Monday, 25 September 2017

A Analysis

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I was discussing the US Department of Justice $14B fine levied at Deutsche Bank with my 15 year old son last week. I told him the fine amounted to roughly 70% of Deutsche's market cap, while a similar retroactive tax levy from the EU towards Apple for $14B was about 3% of their cash on hand or a quarter's operating profit.  My son said, "Whoah! Waitaminute! I thought Deutsche Bank was a big company like Apple. Didn't you say that they had trillions of euros of assets on their balance sheet?".

Indeed, I did say such, and he brings up a very valid point that is missed by many a so-called professional. DB is valued at 14.5 billion euros by Mrs Market, yet that amount controlls 1.8 trillion euros worth of assets, and 1.415 trillion after netting and credit adjustments, etc. And to think, some people think a 90 LTV loan is pushing the leverate limiit. Let's take a look at this from a graphica perspective to illustrate just how absurd it is...

Over time, the accounting expression of equity diverges significantly from the markets perception of the bank's equity value.  Somebody is most assuredly mistaken! As of today, DB's books are carrying equity value at 3x that of the stock market. DB market leverage

 

If one were to use the stock market's equity valuation, one would see that a very, very tiny sliver of equity is controlling nearly 1.5 trillion euro of assets - and that's after the slimming down game is done. Expressed differently, DB is leveaged 97.4x. 

DB market-based leverage Ratio

For those who feel this is an unrealistice way of looking at things, run the same exercise for every failed bank and cross reference the results to that of the European banking regulatory body's methodology of calculating leverage and tell me which methid was (and is) the better predictor of bank failure.

Leverage ratio measures
(In EUR bn., unless stated otherwise) Dec 31, 2014 Mar 31, 2015 Jun 30, 2015 Sep 30, 2015 Dec 31, 2015 Mar 31, 2016 Jun 30, 2016 Sep 28, 2016
                 
Total assets 1,709 1,955 1,694 1,719 1,629 1,741 1,803 1,803
Changes from IFRS to CRR/CRD41 (264) (407) (233) (299) (234) (350)
(389)
(389)
Derivatives netting1 (562) (668) (480) (508) (460) (523) (556) (556)
Derivatives add-on1 221 227 198 177 166 157 157 157
Written credit derivatives1 65 58 45 42 30 31 24 24
Securities Financing Transactions1 16 20 21 22 25 25 35 35
Off-balance sheet exposure after application of credit conversion factors1 127 134 131 109 109 102 102 102
Consolidation, regulatory and other adjustments1 (131) (177) (148) (140) (104) (140) (151) (151)
CRR/CRD4 leverage exposure measure (spot value at reporting date)1 1,445 1,549 1,461 1,420 1,395 1,390 1,415 1,415
                 
Total equity 73.2 77.9 75.7 68.9 67.6 66.6 66.8 66.8
Market share Price$ 30.0 44.8 30.2 27.0 24.2 16.9 13.7 11.9
Market Cap$ 41.1 61.4 41.3 36.9 33.1 23.2 18.8 16.3
Market Cap EUR 36.6 54.7 36.8 32.9 29.4 20.7 16.7 14.5
Discrspency bet. Accounting & Market-based Equity 50% 30% 51% 52% 56% 69% 75% 78%
Simple, market price derived leverage (Equity/Net Assets) 2.53% 3.53% 2.52% 2.31% 2.11% 1.49% 1.18% 1.03%
Regulatory Accounting (Fully loaded CRR/CRD4 Leverage Ratio in %1) 3% 3% 4% 4% 3% 3% 3% 3%
Leverge Multiple 39.5x 28.3x 39.7x 43.2x 47.4x 67.3x 84.5x 97.4x
                 
Fully Loaded CRR/CRD4 Tier 1 capital2 50.7 52.5 51.9 51.5 48.7 47.3
48.0
48.0
 
               
Fully loaded CRR/CRD4 Leverage Ratio in %1 3.5 3.4 3.6 3.6 3.5 3.4 3.4 3.4
1 Based on current CRR/CRD 4 rules (including amendments with regard to leverage ratio of Commission Delegated Regulation (EU) 2015/62 published in the Official Journal of the European Union on January 17, 2015).
2 Regulatory capital amounts, risk weighted assets and capital ratios are based upon CRR/CRD 4 fully-loaded.
 
Here's my DB warning from 11 and half months ago...
 Our next article will continue to hammer home the liklhood that DB will have to recapitalize, and where they probably WONT'T be getting the money from, as well as the likelihood it will come from someone who really didn't plan on giving it up (Ahem, depositors/savers/checking account holders). For those who are not yet convinced, peruse these related items...

