A financial system stability assessment report, from the International Monetary
Fund (IMF), on one bank in Europe identified Deutsche Bank AG (NYSE: DB), as
the TOP bank that poses the greatest systemic risk to the global financial
system. Systemic risk was identified as a major contributing factor in the
'financial crisis' of 2008. This is essentially the risk of contagion by the
failure of one firm leading to failures throughout its' industry.
On February
24th I talked about DB (Deutsche Bank) as the next major bank to fail.
Since then price has plunged 31% and its likely headed much lower yet.
IMF: The Top Bank That Poses Global Financial Risk Is DEUTSCHE BANK!
Deutsche Bank's $75 Trillion In Derivatives Is 20 Times Greater Than German
GDP!
Deutsche Bank was historically one of the most respected banks in the world.
Today, it is increasingly the subject of reports that it was on the verge of
collapse which was primarily due to a massive exposure to derivatives estimated
at $50 to $70 trillion. The bank has struggled continuously since the 2008
financial crisis, and its' stock price, as of late July 2016, stood at a new
seven-year low of just $14.57 per share which is less than 10% of its' peak
price, in 2007, before the 'financial crisis'.
The bank's CDS spread shot up to recent highs (a CDS is a measure of risk
– higher is bad) and its' share price hit 33 year lows. DB has been struggling
in Europe's negative interest rate environment. Negative interest rates have
been crushing European and Japanese banks. Deutsche Bank's CEO John Cryan told
analysts that banks will increase fees and take other measures which will be
passed on to customers.
The bank was hit with a $2.5 billion fine in October 2015 for its' involvement
in the LIBOR scandal regarding interest rate rigging. In January 2016, it announced
a record loss of more than $6 billion for 2015 which is a stunning reversal
from a 2014 profit of $1.6 billion. In my past articles, I issued a warning
that Deutsche Bank was massively leveraged and that its' problems were most
probably insurmountable. In June 2016, the Fed announced that Deutsche Bank
had failed its' stress test for the second year in a row. The bank was also
hit by the BREXIT decision seeing as it derived nearly 20% of its' revenues
from the United Kingdom.
Does Deutsche Bank Have Similarities to Lehman?
The biggest problem that Deutsche Bank faces is excessive leverage on its'
balance sheet. It faces insurmountable challenges from poor-performing core
businesses and a lack of capital. I believe that the company ultimately must
raise more equity capital to solve its' leverage problems. Deutsche Bank's
valuation highlights the market's pessimism. As of June 15th, 2016, the bank
traded at 27% of tangible book value, which means that the company is worth
less than its' liquidation value.
In 2008, failures at Lehman Brothers and American International Group Inc.
(NYSE: AIG) led to a run on banks and imperiled the financial system. Similarly,
a failure at Deutsche Bank will have catastrophic consequences for the banking
system during 2016.
The U.S. Department of Justice (DOJ) has ordered Deutsche Bank AG (DB) to
pay $14 billion in order to settle claims of miss-selling mortgage-backed securities.
Deutsche Bank said it would fight a $14 billion demand by the U.S. Department
of Justice to settle claims that it miss-sold mortgage-backed securities which
raises questions about the future of Germany's largest lender.
The bank's market value is about $18 billion. A pending fine of $14 billion
is not a good sign. The bank, which is already battling multiple legal cases,
has only around $6 billion in its' litigation reserves. Therefore, paying a
$14 billion fine would seriously impact the capital structure of the
bank. It is important to note that Deutsche Bank has already been struggling
in terms of profitability.
The Destruction Of An Illusion:
Last Monday, September 26th, 2016, their stock crashed yet again; down another
6%. Its' bonds have slumped, while the cost of credit default 'swaps' are essentially
a way of hedging against a collapse. It all has a very 2008 deja vu feeling
to it.
Markets should be bracing themselves for the worst outcome. The European 'debt
crisis' will create long-term systemic risks for ALL banks. Shares in all European
banks continue to lag while at the same time U.S. indexes are making all-time
highs!
Deutsche Bank has struggled in Europe's negative interest rate environment
and very recently the German Chancellor Angela Merkel has ruled out a government
rescue of the bank. Deutsche Bank has the second largest 'derivative' book
in the world while behind JP Morgan and that is indeed a serious concern. If
the viability of Deutsche Bank is put in jeopardy, many other Euro banks will
go under, as well, which would induce "global turmoil" reminiscent of 2008.
The IMF has highlighted Deutsche Bank as the most important net contributor
to 'systemic risk'. Once confidence is lost, a bank is in big trouble. If Deutsche
Bank does go under, it will most likely take Merkel with it and quite possibly
the euro as well!
This is Your Biggest Buying Opportunity Of Your Life!
The difficulty in identifying asset bubbles is directly related to credit
expansion. The problem is not the asset bubbles, whether they be in stocks,
housing, or student loans. This is merely a symptom of a deeper condition.
The real threat is the underlying credit expansion by easy monetary policies
that has created these asset bubble problems in the first place.
Every crisis also brings an opportunity with it, hence, lets' make the best
use of the opportunity before the price of gold and silver blows through the
roof. It is better to invest now and see our investments multiply, instead
of waiting for the crisis to start, as, by then, more than half of the rally
would be behind us.
