This is not the time of the year when Europe is at its best weather-wise.
Today the evening is cold, rainy and the wind is picking up.
The political events out there have developed a new dynamic too – it’s not just the Italian budget debacle anymore. After president Macron made financial concessions to the yellow-jacketed protesters, the French budget deficit is projected to look no better than the Italian one.
Even in Germany, chancellor Merkel had to blink and allow for the shotgun wedding of Commerzbank and the troubled Deutsche Bank. Let’s stop on the latter for a moment, because it’s an interesting story on its own.
Deutsche Bank is in crisis and everyone has known that – its stock lost more than half its value in 2018 alone. This biggest European bank is in the news a lot and never in a good way - the list of criminal charges against it reads like a crime novel and the bank spends a fortune in fines and settlement.
Its derivative exposure is huge, and it is hard to quantify what is the real net bottom line, but it could well be more than 10 times the Gross Domestic Product of all Germany.
It doesn’t help the situation that the bank’s leadership is a revolving a door - it went through four CEO’s in as many years to the point that is not clear who is actually running that place.
While all this is not unusual among world biggest banks (just look at HSBC, Wells Fargo, or, for a real eye opener, at Goldman Sachs), DB seems to suffer the most. It could be that their derivatives exposure is the source of this downfall, but for a different reason than most think.
These derivatives are delicate credit instruments held in tens of trillions of dollars by major banks around the world, but it’s never clear who is on the other side of the trade. There must be a big player backing it up and it must be default free, at least for a moment. And there is only one player that fits that definition – the US Treasury, more specifically it’s Exchange Stabilization Fund.
So, how this is causing Deutsche Bank trouble? It appears that through its derivative exposure Deutsche Bank helped manipulate interest rates and propped the US dollar.
Throw in the mix the rising tensions between Germany and the US, and the bank’s situation looks terrible politically.
Enter BaFin, the German fiercely independent financial supervisory authority that appears to be calling the shots at Deutsche Bank for a while now. Specifically, it is forcing them to liquidate exposure to dollar credit swaps.
In May of this year the bank stunned the markets by suffering a staggering one-day loss that was almost 12 x VaR (value at risk), or 12 times what DB's risk officers have estimated it might lose on a typical day. And these guys are not incompetent. The only explanation is that they were forced by BaFin to close some positions in the marketplace.
The US Fed isn’t, of course, taking it on the chin with his hands down, they’re punching back like mad, prosecuting DB, damaging them publicly and forcing the bank out of lucrative markets like precious metal trading.
In a related example of the US and Germany exchanging punches, the VW concern recently built an engine plant in Russia, in Kaluga. Clearly against US interest, who want to put Russia in an economic penalty box.
The plant opened on Sept. 4th, 2015, after it took three years to finish.
On September 18th, 2015 the US Environmental Protection Agency served a Notice of Violation (NOV) to Volkswagen for emission problems and the rest is history.
And all this could be a coincidence, of course. Or my mind wandering on a cold December night.
In the movie “The Counselor” Brad Pitt says this about some serious people he deals with south of the border: “you know, they heard about coincidences, they just never saw one.”
Could be a good advice.
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Tom Kubiak is the author of The Traveler