Mike Larson here with an emergency update. Shares of Deutsche Bank (DB) plunged more than 6.7% after reports circulated that some funds are starting to yank money out of the German bank.
Specifically, Bloomberg reported that several hedge funds that clear derivatives with DB are pulling excess money from the bank and moving it elsewhere. They include names like Millennium Partners, Capula Investment Management, and Rokos Capital Management.
While only about 10 firms out of more than 200 supposedly took the step, the news rattled markets for a very good reason: This is exactly what led to runs at brokers and banks like Bear Stearns and Lehman Brothers! They started when a few customers pulled their money, then rapidly escalated into a crisis of confidence and a bout of contagion selling throughout the financial sector. That, in turn, necessitated massive central bank and government bailouts.
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| Will Deutsche Bank go the way of Bear Stearns? |
Will that happen at Deutsche Bank? Spokespeople and officials for the institution have claimed in recent days that it has plenty of capital and liquidity. The German government has denied it will need to bail DB out.
Plus, a DB official was quoted by Bloomberg today saying: “Our trading clients are among the world’s most sophisticated investors … We are confident that the vast majority of them have a full understanding of our stable financial position, the current macroeconomic environment, the litigation process in the U.S. and the progress we are making with our strategy.”
But remember what I said earlier this week: The firm is facing billions and billions of dollars in fines from the U.S. Department of Justice. Its core business has been hemorrhaging money and employees for several quarters. And it faces huge margin pressure from the European Central Bank’s ongoing QE efforts.
Plus, DB has $2 trillion in assets. It had $47 trillion in notional derivatives exposure at the end of 2015 (though the bank claims that collateral and netting reduces its exposure to more like $52.8 billion). It’s also the biggest bank in the biggest economy in Europe. That means it’s not some two-bit institution in some distant global backwater.
DB isn’t the only mega-bank that’s struggling mightily in Europe either. The second-largest bank in Germany, Commerzbank (CRZBY), just said today that it would slash 9,600 jobs, scrap its dividend, and restructure its operations further. The moves will cost a whopping $1.2 billion.
I hope to heck you took my advice more than a year ago to get out of European bank stocks. That would’ve saved you a fortune. Now the obvious question is: “What does this mean here in the U.S.?”
The short answer is: “No one knows.” But I will say this: My background is in the credit markets. I have spent the better part of the past two decades following and analyzing mortgages, real estate, banking, bonds, and all kinds of investments related to them.
I have lived through both short-term and long-term credit busts prompted by the failure of Long-Term Capital Management … the implosion of high loan-to-value home equity lenders … the dot-com recession … the biggest housing bust in the U.S. ever … and more.
We are now at the tail end of the biggest easy-credit boom in history, fueled by round after round of global QE and interest-rate cuts. We have already seen cracks around the edges, in industries as diverse as autos and commercial real estate. And we have seen European bank stocks lose chunks of value over the past several quarters.
That’s why events like this have me concerned. If we do get contagion selling in other European banks, as well as U.S. institutions, it is only going to accelerate the nascent tightening in credit that’s already underway. That, in turn, is problematic for the economy, overvalued real estate, or weak stocks.
So my recommendations are straightforward:
Continue to avoid the sickly Euro-bank sector, including all the banks named in this column that trade both there and here.
Until next time,
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
{ 46 comments }
Is it likely that more funds will flow into U.S. Treasuries thus driving down the 10 year rate?
Mike Nice
The real question with DB is counterparty credit risk. That was the same issue in ’08 and with the derivative exposure at DB, it could rear its ugly head again. Good advice Mike regarding getting out of US banks.
Interesting peter that you should mention counterparty credit risk. Read this article. No it is not an octopus.
http://www.marketslant.com/articles/deutsche-bank-crisis
Yeah Mike, true, you are only a couple weeks late here.
Jack Lovett
Sounds like 10 smart clients moving excess funds into US positive interest bearing accounts. Once US Fed raises rates, the ECB will be able to move to ZIRP. This will reduce pressure on All European banks. This latest rumor is just noise. Don’t see Global financial powers letting DB take the whole system down. Love the volatility though.
