Deutsche Bank Trigger Set To Go

October 4, 2016

Deutsche Bank officials arrive in Washington this week in the hopes of finishing off a deal with the DOJ to reduce the pending fines for mortgage-backed securities fraud, from $14 billion to $5.4 billion. News coverage of DB's woes includes www.cityam coverage of the “Fall of the House of Merkel,” as her failure to act on the DB crisis is now losing her support and destroying her reputation as the anchor of European stability. Even if she wins re-election, it will be due to a laughable lack of alternate candidates, rather than her continuing popularity.

A DB bailout is seen as inevitable, with some proposals calling for the German government to recapitalize the bank by buying a 20-percent stake. Jeremy Warner of the Daily Telegraph headlined his article on Monday, “Deutsche Bank woes reveal a new financial crisis,” which he says is different from that in 2008, because government regulators have made matters far worse by their zero- interest-rate policies, which make banks unprofitable; by boosting reserve requirements under Basel IV; and by imposing fines for past misdeeds that are a new form of indirect taxation.

The NY Times' Dealbook has a sober assessment of DB's appetite for high-risk transactions out of its London offices as the root cause of the crisis, which can bring down the entire banking system, due to all the big Wall Street and other banks that are counter-parties to the derivatives portfolio built up by Deutsche Bank's London center. The Times claims that DB is leveraged at 25:1—$75 billion in equity supporting $1.8 trillion in assets, but this is a significant understatement. Using the tangible capital measures and International Financial Reporting Standards, Deutsche Bank is leveraged at 37:1. This is also the figure cited by the FDIC. By comparison, JPMorgan's ratio, is 18:1 using the more accurate international measures.

[The calculations are: Deutsche Bank's tangible capital is 2.68% of assets. So the leverage ratio is 100/2.68 = 37 in the case of Deutsche Bank. JP Morgan Chase's tangible capital is 5.49% of assets; it's leverage ratio is 100/5.49 = 18].

DB's assets are heavily concentrated in Level 3 securities, which are near impossible to sell in a crisis and also nearly impossible to properly value. 32 billion euros, or half of the bank's equity buffer, is in Level 3 securities.

Bloomberg adds another piece to the Deutsche Bank scandal, reporting that the U.S. Department of Justice and the UK Financial Conduct Authority are probing DB's role in a $10 billion money-laundering scheme, engineered by DB's former chief trader in the Moscow branch, Tim Wiswell. Using a technique called “mirror trading,” involving offshore entities, Wiswell helped Russians illegally launder their money overseas—until he was caught and fired. In a wrongful dismissal suit, Wiswell made clear that his bosses back in London were fully aware of everything he was doing, and had signed off on all of the new clients he had served through his money-laundering actions.

Marketwatch reported Monday that a Milan federal prosecutor has indicted three DB executives, along with Nomura International officials and top management of Banca Monte dei Paschi di Siena, on fraud charges, based on BMPS's fraudulent reporting on its financial well-being. Judge Livio Cristofano acted off of findings of a one-and-a-half year probe by Italian prosecutors of stock price manipulation and false accounting by the Siena bank, in partnership with DB and Nomura. A plea deal was requested by the bank in July, and the court will soon decide. But 13 executives from the three banks were formally charged on Saturday and face criminal trial. This includes six current and former DB executives.