On September 30, the head of the Deutsche BankJohn Cryan sent a message to employees complaining that his bank had become the target of speculation. On 3 October we learned the reaction of the German Vice-Chancellor Sigmar Gabriel, who did not know whether to laugh or be furious at seeing that bank, which turned speculation into a business model, declare himself a victim of the same speculation.
The stock prices of the first German bank (seventh in the western world) have become highly volatile especially since the American Department of Justice brandished a sword of Damocles a $14 billion fine for highly reprehensible practices of the DB in the United States between 1999 and 2009. Practices judged to be fraudulent, adopted by an American subsidiary (MortgageIT) specialized in mortgage loans, which the DB had acquired in January 2007. The question is to the final extent of this fine: if it exceeds the 5,5 billion set aside for the purpose, DB will have to face a shortage of assets.
But how does the DB show up in its latest accounts? The most recent situation is as of June 30th. The bank had total balance sheet assets of 1.803 billion euros (more than the Italian GDP) against which it faced "nominal" assets of 66,8 billion. However, concerns arise from thinking that those assets include posts referable to derivative contracts (asset balances) for an amount of 615 billion; these are highly speculative games that bank executives have fallen in love with from 1990 onwards. Since that year, finance has counted more and more in DB (speculation as a business model mentioned by Sigmar Gabriel) and less and less the real economy.
As for the "nominal" assets which can be read in the financial statements, it must be said that it is represented by some very uncertain matches: 8 billion in goodwill, 3,7 billion in deferred taxes and another 5,7 billion which according to the Basel rules must be deducted from the nominal capital to calculate regulatory capital. This in fact reduces to 43,6 billion. Last but not least, among the assets there are some of very poor quality (so-called level 3), the valuation of which is not based on market values because they do not exist: they are 28,8 billion euros made up of illiquid items and with… subjective valuation. The "leverage" of DB calculated on the regulatory capital was therefore 41:1. Much more than the one (33:1) shown by Lehman Brothers when the American authorities improvisedly decided to derail it; but it must be said that the American bank also had 70 billion dollars of toxic assets which, by themselves, wiped out all the assets.
As is happening for many Italian banks (Monte dei Paschi and the like) the market values the banks at a very base price. In the case of DB, as at 30 June the tangible equity per share was declared at 44,54 euros against a recently reached minimum price on the stock exchange of 9,9 euros and a current closing of less than 12 euros: a discount of over 70% which in absolute value exceeds 40 billion. Nor is there any hope that the current management will remedy this situation. Net income for the first six months of 2016 decreased by 81% compared to the previous year. The ROE in the six months is declared equal to 0,7% and the cost/income indicator (which reveals management efficiency) is 90%very high value. This explains the flight of some of the bank's major customers (the hedge funds).
A heritage refreshment could take place selling assets or asking for money on the market. The first solution would mean a shrinking of the bank whose logic has so far been of a completely different sign. Using data from the latest R&S survey of international banks, DB is among those that expanded the most between 2006 and 2014; this in spite of the "line" of reduction that the BIS had tried to affirm in the aftermath of the great crisis. The run-up to the other giants (HSBC, JP Morgan Chase, BNP, Crédit Agricole, Barclays, Bank of America and Citigroup) took place by expanding the speculative soul, the most dangerous one.
And now the bill is high: sell assets (Abbey Life, stake in China's Hua Xia Bank and more) or ask the market for money in a very complicated situation. According to the top investors interviewed by the Financial Times (see edition of last October 2) the problems are considerable. Definitely a nice resizing of the image compared to that fateful 1990, when – as Eric Le Boucher recalled in Les Echos of 30 September – in Germany there was an Olympus with three gods: Helmut Kohl's chancellery, the mythical central bank (Buba) and precisely the Deutsche Bank which held the the Rhine industrial model.
What lesson to draw? In the first place avoid the formation of such large banks which become real "bombs" on the market (term used by Timothy Geithner in Stress Test, 2014); it is an old lesson, known and established; but it seems that the recent calls for further concentration by the European central banks (and by our government) are moving us into a world of incompetence and opportunism.
It is evident that the DB in no case can it be made to fail since the consequences would be even more serious than those that resulted from the bankruptcy of Lehman Brothers (roughly three times as much judging by the volume of assets at stake). It therefore remained intact thatmoral hazard legitimized by the TBTF (Too Big To Fail) which in words it was said to abolish. These failures avoided can only fall on the shoulders (and savings) of citizens.
Another lesson to be drawn concerns access to markets. If the situation is critical, a large bank also encounters difficulties in recapitalising. It is therefore not true that small banks have to increase in size to ensure market access. For a small bank, recapitalization is a small problem, for a large bank the problem is magnified.
But these are even trivial considerations, proven by a long history of cases and it is surprising that we still have to remember them. Perhaps it is worth remembering the maxim that Michael Lewis wrote on the first page of his book dedicated to "The big short" (the great speculation, 2010): the most difficult issues can be explained to the most naive man if he is not already formed no idea about them; but the simplest thing cannot be clarified to the most intelligent man if he is firmly convinced that he already knows everything (Leo Tolstoi, The Kingdom of God is in You, 1897).
