Could it be possible that we are on the verge of the next “Lehman Brothers moment”?
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 “too big to fail banks” in the United States have very deep financial connections to the bank.
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. But after what we have witnessed in recent days, many now believe that the end is near for Deutsche Bank. 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 their global equities trading business…
It takes a lot to rattle Wall Street.
But Deutsche Bank managed to. The beleaguered German giant announced on July 7 that it is laying off 18,000 employees—roughly one-fifth of its global workforce—and pursuing a vast restructuring plan that most notably includes shutting down its global equities trading business.
Though Deutsche’s Bloody Sunday seemed to come out of the blue, it’s actually the culmination of a years-long—some would say decades-long—descent 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.
These moves may delay Deutsche Bank’s inexorable march into oblivion, but not by much.
And as Deutsche Bank collapses, it could take a whole lot of others down with it at the same time. According to Wall Street On Parade, the bank had 49 trillion dollars in exposure to derivatives as of the end of last year…
During 2018, the serially troubled Deutsche Bank – which still has a vast derivatives footprint in the U.S. as counterparty to some of the largest banks on Wall Street – trimmed its exposure to derivatives from a notional €48.266 trillion to a notional €43.459 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 link.)
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’s problems becomes other banks’ problems?
Pay close attention to this.
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’s not the best thing for the world economies.
...watch the global derivatives market. It played a starring role during the last financial crisis, and it will play a starring role in the next one too.
The fundamental structural problems that were exposed during 2008 and 2009 were never fixed. In fact, many would argue that the global financial system is even more vulnerable today than it was back during that time.
And now it appears that the next “Lehman Brothers moment” may be playing out right in front of our eyes.
Now more than ever, keep a close eye on Deutsche Bank, because it appears that they could be the first really big domino to fall.
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