Notes From Underground: The Importance of Deutsche Bank for the Global Financial System

The reverberations from Merkel’s Boner will be systemic in nature. The more I think about the ridiculousness of Chancellor Merkel’s ill-advised comment about not financially supporting Deutsche Bank, the greater my fear of a cataclysmic credit event. According to a recent Zero hedge piece, DB has many trillions of derivatives on its books. Yes, it is notional value but as we learned with Lehman notional value is irrelevant when counterparties to Deutsche’s SWAPS and other credit derivatives demand their collateral back. In today’s shadow banking environment, the rehypothecation of credit through securitized instruments compounds the problems of a default or bankruptcy.

THE SPARK OF THE DEFAULT REVERBERATIONS FROM CREDITANSTALT IGNITED THE GREAT DEPRESSION as loans were called and liquidation of global assets caused price deflation, which put further downward pressure on the global economy. THE GERMAN FINANCE MINISTRY WILL NOT ALLOW DEUTSCHE BANK TO DEFAULT. That is a certain. And Merkel will again have to do a “volta face,” but she has succeeded in bringing global financial issues to the forefront of German politics.

A lack of understanding of financial history was further revealed today when Mario Draghi appeared before the Bundestag’s European Affairs Committee. The head of the committee, Gunther Krichbaum, was very critical of the ECB‘s low interest rate policies. Draghi said he is “sensitive” to German savers concerns about negative interest rates, but Draghi, in stealing a page from the Bernanke/Yellen playbook, maintained that the European economic recovery was in everybody’s interest. The bottom line is that the Burghers of Bavaria are suffering a massive bout of financial repression under the authoritarian strictures of an unelected body. But Draghi caused great pain when he maintained that  he “does not share the view Deutsche Bank poses systemic risk.”

This is a preposterous position for the President of the ECB to take. Mr. Draghi it is time to visit Basel and spend some time in the BIS archives studying  the default of Creditanstalt. Again, Deutsche is a big deal because of its massive derivatives book. Watch the markets closely as the ripples from the debt problems will spread across the world’s oceans. The DB issue will also complicate the domestic political situation as Chancellor Merkel is already suffering from the ill-advised immigration policy. Plus, Merkel dragged the Greeks, Italians, Spanish, Irish and Portuguese through the pain of fiscal austerity as she pressed for no government bailouts of the debt-stressed nations. Merkel and Schaeuble have repeatedly pushed for depositors and bondholders to bear the brunt of undercapitalized banks.

Deutsche Bank’s potential $14 billion fine is a mere pittance compared to the losses incurred from a liquidation of securitized assets on DB’s books. How will the German electorate react to a bail out of a mega financial institution who has been a mainstay at the table of casino capitalism? As I discussed in Monday’s blog post, the German Chancellor has brought financial concerns to the forefront of the upcoming elections. What party will benefit from a massive Deutsche bank bailout? Remember, not long ago Social Democratic Party (SPD) Party Secretary Franz Muntefering referred to foreign investors “as a swarm of locusts.” The Deutsche Bank saga may be a non-event as many have opined but the reverberations of Creditanstalt are making me aware of the possibilities of a larger problem.

We are coming upon month- and quarter-end so positions are being squared and window dressed. Pay attention to GOLD, BONDS and currencies as the safe havens should indicate investor angst. GOLD IS UNCHANGED ON THE QUARTER HAVING CLOSED AT 1324.70 on June 30. Yesterday, Goldman put out a sell recommendation but if the fear of DB is real GOLD OUGHT TO BE BID AGAINST ALL CURRENCIES for with interest rates at zero or lower, what potential policies do the world’s central banks have to meet a systemic crisis such as a Deutsche Bank credit event? I have warned about the coming rise in volatility in the fourth quarter and DB was not even one of the main sparks in the list of global prairie fires. Draghi and Merkel have much to ponder as we head into election season, but guarantee, President Draghi, that Deutsche Bank is a systemic event.





