After a $354 Billion U.S. Bailout, Germany’s Deutsche Bank Still Has $49 Trillion in Derivatives
APR 17, 2019 | REPUBLISHED BY LIT: DEC 20, 2021
On July 21, 2011, when the GAO released its audit of the Federal Reserve’s secret $16.1 trillion in bank loans during the financial crisis, a foreign bank ranked number 9 on the list of the largest borrowers. The loans went not just to the largest banks on Wall Street but to foreign derivative counterparties to the Wall Street banks. The foreign bank that ranked 9 on the list of the largest borrowers was Germany’s largest bank, Deutsche Bank, which took $354 billion in revolving loans from the U.S. Federal Reserve.
According to an article in the Financial Times last week “Germany’s federal and state governments have spent €70bn on bailing out banks since the financial crisis, according to an estimate by Gerhard Schick, head of lobby group Finance Watch.” The figure of €70bn is about 79 billion U.S. dollars. Why did the U.S. Fed throw $364 billion at one German bank when its country of origin has only reached in its pocket to the tune of $79 billion for all of its troubled banks? (Read on for the answer.)
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.)
Deutsche Bank’s feeble 10 percent reduction in mind-numbing derivatives stands in stark contrast to the reduction in Deutsche Bank’s share price last year. On the first trading day of 2018, Deutsche Bank opened at $19.27. On the last trading day of the year, December 31, 2018, Deutsche Bank closed at $8.15 – a reduction in shareholder value of 58 percent.
What that did to Deutsche Bank’s market capitalization was this: with 2,066,773,131 shares outstanding at both the start of the year and at the end of the year, shareholders lost an enormous $23 billion in market cap.
In 2011 when the GAO released the list of the banks that had received the $16.1 trillion in secret loans from the Fed during the financial crisis, two other foreign banks ranked in the top ten of those receiving this strange largesse from the U.S. central bank: the U.K. mega bank, Barclays, ranked number 5 with $868 billion in cumulative borrowings and the Royal Bank of Scotland Group PLC, also of the U.K., ranked number 8 with $541 billion in revolving loans from the Fed. (See chart below.)
With those numbers in mind, now study this chart provided by the Financial Crisis Inquiry Commission, which issued subpoenas and took testimony from more than 700 witnesses. The chart lists Goldman Sachs’ derivatives counterparties as of June 2008 and the dollar amount of exposure. Between Deutsche Bank, Barclays, and the Royal Bank of Scotland, Goldman had a cumulative derivatives exposure to just those three foreign banks of $7.2 trillion notional (face amount).
Goldman is just one investment bank. Add in the derivatives exposure to these foreign banks by Citigroup, JPMorgan Chase, Morgan Stanley, Merrill Lynch and one can begin to understand why the Federal Reserve wanted to keep its $16.1 trillion in revolving loans to both domestic and foreign banks a big secret from the American people. That’s because the Federal Reserve is not just the U.S. central bank but it is also a regulator of bank holding companies, which includes the largest banks on Wall Street. It had allowed this stockpile of financial weapons of mass destruction to grow exponentially in the years leading up to the 2008 Wall Street collapse. According to Phil Angelides, the Chair of the Financial Crisis Inquiry Commission, the “notional value of over the-counter derivatives grew from $88 trillion in 1999 to $684 trillion in 2008.” And it grew in a dark and mostly unregulated market.
Rather than stripping away the regulatory powers of such an incompetent regulator as the Fed, Congress succumbed to the demands of Wall Street lobbyists and gave the crony Fed broadened supervisory powers over the Wall Street banks in the 2010 financial reform legislation known as Dodd-Frank. (Those expanded powers continue to this day despite one of its own bank examiners, Carmen Segarra, blowing the whistle on how she was fired because she wouldn’t bow to pressure to change her examination of Goldman Sachs.)
One of the Fed’s enhanced regulatory powers was to conduct stress tests of the big banks – effectively to convince the American people that the banks were safe and sound again. But in 2016 when researchers at the Office of Financial Research looked at how the Fed was conducting these stress tests, they concluded that the Fed was doing it all wrong. (We think this wasn’t a bug but a feature of how the Fed was pretending to oversee the Wall Street banks while allowing the dangerous derivative markets to continue.)
