Oct 2, 2016

Deutsche Bank’s decline reflects European weakness

Asking whether Deutsche Bank is the next Lehman Brothers is asking precisely the wrong question. Just as Lehman was not the next Long-Term Capital Management. And in turn LTCM was not the next S&Ls, or it the preceding Continental Illinois, and so on back along meandering byzantine pathways past Tulip Manias and South Sea Bubbles all the way to real Byzantine times.
Trying to find the next Lehman is the proverbial search for the key under the street light, rather than where the key might actually be. That key is the understanding that financial collapses are like Tolstoy’s happy and his unhappy families rolled into one: they are all exactly the same at core but always completely different in structure, in the triggering and in the consequences.
A far more interesting question to me, with challenging sub-questions that ripple out in so many directions and on so many layers, is why Deutsche? Why is the biggest bank in what is undoubtedly Europe’s and arguably the world’s strongest major economy the epicentre of global fear and loathing?
Is it something about Germany? About Europe? The European project? The European Central Bank? The cabal of globally significant central banks and what they have wrought? The GFC as lingering, suppurating wound, patched over but never properly dealt with? And perhaps a dozen more.
Yes, I suggest, to all of the above, not that there’s the slightest prospect of any of the architects, managers and manipulators of policy ever engaging in even the most minimal self-assessment. They will all go doggedly on, confident in their blinkered lack of any self-awareness, comfortable in their directly taxpayer-funded or consumer-levied sinecures.
I do think it is particularly delicious and instructive that Deutsche Bank’s decline and possibly inevitable fall has come in the wake of the abandonment of the currency that bore its name.
The old, post-war, pre-unified Germany of the European Community was built on the twin foundations of a strong currency and a strong banking system. At the very pillar of that financial system and at the absolute foundation of that economy was Deutsche Bank.
Today’s Deutsche, capitalised at a figure not much higher than its looming US malpractice fine, would have been beyond unthinkable two decades or more ago, capturing how far it has declined.
The new Germany of the European Union traded a strong currency and bank for easy money for both the economy and the institution, which came from a weak transnational currency, but seemingly also unavoidably, as part of the dynamics of the trade, a weak banking system.
Bluntly, if politically incorrectly, would a German Bundesbanker have overseen monetary policy like a French and even more an Italian ECBanker have done? Would that proverbial Bundesbanker have embraced the ECB’s (and Fed’s and BoJ’s) financial alchemy of seeming to turn copper into gold, an alchemy which merely postponed and amplified the disastrous inevitable?
Similar sets of bank-specific questions can be posed in relation to former and more contemporary Deutsche bankers.
There are of course two big questions about Deutsche Bank which provide some parallel to Lehman. Just how bad are its assets: is it a zombie bank? And how significant and how vulnerable are its investment banking-type linkages — derivatives and cross-party exposure and the like?
There is also one very specific question: what happens if it pays the $US14 billion ambit claim from the US Department of Justice? How does it finance it? What does the payment and/or the financing specifically trigger, both narrowly in relation to Deutsche and across the European banking system? What would the German government do? What would the ECB do?
That could trigger a broader implosion. In that sense, Deutsche could prove to be the next Lehman.
There are two linked reasons why I am wary of this too-specific focus.
First, the history of financial implosions makes it clear that this history never repeats itself.
Yes, as I noted, the core is always the same: broadly, greed and seeming easy money — some variation of the alchemy we all seek: borrowing at, say, 3 per cent and risklessly investing at 6 per cent, with more and more in geometric expansion joining the free lunch.
But politically incorrectly again, the fat lady never sings the same aria. Apart from anything else, like generals fighting the last war, we have probably barred the regulatory gates against a replay.
The second reason is broader. We need to pull our gaze back from searching for the next Lehman — even more so, when we think we’ve identified it — to look more broadly at exactly what has developed in not just the global financial system overall but indeed the world’s real economy.
Rather simply, we need to try to pre-empt the next disaster, not guarantee we can avert the last one again.
It gets worse when you look at what the troika of major central banks have done. I would argue the combination of zero interest rates and QE has actually been a recipe for creating the next implosion.
There’s wide concern that the combination has led to very obvious bad behaviour — the bubble in debt-financed asset values.
Just how exactly you address the problem of too-much leverage by deliberately encouraging even more leverage defies the most uneducated common sense.
Janet Yellen and Mario Draghi have clearly never been to an AA meeting; as virtual reality teetotallers, they are utterly incapable of understanding the disastrous consequences of their pouring 100 proof hooch into the global monetary punch bowl. One of yesteryear’s Bundesbankers would have been snatching the bowl away.

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