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12 Responses to “Notes From Underground: The Importance of Deutsche Bank for the Global Financial System”

  1. asherz Says:

    Yra-If Creditanstalt did not default, would there have been no Great Depression? If Archduke Franz Ferdinand was not assassinated, would WW l have been averted? And closer to our time, if Lehman Brothers did not go bankrupt, would the 2008 financial meltdown not have occurred?
    DB will not be allowed to default now. But that doesn’t mean that with all the deep fissures that exist in the global financial structure, will not inexorably lead to an unprecedented collapse for the myriad reasons we all know. The little Dutch boy has only so many fingers to stick into the dike.

    • yra Says:

      Asherz–I believed you would be the first responder because you are an economic historian and not just because of your age and time spent studying at Columbia in the Graham years.There is always a catalyst to light the tinder that the comfort of the leisure class just does not want to see.

    • Blacklisted Says:

      As Thatcher realized when losing power, it’s just time. The invisible hand just is, like a beating heart or the waves of light and sound, everything in the universe with energy moves in cycles. If it’s not DB that starts the launch into the dollar, stocks, and gold, something will, only from a more coiled state.

  2. asherz Says:

    Yra- You’ve been on a Stanley Fischer head hunting expedition lately, so here is some more grist for your mill.
    On an address to some economic students he said the following:

    WASHINGTON—Federal Reserve Vice Chairman Stanley Fischer on Tuesday expressed frustration with ultralow interest rates, saying they should rise over time.

    “It bothers me, it really bothers me,” he said when asked about low rates at an event for economics students at Howard University in Washington…….I don’t like it, but I don’t want to raise the interest rate too much. I think we should at some point. I don’t know when,” he said. “The interest rate I believe is not at zero at a normal level and it should be [normal] at some point, not immediately.”

    “I think there’s also a problem in going to a zero interest rate in the sense that it says that capital isn’t very productive, there’s not much going on in the economy,” Mr. Fischer said, adding that “we would be better off if there was a price for using money.”

    Really now! A brilliant discovery.

    • yra Says:

      Asherz–thanks for noting Fischer for I had palnned to discuss his renewed stridency on rates just six days after he voted with the consensus–amazing—and his lack of spine is why the FOMC is absolutely duplicitous with every breath it takes and every decision it makes—Fischer has made the FED process transparent and it scares me .

      • Asherz Says:

        The reason for the spineless Fed is apparent. Every time they seriously hint at a rate raise the markets go into convulsions. Who wants to get blamed for a crash which would be followed up by Pecora Commission investigations. The inevitable conclusions would be that monetary policy pre and post 2008 was an exercise in insanity and history will mark the culprits forever.
        It’s better to be a cowardly fox than a courageous lion in the eyes of these brilliant heroes.

  3. Ron Ferrill Says:

    DB’s debt load is a big deal. Don’t know how they could or would back an equity offering. And of course those Trillions in derivatives are scary. Will a large % of the derivatives wind down as time-oriented? Or, I they constantly rolled? Hmm.

    I don’t understand how this can end with them (DB) being a healthy going concern unless people and companies plow money into accounts. But why would they? That would require incentives, like return on savings accounts. Then DB would need to have somewhere to put the $/Euros/DMarks to work making more than the interest rate paid…. Seems bleak to me.

  4. Blacklisted Says:

    Counter-party risk makes paper gold risky, and bail-ins, plus civil asset forfeiture makes physical in your box risky, since of course the broke govt considers holders to be hiding it from taxes or using it for drugs. Few will be unscathed in the years ahead, unless all career politicians are thrown out on their ears. Anyone that supports the establishments last great hope for corrupt women, derserves what’s coming.

  5. Margo Ranger. Says:

    There is a further issue in the geopolitical sphere that also has to be considered. The current issue of the New Yorker shines a light on the ultra-right in Germany, which has to be worrisome to audiences well beyond Merkel.

    • yra Says:

      Margo–absolutely.And as we have discussed in this Blog for the last few years the financial repression of the German saving class to bail out Europe will become the biggest and most important political issue in the upcoming elections—Merkel’s ridiculous comment about no financial support for deutsche brings the financial issues front and center in the upcoming elections–it is now far more then immigration

  6. Chicken Says:

    This has been a test of the Global Financial Emergency Alert System….

  7. Rob Syp Says:

    What happens if Merkel does not offer support to DB? Wouldn’t some kind of support come from the ECB? And if it does it plays into you’re running theme of who backs the ECB?

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