After a tumultuous week for Deutsche Bank which saw the DOJ demand a $14 billion settlement for the bank’s past RMBS transgressions, it was another bad day for the giant German lender, whose stock and contingent converts tumbled after the investing community realized that even a modest $5.5 billion final settlement would leave it perilously undercapitalized and likely scrambling to raise more cash.
As SocGen’s Andrew Lim calculated, Germany’s biggest bank would be “significantly undercapitalized” even if an eventual settlement with the DoJ can be covered by the bank’s reserves. Any settlement above €5.4 billion would imply a capital increase is needed just to pay the fine, he wrote.
Recall that several years ago, we were the first to point out the true “elephant in the room”, namely Deutsche Bank’s $75 trillion at the time in gross notional derivatives which as we said then was about 20 times bigger than Germany’s GDP, and 5 times bigger than the entire economic output of the Eurozone.” Much to the chagrin of those who did (and still do) accuse of being conspiratorial something or another, since then Deutsche Bank stocks has plunged, reaching all time lows as recently as a few months ago.
Still, Deutsche Bank’s “derivative problem” was largely ignored by the “experts” because why bring attention to something which is fundamentally a devastating break in the narrative that “Europe is fine” and the financial crisis is contained.
Fast forward to today when Europe is once again not fine, only this time one can’t blame Europe’s problems on Greece or Brexit, when in a surprising admission of reality, none other than Italy’s prime minister Matteo Renzi, “went there” and slammed Deutsche Bank as the true “derivative problem” facing Europe.
To be sure, Renzi has his own problems, chief among which is how to conclude the latest and greatest bail out of Italy’s third largest and most insolvent bank, Monte Paschi, a process which we hear is not going well at all, without resorting to a government-funded rescue – a plan which the Germans have repeatedly frowned upon.
So it is not surprising that when faced with stiff resistance from the Germans, Renzi decided to call a spade a spade when, as Reuters reports, he said that the difficulties facing Italian banks over their bad loans are miniscule by comparison with the problems some European banks face over their derivatives.
As Reuters reports, Renzi once again broke with the fine European tradition of ignoring the massively overlevered elephant in the roon, and said on Monday that Germany’s central bank chief Jens Weidmann should concentrate on fixing the problems of his own country’s banks, after Weidmann had urged Italy to cut its huge public debt.
Specifically, Renzi told reporters in New York that Weidmann needed to solve the problem of German banks which had “hundreds and hundreds and hundreds of billions of euros of derivatives” on their books.
He was, of course, referring to Deutsche Bank.
And while Renzi may be wrong about almost everything else, he is right about Deutsche Bank’s “hundreds and hundreds and hundreds of billions of euros of derivatives.”
€42 trillion to be precise.
Then again, it’s more than just Deutsche Bank’s problem; more than just Germany’s problem. If something bad happens to DB, it is Europe’s problem.
So while DB may or may not find a few billion under the rug to plug its latest leaking hole, the real question is what happens when, not if, another crisis flares up and one or more counterparties to the bank’s trillions in various derivatives suddenly is unable to post margin, as its obligation becomes a pre-petition claim, sticking DB with the entire gross notional derivative amount and forcing the German giant to foot the gross, not net. Something tells us that like in 2013, nobody will acknowledge the biggest elephant in the room: after all, at this point financial liabilities are now a political issue (especially when one can blame Putin). The only difference with 2013 is that as Europe continues to splinter, more disenchanted political leaders (because the “enemy of my enemy is my friend”) will join Renzi in admitting that Europe’ emperor – Germany – and its mega bank, is not only naked but one needs scientific notation to express just how big its financial problems truly are.
Full article: Italy’s PM Unloads On Deutsche Bank’s Unfixable Problem: “Hundreds And Hundreds Of Billions Of Derivatives” (Zero Hedge)