Here's What A Real, Live Veritaseum 5x Short DB Smart Contract Looks Like to Our Research Subscribers 

 If you haven't heard, we're giving out free, fully smart contracts as a 5% rebate to anyone who purchases any of our research packages above the introductory novice $50 level. This is not your Daddy's rebate! The rebate actually gets larger as DB goes down in price. For those who may be coming late to the party, we can offer a 5x long gold (or even a long gold, short DB) smart contract rebate as well. Of course, the bulk of our research targets banks and entities other than DB, but I thought we'd make DB the subject of the rebate to drive the point home. Below is an actual contract crafted off of the price of a single share of DB for about 2 weeks.

 

The research and knowledge subscription module "European Bank Contagion Assessment, Forensic Analysis & Valuation" contains a full report of a very large European Deutsche Bank counterparty that faces a full 27% downside from current levels. It appears as if no one suspects a clue. It also contains much, much more (including at least 3 to 5 suspect banks). We can break this apart a la carte, if requested.

As excerpted:

Susceptible Bank 1: Financial Modeling
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Bloomberg reports "Germany Will Rescue Deutsche Bank If Necessary, Allianz Says", but Angela Merkel disagrees as RT reports "Deutsche Bank shares plummet to record low as Merkel rules out bailout". Let's get one thing straight. If the German taxpayer has to bail out DB, the German taxpayer and his/her economy is toast for the near term.

 

If there is no state aid, then the depositors of DB will get wiped. I made this warning crystal clear over the last 30 days in "Deustche Bank and the Anatomy Of A European Bank Run: Look at the Situation BEFORE The Run Occurs" and "Revisiting the Run on Deutsche Bank: Making the Hypothetical Frighteningly Realistic - You've Been Warned!".

 As a matter of fact, shareholders who subscribe had planty of time to not only get out, but to go short. Reference videos and reports from this time last year....

DB warning

ZeroHedge and Mish (prominent financial blogs) have queried who has significant exposure to DB and vice versa. Well, the Veritaseum subscription research report on the crumbling European banking system answeres that question. Paying subscribers can reference "Those 'Other' European Banks:The Impact of Rising NPLs". Paying subscribers can also reference "Derivative Risk Exposure of Major Banks to Deustche Bank". The questions are answered in exquitite detail therein.

 Our next article will continue to hammer home the liklhood that DB will have to recapitalize, and where they probably WONT'T be getting the money from, as well as the likelihood it will come from someone who really didn't plan on giving it up (Ahem, depositors/savers/checking account holders). For those who are not yet convinced, peruse these related items...

Here's What A Real, Live Veritaseum 5x Short DB Smart Contract Looks Like to Our Research Subscribers 

 If you haven't heard, we're giving out free, fully smart contracts as a 5% rebate to anyone who purchases any of our research packages above the introductory novice $50 level. This is not your Daddy's rebate! The rebate actually gets larger as DB goes down in price. For those who may be coming late to the party, we can offer a 5x long gold (or even a long gold, short DB) smart contract rebate as well. Of course, the bulk of our research targets banks and entities other than DB, but I thought we'd make DB the subject of the rebate to drive the point home. Below is an actual contract crafted off of the price of a single share of DB for about 2 weeks.

 

The research and knowledge subscription module "European Bank Contagion Assessment, Forensic Analysis & Valuation" contains a full report of a very large European Deutsche Bank counterparty that faces a full 27% downside from current levels. It appears as if no one suspects a clue. It also contains much, much more (including at least 3 to 5 suspect banks). We can break this apart a la carte, if requested.

As excerpted:

Susceptible Bank 1: Financial Modeling
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 If you haven't heard, we're giving out free, fully smart contracts as a 5% rebate to anyone who purchases any of our research packages above the introductory novice $50 level. This is not your Daddy's rebate! The rebate actually gets larger as DB goes down in price. For those who may be coming late to the party, we can offer a 5x long gold (or even a long gold, short DB) smart contract rebate as well. Of course, the bulk of our research targets banks and entities other than DB, but I thought we'd make DB the subject of the rebate to drive the point home. Below is an actual contract crafted off of the price of a single share of DB for about 2 weeks.

Veritaseum 5x Short DB Smart Contract

Click here to explore and subscribe to our research. You will have to be willing to fully identify yourself and comply to the terms or our program (in essence, promise not to use the package for anything other than our rebate) in order to qualify for the rebate. Once the subsciption is paid for, email us to get started.

Oh yeah, if you haven't heard...

An Analysis of Deutsche Bank's Likely Recapitalization - German Tax Payer Bailout or German Bank Depositor Bail-in?

Deutsche Bank is going to need some money, and it's going to need some quite soon. The next two or three articles that I write will focus on why there is such a need. In a concerted effort to reduce or potentially eliminated the risk of taxpayer-funded bail-outs of European banks, the EU implemented a new “bail-in” regime beginning on January 1, 2016. As such, rules which require banks and certain systemically significant market participants in EU member states will have to write-down, cancel, convert into equity or otherwise modify certain unsecured liabilities if such steps are required to recapitalize the institution. What is the most bountiful unsecured liabilities of a bank? Read more...

