Deutsche Bank's Precarious Dilemma:
George Soros surprised many by making a €100 million bet that Deutsche bank would collapse following the Brexit vote, and some believe that the collapse of the 147 year old bank is not a matter of 'if', but 'when'. Many experts postulate that the Brexit ‘Leave’ vote was the final nail in the coffin, writes Thomas Hughes.
After the Brexit vote Deutsche Bank shares opened 16% lower on Friday 24th, and closed 14% lower at €13.37. The share has been trading around the €14.6 mark for the month of July. These are shares that were trading around €157 at their peak 10 years ago. This means these shares have lost over 90% value in the last 10 years. This devaluation and other woes that beleaguer the bank, are the symptoms that experts are emphasizing when predicting the demise of the institution.
Litany of woes
Deutsche bank ended 2015 with a whopping €6.8 billion loss. This was swiftly followed by a series of bad events;
>May 16, 2016: Berenberg Bank announced that with its 40x leverage ratio the bank could not overcome its problems.
>June 2, 2016: The US Libor probe nets 2 ex-Deutsche Bank employees for rigging interest rates. The UK’s Financial Conduct Authority announces at least 29 Deutsche Bank employees are involved in the scandal.
>June 23, 2016: Brexit ‘Leave ’vote means Deutsche Bank could lose 19% of its revenues.
>June 29, 2016: IMF direly announces “Deutsche Bank appears to be the most important net contributor to systemic risks”.
>June 30, 2016: Deutsche Bank fails Fed stress test in US. the Fed says the bank has “poor risk management and financial planning”
Deutsche Bank’s derivative book stands at a mind boggling €52 trillion euros. What would happen if the bank were to collapse?
Lehman times five
Some experts say that the fall of Deutsche bank would be like Lehman Brothers again, only this time five times over. The fact that the bank has deleveraged €425 billion in the past year alone, is a big indicator of things to come.
The biggest worry is that Deutsche Bank is tied to many other banks in Forex and Currency swaps, and so collapse of the bank would have a rapid domino effect that would knock down at least 10 other banks. The fact that these currency swaps are further tied to sovereign debts, mainly in Greece and Italy- could have a contagion that may not become untangled. It is not unimaginable for struggling economies like Greece to collapse completely.
Gold investors will be the biggest beneficiaries of a Deutsche Bank collapse. The fact that Soros put serious money on the precious metal may be a harbinger of events to unfold. Some say gold prices could rise to $2,000/oz, and the last time these kinds of prices were seen was during the 2008/2009 economic crisis. It is not unimaginable for gold prices to soar to $3000/oz in the event of a crisis several times the magnitude that of 2008/2009.