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<\/a>Could it be possible that we are on the verge of the next \u201cLehman Brothers moment\u201d?\u00a0 Deutsche Bank is the most important bank in all of Europe, it has 49 trillion dollars in exposure to derivatives, and most of the largest \u201ctoo big to fail banks\u201d in the United States have very deep financial connections to the bank.\u00a0 In other words, the global financial system simply cannot afford for Deutsche Bank to fail, and right now it is literally melting down right in front of our eyes.\u00a0 For years I have been warning that this day would come, and even though it has been hit\u00a0by scandal after scandal<\/a>, somehow Deutsche Bank was able to survive until now.\u00a0 But after what we have witnessed in recent days, many now believe that the end is near for Deutsche Bank.\u00a0 On July 7th, they really shook up investors all over the globe when they laid off 18,000 employees and announced that they would be completely exiting\u00a0their global equities trading business<\/a>\u2026<\/p>\nIt takes a lot to rattle Wall Street.<\/p>\n
But Deutsche Bank managed to. The beleaguered German giant announced on July 7 that it is laying off 18,000 employees\u2014roughly one-fifth of its global workforce\u2014and\u00a0pursuing a vast restructuring plan<\/a>\u00a0that most notably includes shutting down its global equities trading business.<\/p>\n
Though Deutsche\u2019s Bloody Sunday seemed to come out of the blue, it\u2019s actually the culmination of a years-long\u2014some would say decades-long\u2014descent into unprofitability and scandal for the bank, which in the early 1990s set out to make itself into a universal banking powerhouse to rival the behemoths of Wall Street.<\/p><\/blockquote>\n
These moves may delay Deutsche Bank\u2019s inexorable march into oblivion, but not by much.<\/p>\n
And as Deutsche Bank collapses, it could take a whole lot of others down with it at the same time.\u00a0 According\u00a0to Wall Street On Parade<\/a>, the bank had 49 trillion dollars in exposure to derivatives as of the end of last year\u2026<\/p>\n
During 2018, the serially troubled Deutsche Bank \u2013 which still has a vast derivatives footprint in the U.S. as counterparty to some of the largest banks on Wall Street \u2013 trimmed its exposure to derivatives from a notional \u20ac48.266 trillion to a notional \u20ac43.459 trillion (49 trillion U.S. dollars) according to its 2018 annual report. A derivatives book of $49 trillion notional puts Deutsche Bank in the same league as the bank holding companies of U.S. juggernauts JPMorgan Chase, Citigroup and Goldman Sachs, which logged in at $48 trillion, $47 trillion and $42 trillion, respectively, at the end of December 2018 according to the Office of the Comptroller of the Currency (OCC). (See Table 2 in the Appendix at this\u00a0link<\/a>.)<\/p><\/blockquote>\n
Yes, the actual credit risk to Deutsche Bank is much, much lower than the notional value of its derivatives contracts, but we are still talking about an obscene amount of exposure.<\/p>\n
And this is especially true when we consider the state of Deutsche Bank\u2019s balance sheet.\u00a0 According to\u00a0Nasdaq.com<\/a>, as of the end of last year the bank had total assets of 1.541 trillion dollars and total liabilities of 1.469 trillion dollars.<\/p>\n
In other words, there wasn\u2019t much equity there at the end of December, and things have deteriorated rapidly since that time.\u00a0 In fact, it is being reported that\u00a0a billion dollars a day<\/a>\u00a0is being pulled out of the bank at this point.<\/p>\n
I know that most Americans don\u2019t really care if Deutsche Bank lives or dies, but\u00a0as the New York Post has pointed out<\/a>, the failure of Deutsche Bank could quickly become a major crisis for the entire global financial system\u2026<\/p>\n
But the important fact to remember is that Deutsche Bank traded these derivatives with other financial firms. So, is this going to be another Lehman Brothers situation whereby one bank\u2019s problems becomes other banks\u2019 problems?<\/p>\n
Pay close attention to this.<\/p>\n
If the situation gets out of hand, the Federal Reserve and other central banks will have no choice but to cut interest rates even if it\u2019s not the best thing for the world economies.<\/p><\/blockquote>\n
In particular, some of the largest \u201ctoo big to fail banks\u201d in the United States are \u201cheavily interconnected financially\u201d to Deutsche Bank.\u00a0 The following comes from\u00a0Wall Street On Parade<\/a>\u2026<\/p>\n
We know that Deutsche Bank\u2019s derivative tentacles extend into most of the major Wall Street banks. According to a\u00a02016 report<\/a>\u00a0from the International Monetary Fund (IMF), Deutsche Bank is heavily interconnected financially to JPMorgan Chase, Citigroup, Goldman Sachs, Morgan Stanley and Bank of America as well as other mega banks in Europe. The IMF concluded that Deutsche Bank posed a greater threat to global financial stability than any other bank as a result of these interconnections \u2013 and that was when its market capitalization was tens of billions of dollars larger than it is today.<\/p>\n
Until these mega banks are broken up, until the Fed is replaced by a competent and serious regulator of\u00a0 bank holding companies, and until derivatives are restricted to those that trade on a transparent exchange, the next epic financial crash is just one counterparty blowup away.<\/p><\/blockquote>\n