The OFR researchers who conducted the study, Jill Cetina, Mark Paddrik, and Sriram Rajan, determined that the Fed’s stress tests are measuring counterparty risk for the trillions of dollars in derivatives held by the largest banks on a bank by bank basis. The real problem, according to the researchers, is the contagion that could spread rapidly if one big bank’s counterparty was also a key counterparty to other systemically important Wall Street banks. The researchers wrote:
“A BHC [bank holding company] may be able to manage the failure of its largest counterparty when other BHCs do not concurrently realize losses from the same counterparty’s failure. However, when a shared counterparty fails, banks may experience additional stress. The financial system is much more concentrated to (and firms’ risk management is less prepared for) the failure of the system’s largest counterparty. Thus, the impact of a material counterparty’s failure could affect the core banking system in a manner that CCAR [one of the Fed’s stress tests] may not fully capture.” [Italic emphasis added.]
The black hole surrounding derivatives is just as dark today as it was in 2008 – and just as dangerous. The Financial Crisis Inquiry Commission had this to say about the crash: “the existence of millions of derivatives contracts of all types between systemically important financial institutions—unseen and unknown in this unregulated market—added to uncertainty and escalated panic, helping to precipitate government assistance to those institutions.” There is not one Federal or state regulator today who could tell you which counterparty has the most concentrated risk to derivatives. Nor is there one Wall Street bank who has clarity on this issue — because the majority of the over-the-counter derivative contracts are secret contracts between one party and another.
We know that Deutsche Bank’s derivative tentacles extend into most of the major Wall Street banks. According to a 2016 report from 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 – and that was when its market capitalization was tens of billions of dollars larger than it is today.
Until these mega banks are broken up, until the Fed is replaced by a competent and serious regulator of 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.
Germany’s Deutsche Bank, Again in Trouble, Received a U.S. Bailout Twice as Big as Lehman Brothers
OCT 3, 2016 | REPUBLISHED BY LIT: DEC 20, 2021
The gyrations in Deutsche Bank’s shares last week together with a June report from the International Monetary Fund indicating that the bank was “the most important net contributor to systemic risks” has cast a trading pall over all of the global banks.
Against that backdrop, most Americans would be stunned to learn that the German Deutsche Bank, which perpetually finds itself on the wrong side of the law, was bailed out in five separate U.S. emergency lending operations during the 2007-2010 financial crisis, receiving more than twice the emergency financial assistance as that received by Lehman Brothers, the failed U.S. investment bank.
According to the Government Accountability Office (GAO), Deutsche Bank received cumulative loans totaling $77 billion under the Federal Reserve’s Primary Dealer Credit Facility (PDCF) and $277 billion in cumulative loans under the Term Securities Lending Facility (TSLF) for a total of $354 billion. Lehman Brothers received only $183 billion in Fed emergency lending programs according to the GAO report. (See GAO chart below.) These loans were made at below-market interest rates, thus constituting a bailout.
As Senator Elizabeth Warren explained to her colleagues on the Senate Banking Committee on March 3 of last year:
“Now, let’s be clear, those Fed loans were a bailout too. Nearly all the money went to too-big-to-fail institutions…Those loans were made available at rock bottom interest rates – in many cases under 1 percent. And the loans could be continuously rolled over so they were effectively available for an average of about two years.”
But Deutsche Bank received additional forms of bailouts during the crisis. According to Fed data turned over to Bloomberg News after a multi-year court battle, two units of Deutsche Bank borrowed at least $2 billion in low-cost loans from the Fed’s Discount Window during the crisis. And, it was finally revealed that Deutsche Bank was one of the banking behemoths that got a back-door bailout via the failed insurance giant, AIG. Deutsche Bank received $11.8 billion from the taxpayer for derivative transactions and securities lending obligations AIG was on the hook for. The U.S. government paid these obligations at 100 cents on the dollar, despite AIG being insolvent at the time and requiring a $185 billion taxpayer bailout itself for making casino-like bets with the big banks. Public pressure eventually forced AIG to release a chart of these taxpayer payments.
One of the most egregious aspects of the bailout of Deutsche Bank is that it has serially defrauded both U.S. taxpayers and investors. Its history suggests it would have been far more appropriate to yank its charter in the U.S. than to bail it out using U.S. taxpayers’ dollars.
In 2015 Deutsche Bank settled charges with British and U.S. authorities for $2.5 billion for rigging the interest rate benchmark known as Libor. Deutsche Bank pleaded guilty to the U.S. charges.