 

Our next article will continue to hammer home the liklhood that DB will have to recapitalize, and where they probably WONT'T be getting the money from, as well as the likelihood it will come from someone who really didn't plan on giving it up (Ahem, depositors/savers/checking account holders). For those who are not yet convinced, peruse these related items...

The research and knowledge subscription module "European Bank Contagion Assessment, Forensic Analysis & Valuation" contains a full report of a very large European Deutsche Bank counterparty that faces a full 27% downside from current levels. It appears as if no one suspects a clue. It also contains much, much more (including at least 3 to 5 suspect banks). We can break this apart a la carte, if requested.

As excerpted:

Susceptible Bank 1: Financial Modeling

 

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Deutsche Bank is going to need some money, and it's going to need some quite soon. The next two or three articles that I write will focus on why there is such a need. In a concerted effort to reduce or potentially eliminated the risk of taxpayer-funded bailouts of European banks, the EU implemented a new “bail-in” regime beginning on January 1, 2016. As such, new rules require banks and certain systemically significant market participants in EU member states to write-down, cancel, convert into equity or otherwise modify certain unsecured liabilities if such steps are required to recapitalize the institution. What are the most bountiful unsecured liabilities of a bank?

Screenshot 20160922-081728-picsay

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Deutsche Bank is trading at 1/4 its book value. Book value is the measure that the street uses to value banks. Unfortunately, boo value is meaningless for banks today, who's books are no longer marked to market, distorted by negative interest rates and transformed by Harry Potter style accounting. It appears as if the market is not going for it. We, at Veritaseum, never did! Here's an example of why oen should heavily discount DB's book value number. Mortgages are one of the, if not the, biggest loan buckets on DB's balance sheet. Five percent of those mortgages are underwater (guaranteed losses). Seventeen percent are over 70% loan-to-value ration. Well, you may be saying to yourself "That's not bank run material".

The German housing market is on an absolute tear. One could be tempted to say its a bubble, but the German economy is the strongest in all of Europe, right? It's the engine that powers the EU, right? Well, German home prices have handily outgrown, and continue to do so, German wage growth - by a very wide margin. So, if real wages aren't powering these fantastic price gains, then what is???

Geran rates

IF the ECB fails to perfectly juggle all of those negative interest rate balls simultaneously (unlikely) then DB will have a hell of a Bear Stearns/Lehman-like problem on its hands, as housing prices crash and DB's mortgage portfolio goes from 5% underwater (likely quite understated) to something like 30-40% underwater. There goes bank equity and here come bank bail-ins!

The info below is taken from our DB subscription research (see Derivative Risk Exposure of Major Banks to Deutsche Bank). Those who are truly interest in this should purchase our DB counterparty research to see who we feel is the most profitable potential short in the sector. It can be found here -European Bank Contagion Assessment, Forensic Analysis & Valuation. We can break out the short only research for $500 fi you don't want to subscribe to the entire series.

DB mortgage problem

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Americans are trained to know and to cherish the ideals of democracy and to believe in the American Dream which teaches most Americans that equal opportunity is here for all and that the chances for success for anyone lie within him/herself. None of us are taught to know and understand the American status system which is an important part of our American Dream and often makes the success story a brilliant reality. We all are trained in school to understand democratic ideals and principles and to believe in their fullest expression in American life, but we only learn by hard experience, often damaging to us, that some of the things we learned in early life exist only in our political ideals and are rarely found in the real world. We never learn these things in school, and no teacher teaches us the hard facts of our social-class system, and by extension, our capitalist class system.

We posit that one should study the basic facts of our status system and learn them through systematic, explicit training which will teach at least the adult student much of what he/she needs to know about our status order, how it operates, how he/she fits into the system, and what he/she should do to improve their position or make their present one more tolerable.

The primary drivers of social class mobility (i.e. Less stringent socio-economic stratification) are knowledge and access. Barriers to each of these is what drives socio-economic stratification and stifles social class mobility. For the extreme minority on the top of the socio-economic ladder, it is in their best interest to stifle mobility as much as possible, for mobility only represents:

  1. 1) Downward movement for them, or
  2. 2) Upward movement for those below them.

Any which way one can look at it, mobility, at best, represents displacement and lesser access, less capital, less relative status.

For those who are not members of the very top minority, socio-economic mobility usually means brighter outlooks – as long as said mobility is upward-facing (remember, mobility can be in both directions). As a matter of fact,

The primary products of Veritaseum are knowledge (through our interactively delivered research and opinion) …the lower you move down the socio-economic hierarchy, the more critical and leveraged the shift in socio-economic status becomes.... And access (through our patent-pending blockchain technologies) …

We are, in essence, the socio-economic mobility vendors.

Click here to access the Veritaseum Socioeconomic (Social Class) model... 

