October 10, 2016

Deutsche Bank has risk exposure of 12 times Germany's GDP

I recently wrote that ... "It's plain and simple: The major money center banks are bad actors; they have demonstrated this time and time again, learning little from The Great Decession in 2008."

The most offensive and dangerous player in the banking world is Deutsche Bank (DB). And the most offensive and dangerous investment advice is from those who are not concerned with Deutsche Bank and the potential systemic risk that the bank could deliver to the global financial system.

Avoid Deutsche Bank like the plague and avoid anyone -- and that includes our money center CEOs who were also silent on the subject of derivatives in 2007 (!) -- who tells you not to be concerned with the German financial institution.

As I wrote back in the summer, Deutsche Bank is the canary in the coal mine.

Forget the structural inability of DB's core bank to make money in a negative interest rate environment. Many other banks in Europe have the same problem.

Forget that Deutsche Bank's market cap of $18.8 billion compares to troubled Twitter's $15 billion market cap in the market cap playoffs I mentioned last weekend in Barron's.

That's the little and inconsequential stuff.

If anyone tells you to buy Deutsche Bank or that we should not be concerned about its influence on the world's banking community and the systemic risk that Deutsche holds (like an annoying drone hovering over investors) tell them this.

I cut my teeth on bank research starting when I co-authored "CITIBANK" with Ralph Nader while getting my MBA at Wharton. I proceeded to follow financial industry on Wall Street for four decades.

There is no industry that is more opaque than the banking industry. And Deutsche Banks takes the cake.

Deutsche Bank has gross notional risk exposure in its (opaque) derivative portfolio of approximately $50 trillion (yes, that is trillions of dollars) That is 12 times annual German GDP (of less than $4 trillion). In a sleight of hand in its balance sheet reporting, DB nets out cross-exposure and currently reports that it only has a bit more than $12.5 billion in net derivative exposure.

Pay particular attention to the credit default swap rates at Deutsche Bank, which have trended from about 90 basis points at yearend 2015 to almost 250 basis points currently. I suspect they will be trending higher in the months ahead.

After American International Group AIG and the banking industry delivered those toxic financial weapons of mass destruction in the mid-2000s, one would think investors would have learned.

But clearly many haven't.

And don't do Deutsche Bank!