TND Guest Contributor: Dave Kranzler
All eyes are focused on Deutsche Bank. Rightly so, for the most
part. “As you said, Deutsche Bank is blowing up” (Dr. Paul Craig
Roberts in an email to me this morning). It was reported this morning
that the bank’s CEO released a memo to employees in which he assured the
“troops” that everything was fine. Most people do not remember this
but I’ve been cursed with a great memory for certain details. Jimmy
Kayne, the CEO of Bear Stearns, when Bear blew up gave the same type of pep
talk to Bear employees shortly before Bear was flushed down the toilet.
Reaching even further back in the annals of epic corporate fraud
induced collapses, Ken Lay gave the exact same kind of pep talk to his people
right before Enron collapsed.
As the adage goes, once a rumor is denied at least three times, the
fact-basis of the rumor has been confirmed. But it’s not just DB – it’s
the entire western banking system.
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While DB stock was getting pummeled yesterday, it escaped everyone’s
attention that Morgan Stanley stock was down over 7% as well. Bank of
America stock was hit 5.4%. Goldman Sachs as drubbednearly 6%.
Today Credit Suisse stock is getting hit 7.7%. These banks all
have one common denominator: an exceedingly high degree of exposure to
Euro-debt credit default swap counterparty risk. Include RBS and
Barclays on that list as well, both of which are headed for the credit
default swap waste bin unless the Fed and the ECB decide to print enough
digital money to keep them alive. The most stunning collapse in stock
price is perhaps Credit Suisse (green line) which had been the best
performing stock among the group until mid-July. Wonder what changed?
Nearly as a notable as CS is Morgan Stanley (dark purple), which has
managed to stay out of the media but it clearly exhibiting signs of extreme
underlying financial distress. Most might not remember, but Morgan
Stanley should have been one of the primary casualties of the 2008 de facto
collapse but it was quietly re-monetized so that it could continue fleecing
the public by raking in big fees from the huge volume of “Club Med” European
credit default swaps that it sells.
It’s nearly impossible
to identify the specific root cause of the obvious banking system melt-down
that is occurring. By design the use of OTC derivatives by the banks
has been completely obscured and hidden from sight. As was evident
from Jamie Dimon’s admissions during the “London Whale” crisis at JPM, even
the people running these banks do not have a full understanding of the
magnitude and degree of risk buried in the big bank balance sheets. Since
the Central Banks get their bank-specific information from the banks, it
means that Central Banks therefore do not fully understand the scope and
severity of the problem either.
That fact alone should be enough to frighten anyone paying attention out
of the banking system and into the relative safety of precious metals.
I was chatting with a close friend of mine in NYC. He lived with me
through the turbulence at Bankers Trust (Proctor and Gamble derivatives
lawsuit, Long Term Capital exposure, etc). He stayed on and worked at
Deutsche Bank and then at Lehman. He knows when something is
irrevocably wrong at these banks. His comment to me this morning was
that “something is blowing up behind the curtain in the banking system and it
has to be the derivatives.”
Of course, the reason the derivatives are blowing up is because the
underlying credit instruments from which they are “derived” are melting down
as well. We know about energy, industrial commodities and high yield –
all of which the banks above have heavy exposure – but I would also suggest
that auto loans and mortgage paper (luxury housing bubble pops) are starting to crack hard
too. Banco Santander has been one of the more aggressive auto finance
lenders and its stock has is down 50% since April and down 38% since early
October. Capitol One down 25% since early December.
The message is clear: the credit markets are beginning to
accelerate in their collapse.
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About Dave Kranzler:
I spent many years working in
various analytic jobs and trading on Wall Street. For nine of those years, I
traded junk bonds for Bankers Trust. I have an MBA from the University of
Chicago, with a concentration in accounting and finance. My goal is to help
people understand and analyze what is really going on in our financial system
and economy. You can follow my work and contact me via my website Investment Research Dynamics.
Occasionally, I publish on Seeking
Alpha too. As a co-founder and principal of Golden Returns Capital,
LLC Mr. Kranzler co-manages the Precious Metals Opportunity Fund, a metals
and mining stock investment fund.