This model congeals basic materials about social class in America, identifies the multiple levels, and makes apparent the categories that can facilitate the movement from lower levels to higher ones, and vice versa. Its fundamental goals are to tell the reader (1) how to identify any class level, and (2) how to find the class level of any individual.

Social class enters into almost every aspect of our lives, into marriage, family, business, government, work, and play. It is an important determinant of personality development and is a factor in the kind of skills, abilities, and intelligence an individual uses to solve his problems. Knowledge of what it is and how it works is necessary in working with school records and the files of personnel offices of business and industry. What a woman buys to furnish her house and clothe her family is highly controlled by her social-class values. Keeping up with the Joneses and proving "I'm just as good as anybody else," although fit subjects for the wit of cartoonists because these slogans touch the self-regard of all Americans, are grim expressions of the serious life of most American families. The house they live in, the neighborhood they choose to live in, and the friends they invite to their home, consciously, or more often unconsciously, demonstrate that class values help determine what things we select and what people we choose as our associates.

This model provides a ready and easy means for anyone to equip him or herself with the basic knowledge of socio-economic class so that they can use this type of analysis whenever such factors are important in helping them to know a situation and adjust to it. I have used the model to help predict behavior in the investment real estate market, particularly the residential market in the NYC area where gentrification was rampant. It is now even more apropos, given the significant asset deflation, constriction and selective re-expansion of credit, and considerable shifting of wealth and resources within the US and worldwide.

The businesses of those who make, sell, and advertise merchandise as diverse as houses and women's garments, magazines and motion pictures, or, for that matter, all other mass products and media of communication, are forever at the mercy of the status evaluations of their customers, for their products are not only items of utility for those who buy but powerful symbols of status and social class. This model, and the more detailed and sophisticated one that shall follow, can greatly aid them in measuring and understanding the human beings who make up their markets. Note: This model has been geared towards the NYC Metropolitan area, hence may need to be fine-tuned for dissimilar rural, suburban or non-US areas.

The model has been built upon a modified version of the Index of Status Characteristics (I.S.C.).

 

Social Mobility

 Social class is defined (on this blog) as the amount of control one has over one's socio-economic environment. It is much more than money, although money is a large component. For instance, Barack Obama is in a higher class than Robert DeNiro or Michael Jackson, although Robert DeNiro and Jay-Z are most likely wealthier. Obama's higher class stems from his ability to exert more control over his socio-economic environment. The factors that this author uses to determine class combine (with the associated weights) to create a "socioeconomic index":

Socioeconomic Index=

(Occupation X 12) + (Income source X12) + (Income X 7) + (Wealth X 14) +

(Education X 7) + (Dwelling area X 15) + (Class Consciousness X 7) +

(Housing X 12)

As you can see, wealth is the largest contributor to the class standing, and coincidentally it is the factor that is the most at risk in this current economic climate. I believe that there will be a significant entry into the upper middle class by those who were once firmly entrenched into the upper classes! While that may not seem like a big deal to many, it is damn big deal to those who are moving down the ladder. This also means, that there will be some space for others to move (relatively speaking) up the ladder. One man's (or woman's) misfortune is another's opportunity. I believe this blog can not only be used to insure and proof against downward mobility for those in the upper strata, but can also be used by those in the lower, middle and lower upper strata to rise upward a notch or even two. Social Mobility is the name of the game in times of severe dislocation - times like we will ikely be experiencing soon.

Lower Strata

Underclass/Poor

 
 

Working Poor

 

Middle Strata

Lower Middle Class

 
 

Upper Middle Class

 

Upper Strata

Lower Upper Class

<-- 20% to 30% of Veritaseum users are here, roughly 1,000 of you! We would like to diversify and smooth this out...

 

Higher Upper Class

 

  Now, in term of wealth (not social class and influence, just wealth) we can split the upper strata into three different categories (there are only two above because of the other factors that come into play when social class or socioeconomic standing is taken into consideration). There is the poor wealthy, those guys and girls that are just a hair's breath from being pulled into the upper middle class strata due to marginal wealth. This would be the $1m to $10m net worth crowd, who rely on business profits, salary and investment returns for income. The next would be the middle strata of the wealthy, hailing between $10 t0 $100 million in Net Worth, and then there is the upper strata wealthy at above $100 million. Each of these three strata of wealth represent, in my opinion, distinct behavior tranches in terms of discretionary expenditures, investment, and politics and (what passes as, this is a story for another post) philanthropic activities.  

 

Demographic

Source of wealth

Net Worth

Lower strata wealthy (High net worth)

Service professionals, corporate executives, entrepreneurs, inheritors

Salaries, stock options, restricted stock, small business profits, investment returns

$1 m to $10 m

Middle strata wealthy (Very High Net Worth)

Corporate executives, entrepreneurs, inheritors

Business ownership, investment returns, salaries, restricted stock, stock options

$10 m to $100 m

Upper strata  (the truly Rich!)