Mike,
I would like to remind you that ALL of the Big Bank Runs and Stock Market Crashes in America’s history have occurred during Conservative Administrations with Conservative Dominate Congresses….. ALL of them!
2008 was a Democratic Congress. Nice try though. Liberals play by their own rules of finance. The last time before the present that Republicans controlled Congress was during the Clinton years when there was a balanced budget for the first time after decades of Democratic Congress control
You do not read so well……. Conservative Administrations/Liberal Administrations….. the Crash began in the end of 2007 AFTER many years of Conservative Administrations and Conservative Congresses…… Same thing happened under Hoover in 1929 and BOTH Crashes where saved under the leadership of Liberal Progressive Administrations and Progresssive Liberal Congresses…. 1932 and 2009…… It is called History…… You might want to open a history book rather than getting your altered history from FAUX News, aye?…. Gezzz… :(
Also, any real deficit chart will show that the deficit exploded higher and kept going from the Republican Revolution with Reagan forward and ONLY leveled of under the Liberal Progressive Clinton Admnistration…… The Conservatives love to spend money, but have a real problem paying for their spending…… Do some study, rather than believing the soundbites coming from Right Wing Radio…..
seems like people here seem to know you lie alot eagle495
its obvious to most of the readers here at weiss research that eagle495 constantly lies to get some fantasy point driven home heres the real truth about his posting from oct 1st LIBERAL DEMOCRATS controlled the senate from 2004 -2014 LIBERAL DEMOCRATS controlled the congress from 2004 – 2010 and a LYING LIBERAL DEMOCRAT controlled the presidency of the UNITED STATES from 2008 -2016 and the history you always talk about eagle495 is completely fabricated
Not to mention the real cause of the 2008 meltdown…started under Clinton in 1996-97 when they mandated the banks to greatly lower credit standards so that anyone who could breathe could qualify for a mortgage…Janet Reno threatened banks who did not comply..talk to a banker…took 10 years to blow up
Not true. In 2008 both Houses were Democrat.
Nope…you are wrong. The 2000 dot com debacle started in the Clinton admin. You keep repeating this lie.
you lie as much as hillery clinton she must be your mentor
I suspect, friday will be a barnburner down for markets…the fuse is LIT….the investors running for the hills from DB, and others, is happening tonight, and, will spread very fast here. Great news for gold, and mining stocks….here’s your chance of a lifetime folks…expect a massive increase in spot bullion as this unfolds rapidly.
99% of the transactions will be silent, stealth-like, and, not know for days….nobody in Europe will stand a chance in the next few weeks, sorry for them, but, markets have a way of KHARMA, don’t they…always have, always will, thanks to human nature, and, greed.
Having a passing acquaintance with German zietgiest, I will say there is a better than even chance the German government will figure out, by Monday, a way of bailing them out, though it won’t be called a bailout. You heard it here first. Mike is right that the spillover will be negative and affect US banks but it will be an opportunity for some bargains in a few of the more solid regionals.
Donald, good response, everybody knows the situation and as Germany basically is bailing out most of Europe anyway, starting with Greece, it is difficult to see them letting DB default. I agree we will probably see some good bargains soon. And, unlike our Politicians, who just couldn’t put together a budget again on time, I don’t think the Germans will take the weekend, or any time off, until they do have a solution.
Is this the birth of the black swan?
It appears that any cascading or ripple effect will be contained in the advanced markets. African banks are largely insulated.
Hi Mike,
Looks as if you are right on the mark.Keep away from most bank stocks/have cash where you can put your hand on immediately.The most importent thing is to be differsfied.Excellent article.
Denis
Let’s penalize Deutsche Bank for 2008 so we can recreate the financial crisis in 2016. Remember when Obama came into office the first internal argument was over whether to deal with the financial crisis or global warming? $14 billion – these people are so removed from reality it is breathtaking. Let’s vote for more of the same.
