deutsche Bank...
There's a little arrow here where the head of Lehman said, oh, don't worry, the worst is behind us.
We're doing fine.
And yeah, these aren't entirely opposite lines.
Of course, the outcome remains open to question.
So Deutsche Bank is at the center of the European financial system.
And what's happened is there's been a bunch of litigation hits that have raised overall levels of market anxiety.
The U.S. Department of Justice has tabled a 14 billion dollar or 10.5 billion pound settlement deal following a probe into the German lender's sale of mortgage-backed securities during the financial crisis.
So very, very brief.
We've got some videos about this on this channel, notably HouseMD, which I guess has become an increasingly dated title.
But basically what happened was governments forced banks to lend to minorities and other unqualified borrowers in order to push up the numbers of home ownership for minorities.
They were not qualified.
You could write in whatever you wanted, in some cases in your own income.
And the banks were forced to do this.
They didn't just go crazy.
The government kind of forced them to lend to people who were unqualified to pay back over time.
And then they wanted to bundle all of these highly risky loans into more complex financial instruments which they sold around the world.
And of course when math eventually hit, as it always does, then it all began to unravel.
So, the Department of Justice has spent the last, I don't know, year after year after year investigating this, and now they're saying $14 billion US fine.
Now, there was a report late last week that Deutsche Bank and the US Department of Justice were close to agreeing on a settlement of $5.4 billion that bumped up the stock a little bit.
That report has not been confirmed.
In a statement, Deutsche Bank argues that it is financially stable.
Quote, Our trading clients are among 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.
So, that's what they say.
In some sectors or some environments, there are crisis questions being asked.
Is there a risk of a financial crisis repeat?
In Europe, can a large European bank or large European banks face a liquidity event?
And that is a problem.
There's a lot of financial resistance in Europe to bailouts, and we'll get to that more in a little bit.
But a lot of them have suffered from harsh penalties as a result of bailouts, a lot of the European Union partners.
And, of course, the fact that the amount of the fine has yet to be finally set has...
It remains a question for people.
Now, five banks have already reached settlements with the Justice Department over similar issues and problems.
Latest was Morgan Stanley.
That was $2.6 billion in February.
Goldman Sachs Group $5.1 billion in April.
Early September, a German magazine said the Deutsche Bank might pay more than $2.4 billion.
They were using Goldman's settlement as a sort of standard settlement.
But that has not occurred.
Now, of course, if there's a significantly high Department of Justice penalty, $14 billion seems very high, but if that is the case, that's kind of alarming for other banks that are facing similar probes.
And Deutsche Bank is so central to the German and the European economy, it employs 100,000 people, though I guess that number is going down.
So some officials have reported through back channels that it cannot be allowed to fail.
So Citigroup teetered.
Let's go back to 2008 and early 2009.
Citigroup teetered.
Paulson's treasury stepped in.
They had two big cash injections to keep financial losses from spreading after Lehman Brothers failed on September 15, 2007.
So that, of course, is possible.
It's possible to repeat that in Germany.
The European corporate and state culture is different, particularly in banking.
Bailouts are considered just anathema, and German officials in recent days have signaled an unwillingness to step in, but we don't know if that's brinksmanship or for real.
So in August 2016, Deutsche Bank and Credit Suisse were removed from Europe's blue-chip stocks, Europe 50 Index, because of sharp declines in the market value of both stocks.
So what's going on?
Well, as central banks employ these radical monetary policies to try and juice or stimulate growth in Europe, negative interest rates have emerged.
Now that is truly mad.
Interest rates, of course, basically because we're mortal beings, we prefer to have things now.
Rather than later and interest rates are the price of consuming now rather than later.
And when you have negative interest rates, you're saying, well, I'd really like to get more stuff, but I'd really, really prefer it and I'll pay for the privilege of consuming it a couple of years from now than now.
That is completely mad.
That's like taking out a mortgage and paying the bank To withhold the house from you for 20 years, by which time you will own it.
It just makes no sense, but in the mad world of central government bank planning, whatever that means, it's the kind of stuff that emerges.
So when you get negative interest rates, the eurozone banks have a tough time making money because negative interest rates erode profits between the short-term borrowing costs and what banks can charge for long-term loans.
The German 10-year government bond, called the Bund, was yielding negative 0.15% recently, and of course bond yields fall as prices rise.
Now in 2009, Deutsche Bank CEO Josef Ackermann said that Deutsche Bank had plenty of capital and that it was weathering the financial crisis better than its competitors.
Although there is significant indications that the bank was hiding 12 billion dollars in losses to avoid a government bailout.
Because, of course, when you run up to the government and ask for money, well, let's just say your depositors get a little nervous, your stockholders and stakeholders get a little bit nervous, and you do risk a bit of a bank run, which is what takes down these banks and can do it very, very quickly.
Now, a lot of the money that Deutsche Bank did make in the sort of early to mid-2000s stemmed from a manipulation of LIBOR rates.
And I talked about this on Peter Schiff's radio show a while back ago.
We can link to that show below.
So these wins, these big profits for Deutsche Bank, kind of short-lived.
