Monday, 17 June 2019

A Analysis

Thursday, 25 August 2016 15:01

How Deutsche Bank Can Destroy Europe

How can Deutsche Bank destroy the EU? Capital fight and extreme, involuntary deleveraging. DB is closing nearly 200 German bank branches. Not a big deal, right? German bank's depositor base is 111% of German GDP. A run on German banks is literally a run on the German economy - the largest economy in Europe...

fredgraph 1

...not to mention a major (the major) funding source for DB's massive derivative positions.  

Current news events don't portend a positive outcome for Germany's largest bank either. Bloomberg reports: NordLB Boosts Shipping Provisions Five-Fold, Warns of High Loss

Norddeutsche Landesbank boosted provisions for bad loans nearly fivefold to 1 billion euros ($1.1 billion), as Germany’s biggest shipping lender prepares for its first full-year loss since 2009.

NordLB, controlled by the state of Lower Saxony, posted a loss of 406 million euros in the first half as it battles a prolonged slump in maritime markets, including eight years of crisis in the container segment. That compares with a profit of 290 million euros in the same period last year.

“The shipping crisis, which further intensified in the first half of the year, has necessitated impairments that were higher than planned,” Chief Executive Officer Gunter Dunkel said in a statement. The bank lowered its outlook for the year, now anticipating a “significant” loss. It had projected a “negative result” in the spring.

... NordLB’s pessimistic view highlights risks at other German banks, which hold roughly one-quarter of the about 400 billion euros in global shipping loans. Under pressure to unwind sour legacy maritime assets, banks including HSH Nordbank AG and Commerzbank AG are also trying to shrink their loan books.

 What does this have to do with Deutsche Bank? A lot! Because everybody wants to sell these assets that aren't considered very desirable, and all at the same time, we've made a bad situation worse - precisely when DB can't afford it.DB mass selling bad shiping loans

Then there's the issue of DB's somewhat questionable assumptions and characteristics in its financial reporting. Deutsche Bank addendums are quoted as saying:

"The credit risk on the securities purchased under resale agreements and securities borrowed designated under the fair value option is mitigated by the holding of collateral. The valuation of these instruments takes into account the credit enhancement in the form of the collateral received. As such there is no material movement during the year or cumulatively due to movements in counterparty credit risk on these instruments."

What???!!! So, the value of collateral doesn't move now? On planet Earth, not only does the value of collateral move, it tends to move in the exact same direction as the value of the loan, borrowing or underlying, often at an exaggerated pace in the beginning (it's markets are the first to know of turmoil). Reference my podcast interview with Max Keiser at the 2:40 marker. Want some more? Read this page from our EU banking report a couple of quarters ago...

For those who don't believe me, I made this call in early 2008 - twice. Once for Bear Stearns (Is this the Breaking of the Bear?) and once for Lehman Brothers (Is Lehman really a lemming in disguise? Thursday, February 21st, 2008 | Web chatter on Lehman Brothers Sunday, March 16th, 2008). Was I right? Of course, that was then and this is now, so the banks are better prepared, right? Of course. The graphic below was taken from our Banco Popular report (click here for more info), not from 8 years ago, but from a quarter ago - yes, 2016! Hey, there's more...

Banco Popular Research teaser3

Now, just imagine that Italy's Banco Popular is the entity that DB used to hedge it's exposure, and Banco Popular (obviously) can't pay up on every(any?)thing. DB's gross exposure become's DB's net exposure as DB's notion value and market value converge near instantaneously if (or when) market shoots off in one direction (you can likely guess what direction that would be for stakeholders, and this time around that includes depositors and bondholders, not just shareholders).

What does this all mean?  Well, we went through this in explicit detail and have identified no less than 6 (and we're still actively looking) financial institutions that may have passed the EBA stress tests, but have miserably failed our examination - and that's without adding in the bank contagion factor!

To partake in this knowledge, join Veritaseum University and purchase the interactive research asset called "European Bank Contagion Assessment, Forensic Analysis & Valuation".

An Op-Ed piece penned by Veritaseum Chief Contracts Officer, Matt Bogosian

This past weekend (despite American Airlines' best efforts), Reggie and I made it to the Second Annual North American Bitcoin Conference in Chicago. While there were some very creative (and very ambitious) ideas on how to try to realize the disruptive Bitcoin protocol, one of the predominant topics of discussion was New York Superintendent of Financial Services Benjamin Lawsky's proposed Bitcoin regulations (the BitLicense proposal) - percieved by many participants at the event as an apparent attempt to regulate Bitcoin out of existence.

Even assuming that the entities sought to be regulated under the (seemingly draconian) BitLicens[ing] proposal qualify as "financial services institutions" (which I think is tenuous and highly debatable), to say that the proposal is in violation of New York's statutory mandate, "[t]o encourage, promote and assist ... other financial services institutions to effectively and productively locate, operate, employ, grow, remain, and expand in New York state ... [and] ... [t]o establish a modern system of regulation, rule making and adjudication that is responsive ... to the needs of the state's consumers and residents," (NY Fin. Svcs. Law, § 102(a)emphasis mine), is not only an understatement, it's probably totally irrelevant. Courts typically (and perhaps frustratingly) don't second guess legislators and regulators on whether their laws have any correlation to any stated goals, even if those laws have the exact opposite effect of what was alleged as intended. Instead, courts leave that to the voters, effectively saying, "If you don't like the law, change the legislator," and we all know how effective that is.

In other words, Orwell was (and still is) right. The stated purpose of BitLicenses is not corollary to the apparent purpose, which is to maintain the status quo. The status quo doesn't contemplate disruptive innovations like the blockchain. Unless and until a higher authority intervenes ("higher authority" perhaps referring to you, the consituent, or the particularly the avid and concerned social media user), Lawsky's proposal, if achieved, will quite likely end (or at least drive underground) the most significant economic and technological breakthrough known to this century, not only in New York, but very likely the United States.

Imagine if Lawsky had been Superintendent in 1994. Imagine that (for whatever reason) Lawsky felt compelled to frustrate the dissemination of another set of disruptive innovations known as the Internet Protocols.

 

World Wide Web timeline

By analogy, imagine that he proposed a regulatory scheme known as "PacketLicense", wherein anyone routing IP packets that arrived at or passed through devices located in or belonging to residents of New York had to acquire a PacketLicense (unless they were a New York bank, or a retailer incorporated in New York), which (in small part) involved fingerprinting everyone employed by the owner of the device, or any affiliate of that owner. In retrospect, we would laugh at its absurdity, and likely recoil in horror imagining the economic Armageddon such a regulation would cause.

World Wide Web timeline as per Lasskeys Vision

But that is precisely what Lawsky is trying to do with the blockchain. Others have provided extensive treatment on various parts of the proposal. Over my next few posts, I will add my voice to that chorus by providing detailed analysis (and possible fixes) for some of the requirements that I find particularly bothersome. Stay tuned.

In the meantime, if you don't want the natural evolution of the Internet to look like the graphic above, I strongly urge you to voice your own opinions to Superintendent Lassky.

My Twitter Updates

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ReggieMiddleton RT @joshthedavid: How France keeps a grip on Africa. This is why @ReggieMiddleton is important. https://t.co/UhzVcFxfdK
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ReggieMiddleton @kai_trading That is basically what we are doing now. The model has evolved over time, but still remains true. Tokenization of everything!
Friday, 31 May 2019 15:00

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