Deutsche Bank and the memories of Lehman Brothers

dubai - Deutsche Bank could rigger a Lehman scale catastrophe in global finance. Only, only ten times worse.

Deutsche bank's ghastly slide in the stock market (down 54 per cent in 2016, down 90 per cent since the 2007 peak) after global hedge funds pulled cash/securities from its prime brokerage unit has reawakened memories of Lehman Brothers' failure in September 2008. The US Justice Department's $14 billion fine for miss-selling mortgage backed securities on Wall Street (plus fines for money laundering in Russia, the foreign exchange and LIBOR rate manipulation scandals) has left the bank undercapitalised, even though Deutsche Bank has ?220 billion in liquidity and reserves.

This is no ordinary German bank. Its balance sheet is as big as Germany's GDP and Germany is the world's third largest economy. The IMF calls Deutsche the world's biggest contributor to systemic banking risk. Deutsche Bank has a ?46 trillion derivatives book, ten times the German GDP. This makes its potential failure an unthinkable event in international finance. The failure of "too big to fail" Lehman Brothers was also considered unthinkable - yet it happened.

Lehman's failure triggered contagion in the interbank market and led to the shutdown of every major debt capital market in the Euromarkets. The result? A global recession, a $100 free fall in the price of crude oil, electronic runs on banks, epic money printing by the Federal Reserve and other G-10 central banks, stock market crashes, property bear markets. Could Deutsche Bank trigger a Lehman scale catastrophe in global finance? Absolutely, only, only ten times worse.

It was utterly irresponsible for Chancellor Angela Merkel to rule out a potential government-financed bailout for Deutsche Bank or even any diplomatic intervention with Washington to reduce Justice's $14 billion fine. Frau Merkel's nonchalance has devastated confidence in German banks, with even Commerzbank down 10 per cent.

Deutsche Bank's market capitalisation is a mere $12 billion or even below its latest fine. Deutsche Bank's legal provision is only ?6 billion. Germany's largest bank, that financed its Wirtschaftswunder or economic reconstruction after World War Two, now trades at 34-year-lows in Frankfurt.

The price of Deutsche Bank's "contingent convertible" CoCo bonds trade at 32 per cent below par. Bank shares in France, Holland, Spain, Italy, UK and even Switzerland are in free fall. The ultimate sign of systemic panic? Investors have scrambled to buy the Swiss franc and the Treasury-Eurodollar (TED) spread, a barometer of international banking stress, has begun to widen.

As even Deutsche Bank CEO John Cryan wrote in a note to staff, trust is everything in banking. Yet the Bundesbank's failure to acknowledge its "lender of last resort" role and the ECB's eerie silence also makes no sense to me. Have Dr Draghi and the hard money zealots of the Bundesbank forgotten the banking dominos that followed the failure of the Creditanstalt in Vienna, a financial chain reaction that led to an economic deflation and the rise of Adolf Hitler?

Angela Merkel knows that the German public does not even want to discuss the idea of a government bailout ahead of the 2017 election as the xenophobic, anti-Euro AFD grabs 20 per cent of the electorates votes. International politics also plays a crucial role in Frau Merkel's refusal to intervene. After all, Germany forced Cypriot banks to seize depositor funds, imposed savage fiscal austerity on Greece and have refused to even discuss an ECB bailout of the de facto bankrupt Italian banking system.

Unlike Lehman in 2008, Deutsche Bank is not burdened with toxic billion dollar asset black holes (I hope, though Deutsche Bank failed the Federal Reserve stress tests in 2015 and 2016) and has billions in retail German deposits, not entirely dependent on fickle capital market borrowing. The real problem in Deutsche Bank is its inability to generate profits because its vast investment bank is handcuffed by Dodd Frank and the Volcker Rule while its German retail business is devastated by negative ECB interest rates and the existence of politicized Landesbanken and Sparkassen, who operate on razor thin interest rate spreads. Deutsche Bank now faces a global electronic bank run, even though its liquidity coverage ratio is far higher than Lehman. This time the wolf is here. Unmoglich!

The writer is a global equities strategist and fund manager. He can be contacted at: mateinkhalid09@gmail.com