The eventual fine imposed at the end of the LIBOR probe was a record-setting $2.5 billion.
So they made a little money.
I guess it's like being at a casino.
You make a little money, and then you don't.
Now, Bloomberg has recently alleged that Deutsche Bank had knowingly misvalued dozens of transactions between 2008 and 2010, including one transaction currently central to a criminal case against Italy's Banco Monte dei Pasi di Siena.
And that is...
That is a big problem.
So almost four years after it was first revealed, the Deutsche Bank had engaged in some fairly shady deals at the height of the financial crisis that was designed to mask this bank's financial woes.
On October the 1st, Italy finally charged the German lender and six Of its current and former managers for the alleged crime of colluding to falsify the accounts of Italy's third largest bank.
And this third largest bank, it is in fact the oldest bank in the world, this Italian bank.
And its value has dropped 99%.
So kind of on the ropes as a whole.
Italy as a whole, we can have a whole other discussion about the Horror show that is Italian banking these days, but the IMF recently noted Italy does not look like it's going to recover until the mid-2020s, by which time it will have endured two decades of recession.
So they're going for the Japanese, I guess, style model of stimulation through exhaustion.
Could this be blowback?
There is some theorizing along those lines.
So only weeks after the European Union slapped Apple with a $14 billion tax bill for back taxes, the US hit Deutsche Bank, of course, with a $14 billion fine of their own, right?
Regarding this probe into the companies trading mortgage-backed securities during the financial crisis.
It seems like a similar number to me, and it could be a warning shot from the US to the EU. According to the Wall Street Journal, the proposed settlement, this $14 billion for Deutsche Bank, would be the largest fine paid by any of the banks related to similar charges.
As we mentioned, bad news for other European banks that remain under investigation by the Department of Justice.
This includes Barclays, Credit Suisse, UBS, and RBS. Could be a precedent for what other Eurobanks might be expected to pay, and since it is a...
Kind of depth charge against Deutsche Bank, this $14 billion fine.
Well, if you're holding the stocks of other banks in Europe who are also being invested by the DOJ and the fine is many times more than what people expected and still has not been negotiated down with any clarity, might you think about hanging on to or not hanging on to your stock in those European banks?
So the bank, of course, Deutsche Bank has about $16 billion in equity, slightly less, and about $160 billion in debt.
So that's a lot.
But if that's a lot, oh, there's more.
Deutsche Bank's outstanding derivatives exposure...
It is 20 times the German GDP and 5 times the entire eurozone GDP. So a derivative is a security with a price, depends upon or is derived from one or more underlying assets.
One of the most common is sort of futures trading and so on.
There's not a lot of equity, in my opinion.
There's quite a lot of debt.
There's a lot of litigation exposure.
And there's a huge derivative exposure.
You know, 20 times the German GDP, 5 times the Eurozone GDP. I'm no expert, but that seems like a lot to me.
Now, if Deutsche Bank does have to go hat in hand for central bank liquidity assistance, the outcome may be truly catastrophic.
Because Deutsche Bank, unlike Lehman, has nearly 600 billion euros in deposits, which are susceptible to a retail depositor run.
So Lehman failed.
Largely because its corporate counterparties rapidly yanked their liquidity lines, but at least Lehman didn't have retail depositors.
Deutsche Bank is far riskier.
If the institutional panic spreads to the depositor base, in other words, if people think that they might not be getting every penny on the dollar of their deposits back, well, that amounts to some 566 billion euros in total and 307 billion euros in retail deposits.
If Angela Merkel does not halt the plunging stock price, Deutsche Bank's retail clients will take the stock price as a sign of cratering viability, right?
So what heads a vicious circle, we've all seen this before, the lower the stock price drops, the faster they pull their deposits, which drives the stock price even further down, the quicker that Deutsche Bank's liquidity could hit zero.
And that self-fulfilling prophecy, I think the bank's going to fail, so I'm going to pull my money, which causes the bank to fail.
Well, then that's what could be the end association.
There was a significant stigma during the financial crisis in the U.S. when they started using the Fed's, when U.S. banks started using the Fed's discount window, their shareholders noticed it.
So, there are four options that are possible.
Maybe there's more, I'm certainly no expert, but there are four options.
So Deutsche Bank could try and raise capital, right, to fund whatever it's got to pay with this litigation, ongoing litigation issues.
But that might drop the stock price because of dilution or fears that the capital raised may not be enough.
Because, you know, you don't want to raise a huge amount of capital because that's signaling that you have a huge amount of liabilities.
You want to raise just enough, but not too much.
And that's always a bit of a gray zone and people are concerned that you didn't raise enough.
If you have to go back for more, there's less credibility with that.
Now, they could beg the European Central Bank for a liquidity bridge, you know, just tie it as over.
But that might signal counterparties to flee an institution that requires a central bank backstopping.
They could beg for a state bailout, but there's no interest for Merkel so far.
I don't know, maybe if all of Lehman goes across the Mediterranean and comes back on rafts, she might open up her checkbook.
Or they could implement what is called a bail-in, which is where they...
