In 2008, just before Lehman Brothers' balance sheet collapsed and a furious employee punched CEO Dick Fuld square in the face, then-New York Fed President Timothy Geithner had a big idea...
Take the big, failing U.S. banks, and sell them for pennies on the dollar to the larger, somewhat healthier banks.
Make these institutions larger, and they could absorb all the toxic balance sheets - and save the global financial system from calamity.
That was the theory, at any rate. We all know how it worked out in the end: Counter-party risk froze the global credit markets and sent the financial system into a tailspin.
Congress failed to grasp what would happen to a financial system that lacked sufficient liquidity to function - like a brain running low on oxygen - before it passed the $787 billion stimulus of 2009. Two more rounds of quantitative easing, courtesy of an "independent" Fed would follow.
Of course, the "real" costs are virtually incalculable - incalculable costs that are still, a decade later, being borne by the middle class and working people of this country.
That's nothing I'd care to live through again, and yet here we are: staring down the barrel of a disaster brewing in Europe that could jump the Atlantic in minutes...
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It's the "World's Most Dangerous Bank"
"Patient zero" of this brewing financial plague is none other than Deutsche Bank AG (NYSE: DB) - the same Deutsche Bank that last week announced plans to slash 18,000 jobs and dramatically cut back on its global equity business.
Once again, we're seeing pictures of laid-off employees spilling into the streets of Manhattan, London, Sydney, and Mumbai with their desktop belongings in white cardboard boxes. It would look exactly like 2008 but for the width of the neckties and cut of the hairstyles.
CRITICAL: Get your piece of $72 billion dollars being doled out due to Public Law 99-514.
Meanwhile - and I'm not making this up - Forbes reported that two tailors went to the London office of Deutsche Bank on the same day as these firings were announced...
Observers thought the nattily dressed pair were fired employees... until sharp-eyed Internet detectives revealed that the men were actually Saville Row tailors in the building to tweak the cut of some investment bankers' $1,800 suits.
The arrogance...
CEO Christian Sewing was upset enough... to send an email reminding everyone that that sort of thing looks pretty bad and not to do that.
Meanwhile, his bank is toxic and sinking like a stone. Talk about arrogance. Talk about ineffectual leadership.
It's probably a fatal case...
The Next Hot European Import: Financial Contagion
The popular soundbite says "Deutsche Bank is the single greatest source of systemic risk on the planet." Look at its annual report, and you will indeed see, in black and white, that the firm's derivative exposure sat at $49 trillion at the end of 2018.
Now - that's notional value. It includes the total underlying value of a derivatives trade that, critically, often includes vast amounts of leverage.
In 2008, American taxpayers were forced to bail out incompetent businessmen. Now, thanks to Public Law 110-289, it's time they pay it back.
It doesn't mean a firm with $71 billion in assets leveraged its capital into $49 trillion in unhedged derivatives. Bankers can and do take dumb risks... but not that dumb.
(Of course, I may yet live to eat those words.)
The International Swaps and Derivatives Association (ISDA) places a greater emphasis on global net exposure for over-the-counter derivatives. That figure was just $2.3 trillion for the global market - which is big, for sure, but is far more manageable when you consider the size and scope of global assets.
Now... if the company hedged everything properly, even that number wouldn't be so scary.
But - surprise! - counterparties all around the globe are already trimming their exposure to Deutsche Bank.
Bankers learned their lesson in the crisis - they don't want to see a bank freeze their funds indefinitely, like we saw with Lehman.
With Deutsche Bank, we're talking about an institution with so much global exposure that contagion could surge across the Atlantic faster than the old Concorde.
Reports indicate that firms are pulling about $1 billion a day from the Deutsche. And these aren't depositors; these are the counterparties with the exposure to the run on this bank.
For many in the media, the bank's problems came out of nowhere, but the bank's stock price tells us a long, shameful story of a big, bad bank with serious problems.
This is a stock that plunged from $150 in 2007 to $27.50 in February 2009. Now, that in and of itself isn't shocking given the state of the global markets during that period.
But following the U.S. bailouts and massive stimulus operations across the globe, it sank from $75 in October 2009 down to $7.96 today.
Put another way, this stock has lost 90% of its value during the longest bull market in U.S. history. It's about as popular as Congress or food poisoning.
That should tell you all you need to know about management, its balance sheet, its practices, and above all, the danger it poses to the financial system.
Don't Be Fooled into Thinking There's an Exit
Of course, Deutsche Bank has a solution - only the fourth or fifth one it's tried desperately for in recent years. This past April, merger talks with the second largest (and almost as troubled) German bank, Commerzbank AG (OTCMKTS: CRZBY) collapsed when the execution risk and restructuring costs "were too great." Whatever those costs were, they were apparently worse than a billion-dollar-a-day capital bleed.
For now, the bank is trying to strike a deal to send $168 billion in capital, technology, and staff to a French bank called BNP Paribas (OTCMKTS: BNPQY). The word "megamerger" has been floated in the press, as well.
If BNP Paribas sounds familiar, that's because, since 2010, it's been implicated in everything from customer gouging to currency rigging; shoddy record-keeping; sanctions busting in Sudan, Cuba, and Iran; and anti-Semitism.
You know... just another standup bank.
Deutsche Bank already has very little room for error, and it's running out of time. It's over-levered and will likely fail stress tests in the future, to say nothing of surviving an actual financial crisis. Customers are not happy about having to work with BNP Paribas, and there really isn't anything stopping them from redeeming their funds in the months ahead.
Any one of these things would be bad for a bank, but Deutsche Bank's under attack from every conceivable angle... at a time when it's its own worst enemy.
The bottom line is: Stay away and stay safe.
If you must own banks, own small- and mid-sized American regionals like the ones we've discussed before.
If you own Deutsche Bank in hopes of a turnaround, it's probably not worth the risk. Neither is it a smart idea to sell this bank short; you could have serious trouble unwinding your position when the end comes (it will come fast).
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About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.