Deutsche Bank plumbing new depths

Super Mario will bounce along soon to make it all ok again 

Because you're being lied to by omission of key facts.

While it's true that Santander's 670 branch US unit failed the US stress test for the third time in a row and "For two years in a row, the American unit of Deutsche Bank has failed the Fed's stress test," the following text "which determines the ability of the bank to weather another financial crisis." is false because it only applies to the one of several DB units in the US, its wealth planning and transactional banking business. Both failed not because of a lack of sufficient money to pass the test but because Santander didn't us "reasonable or appropriate" assumptions an analysis and DB because they had a range of planning issues. Both had improved significantly since the previous year and the DB unit is no longer a standalone unit, it's now from 1 July become part of the US holding company.

DB has troubles but the US stress test isn't a serious trouble.

DB has nominal derivatives risk but that risk is gross risk so if it has €1 on a positive and €1 on a negative outcome for the same thing is is counted as €2 when the actual exposure is €0.

Meanwhile UK banks and others have vastly greater reserves than in 2008 and home builders have leverage of around half what they did in 2007-8, about 20% this time, making them more resistant to trouble. They also learned the lessons and don't have as much in new builds, with at least one just aiming to replace in new builds what it sells, not grow its stock, for many years now.

Meanwhile there hasn't been the widespread trouble in US mortgage lending that eventually led to the Lehman failure and the regulators in the US, UK and elsewhere now have tools that allow the Lehman type of situation to be resolved instead of leading to failure. In the UK that's done for retail banks partly by setups that have the holding company fail while the operating company is switched to a new owner, so the holding company with the debt and shareholders fails but the operating company keeps on running.

We're not in anything like 2008 due to the smaller scale, far larger bank reserves and far better regulatory tools available now.

The Financial Times story Property funds better placed to weather storm than in 2007 (direct link) is a useful counterpoint and well worth reading and contains these things and others that are of interest:

"‘This is not a Lehman Brothers moment,’ says one fund manager"
"UK banks already have much more capital than they did in 2008"
For property companies "“In the listed sector, levels of leverage then were about 45 per cent — today they are in the mid-20s to 30 per cent,” said Robert Duncan, analyst at Numis Securities"
“It might not be a re-run of 2008, with banks better capitalised to the tune of £150bn, but 2016 is shaping up to be a re-run of 2007,” said Mike Prew, analyst at Jefferies.
"the shock to demand would be mitigated by low vacancy rates — occupancy in central London is higher than during any of the past three market shocks"

Still the opportunity to lose some money, just don't expect things like the freeze of forex trading that happened in 2008 but didn't happen even during the turmoil around the overnight brexit vote result this time or the complete closing of the bank to bank lending markets.

Get your cash ready; the stock market might soon present you with some amazing opportunities.

Indeed, it might. Or not. I'm quite happy with a high cash and P2P position at the moment. Makes it easy to sleep at night. We're well overdue a substantial 20-40% drop in some markets, particularly the US, but there's no way to know just when it'll happen.

The point is that they can charge someone £100 for a £1000 position that stock x will go up and someone else £100 for a position that stock x will go down, each at a certain date. Both results can't happen at the same time so they end up with a profit from one of the outcomes. Gross exposure for that would be £2000 but net exposure is zero and ignoring counterparty risk thy have a £200 profit to collect. There are more complex option and covered warrant positions where the payout varies but a key part of doing this sort of business is managing the net exposure so that it's not large enough to harm the business. That may involve offering someone one deal while market pricing for the opposite position is checked so that at the same time the one is sold, the protection can be bought in the market.

You and I can do the same sort of thing. Say we hold £10,000 in a global equity tracker, we can get our net exposure close to zero by buying say £5,000 of a doubly leveraged short tracker ETF that moves in the opposite direction from the standard tracker. We'd have £20,000 of ownership but perhaps a few hundred Pounds of net exposure due to the tracking issues between the two types of product, notably the way leveraged tracker ETFs don't quite follow markets perfectly, particularly volatile ones. We could instead buy £3333 of a triply leveraged short tracker but those have higher tracking errors than the doubly leveraged type. But the lower cost might be attractive in exchange for the higher mismatch in performance.

In the UK there's the option of just selling but that might involve capital gains tax issues. In the US there's also the higher tax rate for holdings shorter than a year. In both cases buying the opposite moving product is one way to solve the problem by not selling but still getting to minimal net exposure. There are other ways involving things like buying or selling options and covered warrants or spread bets but those are things people are less likely to be familiar with.

That level of mismatch would be a problem but it assumes a failure to properly match the risks and that's one of the core competencies involved in that sort of business. I doubt that they have that level of net exposure.

But this just reinforces the point that you were being lied to and didn't recognise it because you happened not to understand a particular type of product and how risk is managed with it. This doesn't mean that DB globally is in great shape, just that the risks aren't as high as you were being told they were.

Sterling to parity?


www.bbc.co.uk/news/business-36721278