And thats when BARACK OBAMA and HILLERY CLINTON said the biggest threat to America is global warming not ISIS or the ballooning national debt under democrats barack obama and hillery clinton and so now here we are 7 1/2 yrs later after progressives rule of the country and our military has been gutted to the bone our national debt doubled the financial crisis that obama said he took care of its going to happen again
You’re correct that just days after German Chancellor Angela Merkel had reportedly ruled out state assistance for Deutsche Bank (DB), new reports say German financial authorities may already be preparing a rescue plan for the troubled lender. According to German newspaper Die Zeit, the German government is preparing a two-stage plan for the worst-case scenario as to the U.S. Department of Justice sticking to its threatened $14 billion legal settlement. Since the bank is unable to raise capital itself, it’s necessary to allow Deutsche Bank to sell parts of its business to other institutions and having the German government guaranteeing against potential losses. This is just as you said the bank is already selling assets at fire-sale prices as Bloomberg has reports that Deutsche Bank agreed yesterday to sell its U.K. insurance unit Abbey Life Assurance for $1.2 billion. The sale is due to new European regulations that force firms with insurance assets to hold more capital. Thus while the sale results in a pretax loss of about $900 million for the bank, the result will increase its common equity “Tier 1” ratio by about 10 basis points. Tier 1 capital is “high quality” core capital that includes equity and disclosed reserves. The second stage is only in case of an extreme emergency and would involve a state sponsored bailout. According to Die Zeit, the government would take over as much as 25% of the bank. And as you said it appears Deutsche Bank may not be alone. It is reported that Commerzbank, Germany’s second-biggest lender has announced it is cutting more than one-fifth of its workforce and suspending its dividend. Reported by the new service Reuters, the CEO Martin Zielke explained in a note to his employees that we simply don’t earn enough money to lead the bank sustainably and successfully into the future. This situation will get worse if we don’t do something about it. I also suspect that Merkel won’t allow Germany’s largest or second-largest bank to fail outright. But I agree the days of unconditional government bailouts are over for everyone.
Why don’t they say “sue us” and tie this up in court?
Merkel is obama spelled backwards… Debt, immigration of alien nationals, criminals, and terrorists, healthcare un-reformed, infrastructure not addressed, government intrusion increased, bail-out for countries that hate America while American veterans suffer from an absence of healthcare and life’s necessities, ditto for American’s seniors and homeless, everything is worse now are all in the toilet… They will both leave their ugly marks on the citizens of both countries…!
What about Canadian banks?
I have been listening to you in your free money and markets. Then doing 8 to ten hours a day research and pouring over charts. Listening to some of your compatriots. And I moved into gold and silver months ago. So, in watching and smiling because I am secure no matter what. So we shall see. Maybe I can only get a hamburger with a gold coin…but ill be the one with a hamburger! Thanks Mike. Due to all my research i formed. my own opinions, trusted those backed by info like yours and I chose the metals. Have a great Friday and next week. In going sailing on my yacht KOINONIA.. Sincerely: Gregory Jay Chaney
Iis weiss research the same firm who produced a newsletter many years ago rating financial institutions? I think a rovert weiss was involved. Thanks.
Correction to above: robert rather than rovert! Thanks
One other possible fallout for the US is that the Federal Reserve again opens the US wallets to sustain them through the European crisis as they did during the 2007-8 rout. Bernanke hid that secret from the public as long as he could lest the citizens complain about impoverishing the national economy to save foreign banks.
The Feds are ardent globalists who feel they know better and the public should not interfere with what serves the banks, not the public’s interests.
Well I guess we now know why Angela M told citizens to stock up on food and water and essentials. Deutsche Bank has started the domino effect and next up is Commerzebank cutting their dividend and thousands of workers. When banks cut dividends that is the canary in the coal mine. I see Mr. Stumpf was on the congressional hot seat again apologizing apologizing apologizing. You can tell the US is getting close to an election when congress takes one of their friends to the proverbial woodshed. Must con the suckers for their vote.
IN TODAYS UPSIDE DOWN INVESTING WORLD WITH A CLOSE TO 20 TRILLION DOLLAR US DEBT, MULTIPLE TRILLIONS IN DERIVATIVES FLOATING THROUGH THE WORLD SYSTEM, CENTRAL BANKS WORLDWIDE WORKING THEIR FINGERS TO THE BONE TYPING IN DIGITS (TOO DISHONEST TO EVEN PRINT MONEY; THOUGH IF THEY DID, WE’D BE IN A STATE OF DEFORESTATION) AND THE USA WORKING HARD TO BECOME A BANANA REPUBLIC……. WHAT COULD POSSIBLY GO WRONG HERE?
