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Tuesday, July 16, 2019

Deutsche Bank in trouble

Those massive layoffs weren't the only sign that Germany's largest bank appears to be in difficulty:
Here are the dynamics in a nutshell: Deutsche Bank CEO Christian Sewing is pulling back from catering to risky hedge-fund clients, i.e. running a prime brokerage, as he attempts to radically overhaul the troubled German lender while BNP CEO Jean-Laurent Bonnafe wants to expand in the industry. A deal of this magnitude would be a stark example of the German firm’s retreat from global investment banking while potentially transforming its French rival from a small player in the so-called prime-brokerage industry to one of Europe’s biggest.

Of course, publicly telegraphing that DB is in dire liquidity straits and needs an in-kind transfer of its prime brokerage book would spark an outright panic, and so instead the story has been spun far more palatably, i.e., "BNP is providing “continuity of service” to Deutsche Bank’s prime-brokerage and electronic-equity clients as the two companies discuss transferring over technology and staff", according to a July 7 statement. The ultimate goal of the talks is for BNP to take over the vast majority of client balances, which are slightly less than $200 billion currently.

There is just one problem: nothing is preventing those clients who would be forcibly moved from a German banking giant to a French banking giant from redeeming their funds. And that's just what they are doing. Or rather, nothing is preventing them from moving their exposure for now, which is why they are suddenly scrambling to do it before they are suddenly gated.
And the stock price comparison below is not the most encouraging thing I've ever seen, particularly given that we are currently at the height of a bull market.


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50 Comments:

Blogger D Zniger July 16, 2019 6:54 PM  

Interesting how long the music will still be playing? Will they make it a whole year?

Blogger Don't Call Me Len July 16, 2019 7:03 PM  

DB was one of the major players in the last epic economic disaster. Maybe history does repeat. Certainly nothing is ever learned from it, at the highest pay grades at least.

Blogger Mr.MantraMan July 16, 2019 7:20 PM  

I read years ago someone making the claim that DB was the bag man for the German economic "miracle" wouldn't doubt it since the housing bust was predicted by Nolan years in advance. That bubble was a credit hand grenade as I suppose Germany is.

Blogger Seeingsights July 16, 2019 7:26 PM  

The only thing that can save DB is a government bailout. That sort of thing happened before. In the US Financial crisis, Citigroup received around $476 billion in cash and guarantees.
Citigroup's stock was at $15 a share on Feb 27, 2009.
It closed on July 16, 2019 at $71.32.
Whether bailouts of big business is ok is a separate discussion. I'm against it.
A bailout of DB may not be possible in the current political climate. A bailout might energize the populist/nationalist parties and left wing parties like thec Greens, to the detriment of centrist establishment parties.

Blogger Diogenes July 16, 2019 7:40 PM  

So am I off base in thinking that if Deutsche Bank goes down for not having sufficient liquidity even after this French bank hand-off, that might well crush Germany's finances and the wider EU's as well? That doesn't sound good for anyone.

I wonder if the execs at DB will consider that maybe their bonuses weren't worth it.

Blogger Brett baker July 16, 2019 7:42 PM  

The"EU uber alles" crowd might force them to do it.

Blogger Seeingsights July 16, 2019 8:08 PM  

@ Brett baker.
Interesting point.
I can see though a backlash if the EU and its supporters engineer a bailout.
A couple of months ago a ccommenter at a Counter-Jihad website make what I think is an interesting point: whatever actions that the EU takes will contribute to its unraveling.

Blogger Gettimothy July 16, 2019 8:14 PM  

Jump you fuckers

Blogger Dave July 16, 2019 8:23 PM  

http://www.virtualpulp.net/2019/06/29/where-we-go-one-alt-hero-q-1-a-review/

Blogger Nostromo July 16, 2019 8:26 PM  

So, how is the "tribe" tied to the DB? They have to be in some way, right?