Eliminate billions in unsecured claims and deposits and the depositors are going to lose some money.
That's the bail-in when the bank just skims off of your deposits.
But that's going to lead people to want to withdraw their savings.
That leads to a collapse of this fractional reserve banking mode, right?
Where there's only 10 cents in physical deliverable cash for every dollar in depositor claims, right?
They lend out far more or they invest far more than they actually have.
And that scheme is quickly unraveled if people want to get their actual money out of the bank.
And debt, I mean, debt is the foundation of this crumbling system.
Your sovereign debt, national debt, corporate debt, credit card debt, school loan debt, all at record highs all across the world, increasing every single day.
One option that is not on the table is doing nothing.
They have to do something because the markets are most likely going to keep dropping the price of Deutsche Bank stock lower and lower until either it fails or is bailed out or finds some other way to close this gap.
I guess you've got to wonder how the UK currently feels about Brexit given the financial contagion that may be erupting in Europe over the next little while.
Things are actually worse off.
Now than they were in 2008.
The whole global economic and financial system is in worse and shakier shape, basically because there's been no serious efforts to fix any of the systemic problems that triggered the last Great Recession.
And so, you know, the infamous can has been kicked down the road now for eight more years, and things tend to get worse.
There's a basic function that governments like to do, and it's always disastrous in the long run.
So they'll take your tax money, they'll use it as collateral to borrow a huge amount of money, which they then pour back into society, and what that does is give people in society the idea that the government has money and is adding value to society as a whole.
It's basic vote buying.
And it doesn't work.
I mean, governments all around the world have been taking money for decades from people so that there can be retirement benefits.
But the governments have generally spent all of that money, and there's no money for retirement benefits.
And therefore, you've got this inverted pyramid of baby boomers retiring, and the governments have to tax the young in order to pay for the retirement benefits of the old because there's nothing left in any retirement schemes other than dusty IOU notes.
And the young, of course, are going into school more.
They are taking on more debt to complete often fairly useless educational degrees or actually worse than useless educational degrees.
A lot of people come out dumber than they were before they went in.
So they're already in debt.
Job opportunities are very few.
A lot of people are opting out of the workforce, out of marriage, out of all of the things like having kids that generally tend to drive people's economic ambitions.
And so you have a declining tax base, you have an expanding tax requirement base in the elderly in terms of healthcare and not working and consuming resources in terms of pensions.
So this equation can't continue.
It just can't continue.
Governments, of course, have been printing a lot of money.
They need excess population to soak up all of this additional money.
They're not getting it because of low birth rates, so they're importing a lot of migrants in order to soak up some of this money.
It's not that the migrants are earning it.
I think in Germany, of the million migrants who came in, only 53 got jobs.
But they can at least funnel the money through the welfare state to the migrants, which soaks up some of this excess liquidity that has been created by the central banks.
So what happens is these Ponzi schemes, these ever-escalating disasters of debt and financial control, manipulation and decaying productivity and outsourcing of productive jobs and increased useless education, all of the general burning of human and social and economic capital that occurs towards the end of a particular civilization cycle, All of this escalates to the point where things can't possibly continue, and the governments and the central banks never say, oops, our fault.
We really made a lot of bad decisions, so things need to change.
We need to relinquish our power, return the power to the people, return the power to create and control currency to the people, which is anathema to socialist governments or socialist heading governments.
Governments want to do a whole bunch.
They need a whole bunch of money.
They can't raise the taxes to do it because then people understand the government generally subtracts economic value rather than adds to it.
So they need to borrow, they need to print, they need to create bonds and all of that and kick the can down the road.
So when all of this begins to unravel, what normally happens is governments go to war.
I mean, the end result of this is war.
And we saw this after the central banking, in particular the Federal Reserve, was created in 1913.
There was a A boom and then a bust for 13 years in the Great Depression, which was the result of central bank failures and manipulations and controls.
And just generally, anybody who thinks that they can control a complex economy of tens or millions of people, tens of millions of people or more, is a delusional, megalomaniacal narcissist who's going to make terrible decisions in the long run because anyone who thinks they can do that It's completely insane from a reality standpoint.
And so what happens is you get these kinds of disasters that escalate financially and the government cures it all by going to war.
That is really not going to be possible now that we have nuclear weapons throughout most of the Western countries.
So war is not really going to happen, but you can create significant conflict by other methods such as mass immigration from questionably compatible cultures, which creates enough chaos and disruption in people's lives that you can ask them to make sacrifices when they're financial.
Nonsense and delusions finally manifest themselves in massive losses and dislocations.
So I just really wanted to sort of point this out.
There is this risk.
You need to keep your eye on it, I would suggest.
And when things do start to unravel...
Remember, it is not the free market that caused all of these problems.
It is government controls, government manipulations, and most importantly, we need to return the creation and control of currency back to the free market, back to the people.
When you give the government the power to type whatever it wants into its own bank account, you get a short-term high and then a crash almost beyond description.
This is Stefan Molyneux for Free Domain Radio.
Thank you so much for watching and listening.
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