Am killing it with Oct. and Dec. DB Puts. Hope they swirl all the way down the terlet where they belong.
Hi Mike
How long will the banks be able to pay stock holders a reasonable dividend into the future with this low interest rate manipulation in place? Also the risks of loan defaults will increase with rate increases. We pulled out of financial stocks some time ago.
Anybody who waits for a black swan to land will get stuck in the door on the way out.
Mike do you think Fannie Mae and Mac are financial asset or should be out of the bank tsunami? thanks
But I’m sure this time is different ?
One more thing, this market is completely dysfunctional trading on nothing but headlines, money printing, free loans , buybacks, cheating on balance sheets, wall street speculation and you name it. Once Wall street sees even more money from overseas, the party will continue, big time as capital and spoiled sovereign debt piles into our market. You can’t make money shorting this market until a series of black swans changes that. How long will that be, well, it’s been two years now, have you got a couple more years? Do yourself a favor, go to cash and gold and wait until it all explodes. Have a good day.
Obama has doubled our National Debt to $20 TRILLION in just 7 years and that has us hamstrung. When this collapse comes, we will be powerless.
Regarding DB…..and as I noted last week….they have reportedly been unloading derivatives like crazy. Citicorp is reportedly buying them big time. Look for issues in both countries. Indeed, worldwide.
To Mike Larson:
Quote..
“I hope to heck you took my advice more than a year ago to get out of European bank stocks. That would’ve saved you a fortune. Now the obvious question is: “What does this mean here in the U.S.?â€
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It sounds like this advice may have assisted the exodus from European bank stocks and helped to cause what is happening in Europe. It is hard to buck trends, but do we have to follow what will make them worse?
Why were European Banks so appealing in the first place?…. or was it just because American Banks were less appealing to investors?…
As soon as VW had it’s Emissions Scandal, we should have been wary of All European financials.
I knew there would be hanky-panky with Emission controls as soon as my car no longer was tested with a probe up the tailpipe…. about two years ago.
What were they thinking when this was no longer required?
Ron
in Toronto Can
Deutsche Bank is so big that if it goes under, it will drag many other banks down with it, especially in Europe. Italian banks will be first to follow. Britain would be wise to follow through with the Brexit, and perhaps reduce it’s exposure to the worst of it. Putin must be rubbing his hands in glee, waiting for NATO to collapse, and some of the eastern European countries to come to him as their savior. The geopolitical effects of a DB failure could surprise everyone. China could gain a say in European affairs. The Fed did one good thing, when it required American banks to increase their capital backing. That could save some of them from following suit – immediately, at least.
The stock market now moves on rumors not fundamentals. The rumor comes out that the US is willing to settle their case against DB for around 5 billion instead of 14 (think you and I would get a break like that. With us they want their pound of flesh) and the price of the stock jumps 15% the biggest jump in 5 years. Are people really this naive this stock is a dead man walking. All the OPEC chatter and the price of oil jumps 6%. Do people really think any OPEC deal will stand for more than a week. Friday gold and silver was doing OK until this chatter hit the airways and bang they they tanked. The Dow was down and suddenly did a U turn and ended up 160 points on fundamentals no strictly rumors. Kate Middleton comes to Canada and wears a Canadian made coat priced at around $1200. Within minutes the manufacturer is sold out on this item. I think we have reached a point where we let others guide our decision. Common sense and reasoning have flown out the window.
We need a financial calamity in the worst way – to purge the zombie corporations and zombie workers from our ranks. Oh, and I can’t leave the zombie countries off the list. Maybe DB’s troubles will be the catalyst to that end, maybe not. The sooner the calamity happens, the better off we’ll all be in the long run.
Debt to assits perception is the question/ either you believe the DB is solid or their Debt can’t be fixed therefore the World waits- ( not a good position) my take
What about collateralised debt obligations and the sub prime mortgage crisis? Surely it’s a good thing people starting families and growing the next generation of human beings.