Entrepreneurs, inheritors, very few CEOs

Business ownership, investment returns

$100 m to several $billion

A trip to practically any decent sized yacht club or recreational vehicle port reveals the relatively stark differences in discretionary spending behavior. The first strata can be found in the 36 ft. to 68 ft. yacht docks (where a captain is optional, but not mandatory and you really don't need a crew). The second strata can be found 50 ft to 120 ft docks, where captains, crews and semi-custom fiberglass boats abound. The third strata are almost exclusively in the super yacht category, where the carrying cost alone for these (basically waste of money) fully custom built hulls and vehicles are about million a year to start with. You can also see the other social economic strata as well, upper middle class in the 20 to 35 ft boats, the middle and working class in the considerably smaller fishing boats - as opposed to the ultra fast Viking and Hatteras deep sea fishers, etc. It is an interesting and instructional study in social studies and anthropology just walking along your local docks! Once you are aware of how these things break down, you will see many settings in a different light.

Many of those in the higher strata would not be there if they had to compete on a more level playing ground. Alas, elimination of said level playing ground is a goal of those in the upper strata. The problem with that is that such behavior is good for the individual in the upper strata, but bad for society in general for it prevents efficient utilization of human capital. Basically, the best people don't get to do the most things, because they are blocked by those of lesser capability but greater access - access to infrastructure and access to knowledge.

Enter Veritaseum. Our business is to supply said access. We offer knowledge...

Access our knowledge through our proprietary research, analysis and education courses.

We offer access to infrastructure through our gateways to the peer-to-peer capital markets...

If one purchases our research (anything besides the introductory course) we will offer a 5x gold smart contract as a perk. Basically, we will give you a 5% rebate in the form of a Veritaseum smart contract that pays you the price of gold (or a gold index), levered 5x up to a stated maximum. This is a perfect way to both learn and get introduced into the new P2P capital markets and smart contracts.

 

 

 

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Following up on "What Happens to Banks When the Real Funding Rate Appears?", we will take a look at could happen to Deustche Bank when LIBOR does this...

... and depositors realize Deutsche Bank as Ground Zero?, thus contemplate Deustche Bank and the Anatomy Of A European Bank Run: Look at the Situation BEFORE The Run Occurs, from which they may learn this...

... and this...

... consequently doing this...

As explained in "What Happens to Banks When the Real Funding Rate Appears?", bank funding and derivative benchmark costs are going up. In the past, banks have manipulated these numbers to increase their perception of creditworthiness and to synthesize profits from their derivative positions. Reference Wikipedia's description of the LIBOR scandal:

WSJ Libor study

Libor manipulation to lower rate

Hi Guys, We got a big position in 3m libor for the next 3 days. Can we please keep the lib or fixing at 5.39 for the next few days. It would really help. We do not want it to fix any higher than that. Tks a lot.

Barclays Bank trader in New York to submitter,
13 September 2006[25]

On 16 April 2008, The Wall Street Journal released a controversial article, and later study, suggesting that some banks might have understated borrowing costs they reported for the Libor during the 2008 credit crunch that may have misled others about the financial position of these banks.[26][27] In response, the BBA claimed that the Libor continued to be reliable even in times of financial crisis. Other authorities contradicted The Wall Street Journal article saying there was no evidence of manipulation. In its March 2008 Quarterly Review, the Bank for International Settlements stated that "available data do not support the hypothesis that contributor banks manipulated their quotes to profit from positions based on fixings."[28] Further, in October 2008, the International Monetary Fund published its regular Global Financial Stability Review which also found that "Although the integrity of the U.S. dollar Libor-fixing process has been questioned by some market participants and the financial press, it appears that U.S. dollar Libor remains an accurate measure of a typical creditworthy bank's marginal cost of unsecured U.S. dollar term funding."[29]

A study by economists, Snider and Youle, in April 2010, however, corroborated the results of the earlierWall Street Journal study that the Libor submissions by some member banks were being understated.[30]Unlike the earlier study, Snider and Youle suggested that the reason for understatement by member banks was not that the banks were trying to appear strong, especially during the financial crisis period of 2007 to 2008, but rather that the banks sought to make substantial profits on their large Libor interest-linked portfolios.[31] For example, in the first quarter of 2009,Citigroup had interest rate swaps of notional value of $14.2 trillion, Bank of America had interest rate swaps of notional value of $49.7 trillion and JPMorgan Chase had interest rate swaps of notional value of $49.3 trillion.[32] Given the large notional values, a small unhedged exposure to the Libor could generate large incentives to alter the overall Libor. In the first quarter of 2009, Citigroup for example reported that it would make that quarter $936 million in net interest revenue if interest rates would fall by .25 percentage points a quarter, and $1,935 million if they were to fall by 1 percentage point instantaneously.[33]

Central banks aware of Libor flaws

The Governor of the Bank of EnglandMervyn King, by the end of 2008, described the Libor to the UK Parliament saying "It is in many ways the rate at which banks do not lend to each other, ...it is not a rate at which anyone is actually borrowing."[34][35]