According to the U.S. Justice Department, Deutsche Bank also has a history of “participating in transactions used to defraud the IRS.” In 2014 Deutsche Bank, along with Barclays, was probed by the U.S. Senate’s Permanent Subcommittee on Investigations. The two banks had created elaborate schemes to assist hedge funds in converting millions of short-term trades into long-term capital gains to produce a much lower tax rate thereby cheating the U.S. Treasury of tax revenue. Called “basket options” or MAPS at Deutsche Bank, the bank effectively loaned out its balance sheet to hedge funds to conduct billions of trades each year in trading accounts under the bank’s name. Leverage as high as 20:1 (which would be illegal in a regular Prime Brokerage account for a hedge fund client) was often deployed. The banks got paid through margin interest, fees for stock loans for short sales, and trade executions.
According to the final report on the matter by the Senate’s Permanent Subcommittee on Investigations, there had been a previous history of tax abuse against the U.S. by Deutsche Bank. The report found the following:
“About ten years ago, Deutsche Bank became the subject of a series of investigations focused on its participation in abusive tax shelters from 1996 through 2002, which aided and abetted evasion of an estimated $5.9 billion in U.S. income taxes. On December 21, 2010, Deutsche Bank and the U.S. Attorney for the Southern District of New York executed a non-prosecution agreement (NPA) related to the bank’s involvement with the abusive tax shelters. Under the agreement, the bank paid more than $550 million to the United States, and the U.S. Attorney and the U.S. Department of Justice (DOJ) agreed not to prosecute Deutsche Bank criminally for participating in abusive tax shelters benefiting its clients from 1997 to 2005, provided the bank met certain requirements.
“Those requirements included Deutsche Bank’s continued cooperation with the DOJ in its tax shelter prosecutions, and appointment of an independent expert to oversee bank reforms to ensure the bank stopped participating in transactions used to defraud the IRS. The NPA also banned Deutsche Bank’s involvement with any pre-packaged tax products, which were the type of tax shelters that led to the criminal proceedings.”
Now, according to a recent report in the Wall Street Journal, the U.S. Department of Justice believes that Deutsche Bank owes American taxpayers $14 billion for selling toxic mortgage backed securities that helped to collapse the U.S. housing market during the financial crisis. The swoon in Deutsche Bank’s share price has gained momentum since the publication of the $14 billion figure. (That’s not the taxpayers’ problem; that’s the problem of a bank that serially engages in fraud.) Last Friday, the news agency Agence France Presse reported that the Justice Department may be planning to settle the case on the cheap for $5.4 billion.
Let’s be clear on whose shoulders those missing billions in fines against Deutsche Bank are going to fall. It’s America’s young people who will face a higher national debt and a lower standard of living because the U.S. government is now addicted to bailing out and propping up serially out-of-control global banks whose business models increasingly resemble that of a crime syndicate. Settling a $14 billion crime for $5.4 billion is, effectively, another U.S. bailout of a bank that has frequently gamed U.S. markets and fleeced taxpayers. In less than a decade, the U.S. national debt has skyrocketed from $9 trillion to more than $19 trillion today — much of that debt explosion coming from the effects of the banking crisis and the worst economic slump since the Great Depression.
In the wake of its tanking stock price, Deutsche Bank has launched a major public relations offensive. In a front-page article in the Frankfurter Allgemeine Sonntagszeitung, major heads of German businesses like BASF, Daimler and Siemens spoke in support of the bank, pushing the theme that Germany needs its own big global bank to finance their global ambitions. The article comes at a time when Angela Merkel, the Chancellor of Germany, is under a deluge of political pressure to forego any thought of bailing out this serially troubled bank.
In a letter to Deutsche Bank employees on Friday, CEO John Cryan complained that the bank had “become subject to speculation.” Indeed, multiple hedge funds in the U.S. have staked out a short position in the stock. In response to this, Reuters reported that “German Economy Minister Sigmar Gabriel accused Deutsche Bank on Sunday of blaming speculators for last week’s plunge in its share price when the bank had itself made speculation its business.” According to Reuters, Gabriel said:
“I did not know if I should laugh or cry that the bank that made speculation a business model is now saying it is a victim of speculators.”
Just how speculative is Deutsche Bank after the U.S. helped to prop it up during the 2008 financial crash? Prior to the opening bell at the New York Stock Exchange this morning, the bank is showing a stock market capitalization of $18.05 billion with the following exposure to derivatives according to its 2015 annual report:
“At December 31, 2015, the notional related to the positive and negative replacement values of derivatives and off balance sheet commitments were € 255 billion, € 606 billion and € 31 billion respectively.”
That gives a whole new meaning to speculation, even by the wild west standards of U.S. banking.