Skip to main content

Deutsche Bank Part II – Going Nowhere Fast

A few weeks ago I published an article called “Deutsche Bank” that seemed to capture significant reader interest. To summarize, it made the point that a Glass-Steagall like legislation prohibiting institutions investing taxpayer insured deposits from financial risk taking was a pretty good idea. Now I write again, inspired by the continuing news surrounding this historic German institution.
It has recently been disclosed that in 2015 Deutsche Bank barely passed the European Central Bank’s stress test, and did so because the ECB counted as capital $4B that DB was to have received from the planned but not-yet-closed sale of a Chinese lending subsidiary. Counting this $4B was in direct violation of the rules of the stress tests in that the sale was not closed, and today, more than a year later, is still not closed. Of course, the reasoning of the ECB was clear. Keeping the world calm was far more important than holding DB’s feet to the fire. This speaks to the fragility of our global financial system.

And yet, with today’s unprecedented government intervention and a seemingly rock solid global commitment to backstop all large banks and keep asset values fully inflated, perhaps things are less fragile than one might initially surmise.

In 2007 after an unprecedented two-decade boom in global finance (read: leverage) which created an illusion of prosperity, the world began to fall apart and most of the asset value gains from the prior decades began to unravel in the most unwieldy fashion. Aghast at the prospect of a severe global depression, governments and central banks utilized tools previously not even considered in order to avert that outcome and to buy more time. Today, in the wake of that moment, global governments and central banks remain in firm control of the financial system and are holding on dearly to their commitment to sustain asset value levels and thus global wealth levels. It should be clear to all that if these manipulative forces were to be released, the air would likely come out of the bubble quite similarly, and perhaps even more chaotically than what was witnessed in the 2008/09 period.

There is much bemoaning from free market advocates (like me) that the world we once knew and loved is no more. That notion is right, but now we must ask what would be worse: continued manipulation or a chaotic unwind? I’m not sure there is a middle ground, and all of the “taper tantrums” that occur at the mere suggestion of loosened manipulation would seem to reinforce that doubt.

In short, DB will survive. So will all the other TBTF banks. Rates will remain ultra low and asset values pretty high, although not without some sorting out between a few real losers and the rest. Investors will remain challenged to produce any yield to speak of, and people will need to tighten their collective belts to muddle through a likely prolonged period of correction and transition. Populations will ultimately right-size, and education systems will be modernized to help young people prepare properly for the jobs of today and the future, rather than the permanently lost jobs of the past. There will be some breathtaking winners along the way but the likely journey for most will involve hunkering down. If a government official decides to go off script, like the one who recently said idiotically that there was no way the German government would ever take a stake in DB, or a central banker who decides to test the waters with an increase in rates, the market will punish quickly and put everyone back on script.

Popular posts from this blog

Greed & Laziness

In this most contentious and fascinating of election cycles, when nearly each conversation leads to politics, and when polarization runs so high, I ask myself - what is the essence of the debate between left and right?  What does it really mean to be a Conservative or a Liberal?

Why Rates Must Remain Low

There is an old bond trader joke that I first heard in the 1980’s when I traded mortgage-backed securities at Drexel Burnham Lambert.  It went like this:  “Upon dying, Albert Einstein finds himself in what he is told is heaven.  He encounters another individual there and asks him what his IQ is.  When he is told that it is 175 he is overjoyed, knowing that he’s found an intellectual peer with whom he can share much.  Upon meeting another, he discovers that person’s IQ is 140 and is pleased to have met another highly intelligent person with whom he can enjoy chess and other pursuits.  He is feeling pretty good about heaven, when he comes across a person who tells him that his IQ is a mere 90, and he is flummoxed.  What, he wonders, is this guy doing in my heaven and what can I even say to this person?  Then it comes to him.  ‘Where,’ he asks, ‘do you think interest rates are heading?’”

CMBS In Flux

The CMBS market has been in a period of upheaval, with dramatic spread widening on bonds and a resulting much more expensive cost of capital for real estate borrowers who depend upon this channel for their debt financing.Market participants today wonder whether we’ve entered a period like the summer of 2011, when spreads on bonds last widened this dramatically and then snapped back within a year to provide tremendous returns for those who were courageous enough to purchase bonds at the time when there was panic selling.Or, people wonder, is this recent downturn a prelude to a structural or systemic problem, like what was experienced in 2007, when spreads widened and sucked investors in, only to punish those early responders with a much more dramatic price collapse in the next 24 months.