The New York Federal Reserve chose to take no action against them at that time.[36][37] Minutes by the Bank of England similarly indicated that the bank and its deputy governor Paul Tucker were also aware as early as November 2007 of industry concerns that the Libor rate was being under-reported.[38][39] In one 2008 document, a Barclays employee told a New York Fed analyst, "We know that we're not posting an honest Libor, and yet we are doing it, because if we didn't do it, it draws unwanted attention on ourselves."[37]

The documents show that in early 2008, a memo written by then New York Fed President Tim Geithner to Bank of England chief Mervyn King looked into ways to "fix" Libor.[40][41] While the released memos suggest that the New York Fed helped to identify problems related to Libor and press the relevant authorities in the UK to reform, there is no documentation that shows any evidence that Geithner's recommendations were acted upon or that the Fed tried to make sure that they were. In October 2008, several months after Geithner's memo to King, a Barclays employee told a New York Fed representative that Libor rates were still "absolute rubbish."[37]

Alas, as you see in the first graphic of this article, LiBOR is going up, and it's going up for real this time. Banks are paying practically nothing to depositors who are now forced to take the brunt of the risk that banks entail, while others taking the exact same risks are offered considerably higer rewards and payouts. We're talking the EU bail-in laws that put unsecured creditors on equal footing - that includes depositors. So, using our favorite healthy bank, DB, how would this play out of the smarter of our constituency decided to either be properly compensated for this risk or opted not to take it at all?

DB balance sheet liquidity

Assets with maturity within 1 year or less held the major part of total financial assets of Deutsche bank. In 2014 & in 2015 it constituted more than 75% of total financial assets of Deutsche Bank. And assets on demand comprises more than 60% of total financial assets of Deutsche Bank.

The total financial assets of Deutsche bank decreased by almost 90 billion euros from 2014 to 2015. Deutsche Bank’s financial assets designated at fair value through profit & loss reduced by almost 122 billion euros during the same period. Deutsche Bank’s Derivative assets also reduced by almost 115 billion euros.

Among the total financial liabilities, on demand liabilities constituted almost 70% in both 2014 and 2015. And liabilities with maturity within 1 year or less comprises more than 90% of total liabilities.

Deutsche Bank’s total financial liabilities increased by almost 75 billion euros from 2014 to 2015. Out of the total on demand liabilities dues to bank and customers both increased by almost 50 billion euros in aggregate during this period. Financial liabilities designated at fair value through profit & loss also increased from 2.6 billion euros in 2014 to 18.42 billion euros in 2015. This increase was mostly driven by increase of 16.2 billion euros in securities sold by Deutsche bank under repurchasing agreement.

There's an imablance of about 3.5:1 of truly liquid, stable liabilities to truly liquid, stable assets. This means, if depositors really started withdrawing overnight and on demand deposits from DB, DB goes bye-bye! Why would this happen? Ask the ECB, the Fed and their Z/NIRP propensities.

banks charging for deposits

I'll close out with a video from everone's favorite old school investor, Warren Buffet.

We have posted a deep dive analysis of:

Subscribers to any of the advanced research get a Veritaseum-powered Deutsche Bank Short token. It will be funded with a nominal amount of BTC and will represent the short side of a Deutsche Bank bearish smart contract. The token will go up in value as DB goes down in value, and vice versa. We will offer you this token (as well as the Veritaseum client to observe it's movement in value) free of charge. This is an innovative way of showcasing the power and flexibility of the Veritaseum platform. Subscribe to our research to get started. Supply and configurations are limited (since we're paying for everything, there's no financial risk to the contracct recipient that we can think of).

VE DB short 2x leverage

Wednesday, 14 September 2016 17:32

What Happens to Banks When the Real Funding Rate Appears? Featured

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During the financial crisis of 2008, money market funds who subjectively agreed to hold their NAV (net asset value) unit prices at $1 “broke the buck”. That is, the unit of share of the fund fell below $1 (the $62.5 billion Reserve Fund, to be specific, one of only two funds to “break the buck”), which was a significant problem for the investors who used (and considered) said money market funds as cash in the bank. All of a sudden, everyone’s cash account at the Reserve Fund just dipped in value. Uh Oh! This caused short term credit to literally freeze, worldwide, because others were concerned that their bank-like security and liquidity was no longer that secure nor liquid.

Regulators stepped in to make sure this didn’t happen again by demanding that all money funds who do not invest in sovereign securities (those entities who “should” be able to print their own monies, but we’ll get into that in a later post) allow their NAV to freely float with market prices.

The result? Money flew out of prime money funds into perceived safer vehicles.

Demand for government short term paper has increased (to the tune of hundreds of billion of dollars).

 

... and demand for private commercial paper, ie. banks, have dropped by a similar amount, materially driving costs - materially, as in doubling it!

What does this mean?