Blogger Cederq July 16, 2019 8:37 PM  

If DB goes bankrupt, will it have serious repercussion here in US? The straw that broke the depression back? I am asking ones who are more knowledgeable about this.

Blogger Doktor Jeep July 16, 2019 8:56 PM  

Gee, all that mounds of gold they got from the 6 gorillion should have lasted them 1000 years. They say.

Blogger English Tom July 16, 2019 9:20 PM  

@cederq

The banking system is highly interlinked so see this event as the first tremor of an approaching earthquake. A very powerful, earthquake.

Blogger English Tom July 16, 2019 9:25 PM  

@Cederq

The banking crisis now unfolding will be global in scope, so yes, effects will certainly be felt in US.

Blogger Stg58/Animal Mother July 16, 2019 9:34 PM  

Credit Anstalt 2019 Version

Blogger Dave Dave July 16, 2019 9:46 PM  

If Deutsche Bank collapses and ruins the euro, it could spark a massive anti-eu trend in Europe. It's already there, but it'll get big.

Blogger English Tom July 16, 2019 10:13 PM  

@Stg58/Animal Mother

Credit Anstalt 2019 Version.

Good call.

Blogger John S July 16, 2019 10:59 PM  

DB going bankrupt will make Lehmann Brothers look like a stroll in the park...... DB has assets of 1.5 trillion while Lehmann Brothers had 640 billion when it collapsed.

Blogger MendoScot July 16, 2019 11:08 PM  

Deutschland, Deutschland, unter alles!

Couldn't happen to a nicer bunch of Bankers.
My call on Brexit unravelling the EU stands.
The fireworks will launch before the 31st.

Blogger Jack Amok July 16, 2019 11:13 PM  

Huh. No wonder Merkel has the shakes.

Blogger SciVo July 16, 2019 11:19 PM  

Seeingsights wrote:A couple of months ago a ccommenter at a Counter-Jihad website make what I think is an interesting point: whatever actions that the EU takes will contribute to its unraveling.

Yes, that is what happens when all of your authority is fake, and you have no moral legitimacy to rule.

Nostromo wrote:So, how is the "tribe" tied to the DB? They have to be in some way, right?

Don't know, don't care. Either they didn't take advantage of post-WWII to steer Germany into the shoals, or they did and deserve what they get.

Cederq wrote:If DB goes bankrupt, will it have serious repercussion here in US? The straw that broke the depression back?

Yes and no. They are co-opetition: they are part of the system in which we participate and that facilitates a significant amount of our deals, and they are also competitors on the margins for who can steal whose clients. So the crudest rule of thumb is that we're probably better off if they're somewhat weakened, and definitely worse off if they totally effing collapse.

Dave Dave wrote:If Deutsche Bank collapses and ruins the euro, it could spark a massive anti-eu trend in Europe. It's already there, but it'll get big.

Well yeah, this is almost certainly a result of them trying to extend-and-pretend the inherent contradictions of the Eurozone.

Blogger P Glenrothes July 16, 2019 11:37 PM  

Not to worry folks, just last month DB passed the Feds stress test.

Blogger P Glenrothes July 16, 2019 11:47 PM  

"Christine Lagarde is a convicted felon. She was convicted of financial crimes. She could not get a job at 7-11, yet she can be the head of the ECB." - G. Mannarino

Blogger Jack Amok July 16, 2019 11:51 PM  

And the head of the IMF resigned today to take over as President of the European Central Bank...

"The French economist replaces outgoing ECB President Mario Daghi..."

Reminds me of the joke about European Heaven and Hell. In Hell, the French are the bankers.

Blogger Thad Tuiol July 17, 2019 12:43 AM  

Is Hell a place where the Brits are the cooks, the French are the bankers, the krauts are the comedians and the Jews the athletes?

Blogger Jack Amok July 17, 2019 1:07 AM  

The way I heard it, in Heaven the Brits are the police, the French are the cooks, the Krauts are the auto mechanics, the Swiss are the bankers, and the Italians are the lovers. In hell, the Brits are the cooks, the French the bankers, the Krauts the police, the Swiss the lovers, and the Italians the auto mechanics.

