Will Deutsche Bank Be Saved From Collapse?

Deutsche Bank  stock is down over 8% today.  It’s trading at $15.53.  This is 20% lower than the previous low it hit at the apex of the great financial crisis (de facto collapse) in 2008/2009.Untitled

With rumors flying because of DB’s stock performance this year, management issued a statement defending the bank’s liquidity position:  LINK   “Additional Tier 1 coupons” references the debt that was issued as part of a transaction to raise Tier 1 regulatory capital by Deustche Banks.  The accounting behind the scheme – yes, it’s a scheme – is complicated but the regulators permitted DB is issue a security that behaves like debt but is treated as Tier 1 capital for the purposes of measuring the bank’s ability to withstand hits to its asset base.

Suffice it to say that historically, when a bank has been forced to issue a statement defending its solvency, insolvency is not far behind.  We saw this with Bear Stearns and Lehman.  Denial of a catastrophic problem is affirmation that the problem is very real.

Typically the credit markets sniff out a very real problem before the equity market “catches up.”   Deutsche Bank has emerged as one of the most recklessly managed “Too Big To Fail” banks.  Under Anshu Jain’s “leadership,”  DB became a financial nuclear weapon bloated on derivatives, exceedingly risky assets and highly corrupt upper management.  It’s a literal cesspool of financial fraud and Ponzi scheme banking activity.  The graph of the spread on DB 5-yr credit default swaps shows how quickly the market has determined that DB’s financial risk of insolvency is quickly accelerating:


Currently DB has roughly $2 trillion assets supported by $68 billion of book value.  The problem is that many of its assets are highly overstated in value and have yet to be written down.  The financial world shuddered at the $7 billion of admitted write-offs DB took in 2015.  The problem is that over 85% of the charges taken by DB were attributed to legal costs.  We know its “on-balance-sheet” assets are being reported at a significantly overvalued stated level.  DB has big loans to the energy sector, Glencore, Volkswagon/Audi and other sundry highly risky businesses.   It would only take a 3.5% write-down of its asset base to wipe out its book value.  

THEN there’s the derivatives.  DB has $58 trillion of notional amount in OTC derivatives hidden off its balance sheet.  The bank will claims most of that is hedged out and the “netted” amount is a sliver of the notional amount.  But ask AIG and Goldman Sachs how hedging / netting works out in the long run.   “Netting” is only relevant when counterparties are prevented by Central Banks from defaulting.  Once the defaults start, “net” becomes “notional” in a hurry.

I did an analysis of several of the big banks in early 2008, including JP Morgan, Wash Mutual, and Lehman.  I took their identifiable assets and wrote down the identifiable home equity loan exposure and some other risky asset classes to levels I thought were conservative.  I had concluded that those banks were technically insolvent.    Eight months later it turned out I my analysis was quite accurate.  Wash Mutual and Lehman collapsed and JP Morgan would have collapsed if it had not been bailed out by the Taxpayers.

The current era’s first big bank casualty will likely be Deutsche Bank, unless the German Government and the EU and U.S. Central Banks determine that a DB collapse would collapse the west, which it likely would.  To put this in perspective, DB’s stated assets are $2 trillion. Germany’s GDP is just under $4 trillion.   Then there’s the derivatives…

19 thoughts on “Will Deutsche Bank Be Saved From Collapse?

  1. And we don’t know what “Assets” are hidden OFF Balance Sheet. Until proper GAAP accounting standards are restored (Don’t hold your breath) trying to analyse even the ON Balance sheet items is futile.

    1. agree, 6 years with S&P and 10 years as analyst with an IB – sold all my FI share several years ago. Assets as far as possible away from the Matrix…as possible

  2. Absolute carnage in Japan tonight. USD/JPY down to 114.40. Nekkei down up to 5% and 900 points. And this is BEFORE Deutsche Bank goes full Lehman.

    Things are getting interesting.

    1. Yes, BUT, in general USD/JPY down equates (Via Algos) to US Futures Down and Gold UP. Which isn’t happening.

      So are the Algos asleep or are the wheels coming off to the extent that even “their” own “rules” don’t work any longer? Perhaps this really is the End Game?

  3. Today there was some buying in the Jan. 2017 $8 puts and the $10 puts. Something to consider buying if DB gets a dead cat bounce over the next few days.

  4. Can’t help wonder about Deutsche Banks management philosophy beeing able to burn so much money. Guess it must have been the same most modern CB’s seem to have: “when in trouble double”

  5. Hi Dave, I noticed that Credit Suisse started tanking in August 2015 – the same exact time Deutsche Bank blew up. What financial bomb blew up in August?

  6. Has anyone noticed that daily limits have been installed at ATM’S
    @ J.P .Morgan/ Chase ? I used to have a daily limit of $900 from
    the ATM and now has been reduced to $700. The balance in the
    account stays in the mid five figure range. I went into the main branch
    to ask why the daily was lowered and was told it was a security procedure
    to guard against theft in the event my pin# was compromised. I thought
    J.P. Morgan/ Chase found out about my hooker and blow addiction.
    Whew, that’s a load off.

  7. This one is from new subscriber “Colin:” Hey Dave,
    Always love your analysis. A friend shared with me one week of your short sellers journal and I was impressed. GLNG took an extra week after you published it but it did start dropping. I bought a small amount of puts with a 10 dollar strike lol. More of a gamble then anything but what’s 60 bucks. It’s like buying an expensive lotto ticket!
    I’m very experienced in options. Just ordered it for your short picks. I’ve played some of your homebuilder picks I purchased but won some and lost some. Call it a wash. Missed the big recent down moves.

    I don’t really need the info of how to play options… just like your research and analysis. And your right about AMZN, timing is everything. My uncle and I both got burned on those puts. Him much more then me. Keep up the good work!

    1. Hey Colin. Thanks for the feedback and support – I appreciate it. With AMZN using puts to short it is 30% timing, 70% patience. With shorting the stock outright, it’s 100% patience as long as you leave margin room for big irrational spikes up so you can double down. One of my subscribers has been using the Jan 2017 400-strikes as a literal ATM.

      I hope you make a lot of money on the SSJ and thanks for subscribing. Overall since the Dec 7 debut issue, my picks are way ahead of the S&P 500. You’ll see I emphasize the ideas as long term plays. Like with BZH. I recommended shorting with a big research report in late 2014 at $18. It ran into the low 20’s at one point. Now it’s at $6 and will go bust.

      MHK from my debut issue was at $185 – ran to $200 and now is in the $150s. Feel free to email me if you ever have questions.

  8. Dr. Jim Willie just released a report that D.B. is not doubt going
    down unless there is a coordinated effort by the ECB & the FED
    to prop it up. Now the bad news, Citi Bank & Barclays also have
    a epic derivative problems. Dr. Jim also went on to say that these
    particular banks are holding together on a daily basis like using
    a bucket to bail water out of the Titanic. This is going down within
    a matter of weeks. Dr. Jim went on to predict that when T.S.H.T.F.
    gold will shoot upwards to $5,000 and silver will go to $100.

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