No, this is not a punishment. This is actually a good thing, for it forces money to have an appropriately derived price tag attached to it. Risky banks were being funded at the same risk rate as (less risky) sovereign governments. That didn’t make sense. Now the system makes more sense, and banks should be repriced according to their access to, and true cost of, capital. The true cost of capital means that banks can no longer hide behind fake LIBOR quotes to conceal their deteriorating credit metrics. Reference Wikipedia:

The Libor scandal was a series of fraudulent actions connected to the Libor (London Interbank Offered Rate) and also the resulting investigation and reaction. The Libor is an average interest rate calculated through submissions of interest rates by major banks across the world. The scandal arose when it was discovered that banks were falsely inflating or deflating their rates so as to profit from trades, or to give the impression that they were more creditworthy than they were.[3] Libor underpins approximately $350 trillion in derivatives. It is currently administered by NYSE Euronext, which took over running the Libor in January 2014.[4]

Look at what happened to LIBOR consistently after NYSE Euronext took over adminstration. Those spikes that you see previous to that takeover stem from the European sovereign debt crisis. Those numbers had been faked! No telling what the true level of stress really was. Well, this time around we may get to find out. To put this into perspective, the global money market industry is $2.6 trillion in assets. Deutsche Bank’s (a bank that is in trouble) balance sheet is almost $2 trillion dollars. JP Morgan’s balance sheet is $2.4 trillion dollars. Both of these banks have been shrinking their balance sheets.

As excerpted from Bloomberg:

With a seismic overhaul of the $2.6 trillion money-market industry weeks away from kicking in, money managers are bracing for a last-minute exodus of as much as $300 billion from funds in regulators’ cross hairs.

Prime funds, which seek higher yields by buying securities like commercial paper, are at the center of the upheaval. Their assets have already plunged by almost $700 billion since the start of 2015, to $789 billion, Investment Company Institute data show. The outflow has rippled across financial markets, shattering demand for banks’ and other companies’ short-term debt and raising their funding costs.

Interestingly enough, and as is par for the course, we see things differently from the Street, as also excerpted:

Financial firms paying higher rates to attract investors to their IOUs will push three-month Libor to about 0.95 percent by the end of September, according to JPMorgan Chase & Co.

Click here to read more about rising Libor rates.

Although bank funding costs are rising, it isn’t a signal of financial strain as in 2008, said Jerome Schneider, head of short-term portfolio management at Newport Beach, California-based Pacific Investment Management Co., which oversees about $1.5 trillion.

“This is not a credit stress event, it’s a credit repricing due to systemic and structural changes,” he said.

He’s right. It’s not a credit stress event… yet! But, the credit repricing will force a reality and discipline on an industry accustomed to near zero and negative interest rates that it is ill-fitted to handle, and thus in due time, it will likely provide at least a partial impetus for… “a credit stress event”.

NiM (net interest margin - the profit from actual old school banking businesses, ie. lending) is still quite sparse in banks. So, revenue is slim, but expenses to access said capital to conduct business are going up. That's never a good sign. Worse yet, the Fed has signalled it will, yet again, hold off on an interest rate increase - As I have been telling you since December of 2014.

The issue is, the Fed does not truly control the market, it simply manipulates it to the best of its ability. When it's ready, the market will raise rates on its own. Reference where short term rates are trending now, likely as reflection of the Fed not raising rates.

This is particularly true for the European banks...

Our next post will describe how well Deutsche Bank is prepared for such an event. Stay tuned, and if you have not already done so, subscribe to our long/short, macro and educational research (including blockchain tech) - see Corporate Valuation & Equity Research.

We have a brand new DB report out today, reference Derivative Risk Exposure of Major Banks to Deutsche Bank.

Tuesday, 13 September 2016 12:14

These Handsets are Hot! Featured

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Samsung's Note 7 release has turned out to be an absolute fiasco. The latest incident is a Note 7 alleged to have exploded and set a Jeep on fire.

Nathan Dornacher claims the Galaxy Note 7 caused the fire

This looks and sounds bad, and apparently has (or will) cost the company billions in recall expenses, reparations and replacements. Reputation risk is no small deal either. Let's face it, this looks very bad. It feels bad for investors as well, with billions of dollars of market cap disappearing. As bad as it may look, keep in mind the media is giving a less then comprehensive view of the situation. I have found roughly 35 to 40 incidences of burning or exploding Notes. If one were to divide that by the approximate amount of Note 7s sold (2.5 million), it would be roughly .0000148, or just over a thousandth of a percent. The number is not even great enough to determine that there is a problem with the Note 7 in particular. Alas, due to the social and mainstream media exposure, it has not choice but to recall. The FAA has banned use on airplanes (despite the fact you'd have similar odds of the airplane itself crashing).   

Now, I'm sure many of you may disagree with my statisctical view of the situation, but if I'm wrong then iPhones are a risk that need to be recalled as well. I

've found just as many (possibly more) cases of iPhones catching aflame and exploding than that of the Note 7 with just a cursory search.