I imagine the Jews might have been the athletes in Hell back in the day, but in Modern World, it would have to be the (Call Center) Indians.

Blogger Didact July 17, 2019 2:56 AM  

I used to work for Deutsche Bank in the USA. I lost my job there in March 2018 during the previous round of severe job cuts - though that level of pain was as nothing compared to what the Equities business experienced recently, seeing as it has basically been shut down. And it's going to get even worse.

I can tell you from firsthand experience with fixing DB's systems and trying to keep the lights on that the entire firm is basically one giant Bad Bank. There are a lot of really smart people who were and are working there. They have been systematically mistreated and ripped off and lied to by management that has absolutely no idea what the hell they did.

DB tried to expand too far and too fast to compete with other US banks in the capital markets and investment banking businesses, which are extremely lucrative and profitable during good times, but also extremely costly. And their strategy for growth involved basically letting each business line operate with almost complete independence in terms of systems, processes, and data handling. The result is a bank where nothing makes sense, nobody speaks well to anybody else, and the "silo mentality" is taken to an extreme.

There are a lot of smart problem solvers in the Bank. But they are constantly stymied by a management culture that only wants to deal with the problems of the upcoming quarter and hires incompetent bootlickers into senior positions within the middle and back office teams. The trading desks are much more meritocratic, but they have to carry vast amounts of dead weight in the Finance, IT, and other departments.

DB lurches from disaster to catastrophe with almost monotonous regularity. It will not surprise me to learn that it is the next Lehman.

Blogger Didact July 17, 2019 3:00 AM  

Nostromo wrote:So, how is the "tribe" tied to the DB? They have to be in some way, right?

@10,

A lot of traders and bankers within DB are Jewish, but that doesn't mean much. The management teams are quite international. In fact there are large blocs of Chinese and Indians in the bank, and as usual they tend to hire people from their own ethnic backgrounds. I saw this repeatedly while I was there, especially with the Chinese, who routinely hired their own countrymen regardless of competence or skill and ignored the inputs and opinions of white and non-Chinese Asians in their teams about whether or not a Chinese individual was actually qualified for the role. I saw that firsthand too.

Blogger Didact July 17, 2019 3:03 AM  

English Tom wrote:@cederq

The banking system is highly interlinked so see this event as the first tremor of an approaching earthquake. A very powerful, earthquake.


@13,

In theory, all non-US entities in the banking system have to have an American entity called an intermediate holding company (IHC) into which all US-based assets, reporting lines, and products are separated, and which must maintain its own capital base overseen by the Fed and other regulators. That way, if the parent company fails, the US entity will be relatively unaffected - and if the US entity fails, the parent is unaffected as well.

That entity is called DB USA Core Corp, and all US employees of DB work for it. That is basically a business of its own with its own balance sheet, income statement, and cash flow statement, that rolls up into DB AG in Frankfurt.

In practice, however... if DB fails globally, which it very easily could if they lose just 5% of their existing capital base, since they are leveraged about 20x right now, then DB USA fails too.

Blogger Didact July 17, 2019 3:08 AM  

Stg58/Animal Mother wrote:Credit Anstalt 2019 Version

@15,

Not quite, and not yet. Creditanstalt happened because a number of insolvent banks were combined into one really big insolvent bank at government behest. In DB's case, this was avoided because the Commerzbank merger fell apart - and thank God for that, because if it had happened, that would have made Creditanstalt look like a mere historical blip by comparison.

What is much more likely is a death-spiral that will require the German government to bail out DB, which we all know is going to happen. The Germans simply will not let DB fail - it is not only their biggest domestic lender, it is also a symbol of their national pride (what little of it they have left, at this point).