Untitled

The major difference between the Note 7 incidences and the iPhone incidences is that people were serverely injured in many of the iPhone occurences and Apple has (at least according to my cursory research) done very little to remedy this as compared to Samsungs respones. I would chalk this up to the Note 7 incidences getting much more exposure than the iPhone incidences. 

Short Samsung long LG Veritaseum contract
 
A damaged iPhone that caught fire and burned through a man's jeans after it was bent in an accident.A damaged iPhone that caught fire and burned through a man's jeans after it was bent in an accident.

EDMONTON — Twice in the last week, an Alberta family has been forced to flee for their lives after a charging cell phone burst into flames, part of a rare worldwide phenomenon in which smartphones occasionally transform into tiny Presto logs. In Rimbey, Alta., 16-year-old Josh Schultz woke up surrounded by flames after his iPhone combusted in the middle of the night. The family managed to get the blaze under control, but not before Schulz had suffered third-degree burns, and the house had been rendered temporarily uninhabitable.Three days later, an Edmonton fourplex was evacuated in the wee hours of the morning after a charging cell phone began shooting out flames.

She said his iPhone unexpectedly began to smoke and melt, causing first- and second-degree burns. NewsChannel 5 on Your Side has been following cases of exploding smart phones for months. While it's happened across the country, this is one of the first documented cases that's occurred in the St. Louis area. "We were panicking and freaking out. I'm like 'Oh my god, my son is on fire!'" said Michelle Terry of St. Peters.

If you do a search, you can find dozens more, particularly surrounding the iPhone 6/6s series. It remans to be seen if Apple will get the negative publcity backlash that Samsung has recieved, but for some reason I doubt so. The Samsung affair was a strong opportunity to short the stock/ADR. If you missed that, we can wait around to see if the company that avoided the mistakes that Apple made and that Samsung unwisely followed. What mistake is that, do you ask? They both opted to seal in their potentially highly reacgive Lithium batteries, case of form over function. Apple should have been able to take advantage of Samsung's problems, but the iPhone 7 is just so far behind the Note 7 in terms of capability, they simple stand very, very little chance. As a matter of fact, sans a recall it's quite likely that the Galaxy Note 7 would have trumped the iPhone 7 Plus.

Very recently, a compettor of both has announced a flagship device that likely puts the iPhone 7 plus to shame and gives the Note 7 a good run for its money. That company is LG.... and guess what? It has a removable battery and an all metal, aviation grade body. A removable battery design would have saved Samsung over $1.7B, since they could have sent out new batteries in instead of recalling all devices.
Even Apple afficiandos are underwhelmed by the progress of Apple tech relative to Samsung's. While most have said the Note 7 is the best thint since sliced bread, not having it doesn't do anyone any good, and then there's that exploding thing.
LG has come up with just the right device at just the right time. According to one reviewer
Similar to previous LG phones, the more I use it, the more I like it. Also, the longer I use the LG V20 with the Note 7 now returned to T-Mobile, the possibility that I go for the V20 rather than the Note 7 increases as well.
Another reviewer detailed what makes this device ideal for a growing minority, yet influential section, or the smart phone population - the media producers (in contrast to consumers):

Made for Multimedia

Unlike the G5 and its modular system of third-party hardware add-ons, the LG V20 comes with a built-in quad-DAC made by ESS. LG reps made a swipe at the disappearing headphone jacks on some competitors—like Apple’s rumored iPhone 7 and Motorola’s Moto Z saying that the DAC can be used with high-end headphones to enjoy higher fidelity music. ESS reps in San Francisco informed me that the DAC on the V20 supplies enough power to power high-end headphones that traditionally would require an additional power source. When you load the V20 with uncompressed audio files, plugging a pair of headphones into the smartphone will give you a more high fidelity listening experience with the built-in DAC. For comparison, the modular DAC on LG’s G5 costs roughly $199, but the accessory isn’t even available for sale to date for US customers.

LG also said during its keynote that for a limited time, the V20 will ship with earbuds from Bang & Olufsen.

Better Audio Production

Screen Shot 2016-09-07 at 12.12.34 AM.png

The V20 comes with three high fidelity microphones, which LG claims will record better sounding audio files and better videos. The microphones will help to reduce audio clipping in noisy environments, LG said during its presentation. This means that you can capture clip-free audio from concerts with studio quality-like recordings, according to an LG spokesperson. LG also included its Hi-Fi Audio capture app to allow you better control of your audio recording with more fine-tuned settings.

Below is a Veritaseum Smart Cotnract allowing you to swap Samsung equity exposure (on the Korea Stock Exchange) for LG equity (KS) at 3x leverage (using a digital multiplier). No broker, risk or legacy stock exchange needed. No counterparty or credit risk to deal with.

Short Samsung long LG Veritaseum contract

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