The markets have already factored all of these things in. DB's ongoing problems cannot be solved without literally ripping the bank apart and setting the deposit-taking personal/residential/commercial banking side up as its own separate entity, and the more entrepreneurial but much more risky capital markets and investment bank up on its own. DB Asset Management, or whatever they're called these days, is profitable from what I remember, and could probably survive on its own. But the Prime Brokerage business, which used to be one of its biggest profit drivers, is dying.

When you combine all of that with the horrendous state of the systems and processes in that bank, and its resultant bloated employee count, you have a bank that eats up 90 cents in costs for every dollar of revenue. That is vastly higher than any of its competitors, and that is before we get to the endless bad behaviour that has resulted in huge fines and beatings from the regulators.

I would say that DB will fail eventually. It's just a question of when.

Blogger wahr01 July 17, 2019 3:44 AM  

@30

"DB will be bailed out by the EU eventually"

(did you really think they'd allow a bank to fail organically in the EU?)

Blogger Jack Amok July 17, 2019 4:10 AM  

Didact, thanks for the insider view.

Blogger Harambe July 17, 2019 4:37 AM  

This time there will be no angry Austrian who will try and turn this around.

Blogger SciVo July 17, 2019 4:53 AM  

Didact wrote:What is much more likely is a death-spiral that will require the German government to bail out DB, which we all know is going to happen.

Didact wrote:I would say that DB will fail eventually. It's just a question of when.

According to yourself, the answer is when the German gov't fails. And Frankly, it might be the reason why.

Blogger Zwiebel July 17, 2019 5:00 AM  

The trouble started when the bank made Jain Anshu, an Indian from London, head of the bank. His explicitly aim was to "de-germanize" the bank which is what got it into hot water during the 2008 crisis.

Well, I don't mind. Several carmakers are now also in hot water. They all did - and often still do - support the de-germanizing of Germany, therefore, the sooner they fail, the better the chances of Germany crashing, cleansing, and rebuilding.

Blogger Brett baker July 17, 2019 6:21 AM  

The US economy was already crashing when Credit Anstalt hit, though. That's one thing that might keep it from being as bad.

Blogger basementhomebrewer July 17, 2019 7:28 AM  

Whether you're into usury or sodomy, eventually you hit bottom hard.

Blogger Paul M July 17, 2019 7:30 AM  

I wish the finance community would discover logarithmic graphs.

Blogger Sillon July 17, 2019 8:18 AM  

So the DB crashes, the tribe rescues it is a happy coincidence that the EU is pushing ahead with the creation of the European Army.

The EU's Army will be ready just in time to replace the USA military to figh Israel's wars in the middle east.

But it is all a coincidence.

Blogger binks webelf July 17, 2019 9:34 AM  

What about the rest of the EU banking system? Just as fragile, over-leveraged and ready to fall?

Blogger Tars Tarkas July 17, 2019 10:19 AM  

Stefan Molyneux did one of his "Prepare Yourself Accordingly" videos on DB years ago.

I don't know jack about banking, but one assumes that the ECB and Fed and BoJ can't just keep printing enormous sums of money without consequences. Or are these things entirely unrelated?

Blogger Ominous Cowherd July 17, 2019 10:28 AM  

Tars Tarkas wrote:I don't know jack about banking, but one assumes that the ECB and Fed and BoJ can't just keep printing enormous sums of money without consequences. Or are these things entirely unrelated?

So far, most of the consequences have been confined to the financial markets.

Blogger VD July 17, 2019 10:28 AM  

The EU's Army will be ready just in time to replace the USA military to fight Israel's wars in the middle east.

No, it won't. The European armies are almost entirely non-functional.

Blogger Ingot9455 July 17, 2019 11:26 AM  

Thanks. Didact.

In the book version of The Big Short, some of the people working on getting investors for The Big Short invite their investors to see a presentation by Deutsche Bank on their collateralized default swaps or whatever - the part of the real estate market that was always going up because, in part, Deutsche Bank was always buying the collateralized debt instruments.

The investors came away from the Deutsche Bank presentation saying, "I don't care what you're selling, if you're betting against that guy, I'm in."

Blogger Didact July 17, 2019 11:29 AM  

Zwiebel wrote:The trouble started when the bank made Jain Anshu, an Indian from London, head of the bank. His explicitly aim was to "de-germanize" the bank which is what got it into hot water during the 2008 crisis.


@35,

The rot had set in long before. The explosive growth that DB experienced in the 2000s was nothing surprising - every major bulge-bracket bank went through the same thing, and DB was just following the herd.

For most of that expansion period, Anshu Jain wasn't actually in charge of DB - others were. The aftermath of the 2008 Crisis saw Dr. Josef Ackermann take charge, and to give him his due, he did actually try to do something about streamlining DB's divisions and making sense of the bank's insanely tangled balance sheet.

Unfortunately, DB has always been a bank at war with itself. The investment banking arm has always seen itself as a separate business and in many ways a completely different bank from the rest of the company, and each business line within Capital Markets has its own special way of doing things. Streamlining all of that would have taken an Act of God - mere men were not up to the task.

I know. I was involved in some of those streamlining projects.

When it came time for him to retire, Dr. Ackermann wanted to push through his own candidate to succeed him in 2012, but failed. He retired and Anshu Jain from the trading side was brought in. Juergen Fitschen was put in as co-CEO entirely because the German shareholders of DB would never accept a non-German speaker as the head of their national bank.

The power held by the capital markets and banking division at the time was enormous, because by that point they drove over 50% of the revenues and almost that much of the profits. But they were also responsible for the biggest headaches. And it was under Anshu Jain that the capital markets divisions really started creating their own systems and processes, to the point that eventually the Bank got too complicated to manage properly and too expensive to make a decent profit.

The reality is that, unlike other peers in the same industry, DB never made the painful cuts that it really needed to after the 2008 crash. They refused to take the pain back then and ditch the kudzu of obsolete systems and totally incompatible back-ends that made the place such a huge headache.

It is only now, with the closing of the Equities division and significant cuts to Prime Brokerage and other areas, that DB is finally beginning to get a rational footprint again. But the pain involved for the people there right now is considerable.

My former bosses destroyed my life when they cut me loose. That's not an exaggeration; I had to leave the USA and have struggled ever since to find work. But from what I am hearing of my contacts left there, those left behind are utterly demoralised, angry, tired, and fearful.

It would be better by far to put Deutsche Bank out of everyone else's misery, at this point.

Blogger Didact July 17, 2019 11:33 AM  

binks webelf wrote:What about the rest of the EU banking system? Just as fragile, over-leveraged and ready to fall?

@40,

Pretty much. UBS has deleveraged and resized itself, but Credit Suisse, Societe Generale, BNP Paribas, and others are still messed up. The general consensus is that the American banks actually have much stronger balance sheets than their European counterparts - which is an oddly counter-intuitive position for them to be in.

Blogger Didact July 17, 2019 11:44 AM  

Sillon wrote:So the DB crashes, the tribe rescues it is a happy coincidence that the EU is pushing ahead with the creation of the European Army.

The EU's Army will be ready just in time to replace the USA military to figh Israel's wars in the middle east.

But it is all a coincidence.


@39,

Not gonna happen. The European armies cannot fight worth a hill of beans.

Blogger Ominous Cowherd July 17, 2019 11:54 AM  

VD wrote:No, it won't. The European armies are almost entirely non-functional.

I wonder if the Arab armies Israel needs them to fight are any better? The Persian army will be a different and probably tougher kettle of mohammedans, of course.

Blogger Damelon Brinn July 17, 2019 12:01 PM  

Based on pictures of the EU members' defense secretaries, I assume their militaries are models of diversity and everything that implies.

Blogger Sillon July 17, 2019 4:01 PM  

@43

VD, I agree that european military are shit.

However the tribe surely will try, better Europeans being killed than the not so chosen people.

The insistence of the EU on building up an army regardless of the cost is extremely suspicious.

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