Ultimate Black Swan: Is Deutsche Bank About To Collapse?

Needless to say, all anyone cares about on Monday is the presidential debate which has morphed into a Super Bowl-like spectacle.

It’s almost like we should have just declared a national holiday so everyone could sit around, drink beer and tailgate ahead of it. But alas, money never sleeps as they say (well, except on Labor Day when it takes a short nap in the Hamptons).

So obviously the big story today is Deutsche Bank which, frankly, looks like it might end up needing a bailout. It’s a disaster over there between legacy litigation costs, a troublesome derivatives book, and a downright horrible reputation. And that’s not us being pejorative - that’s just the fact of the matter. In fact, they put out some fantastic research, so it’d be a shame if there’s some kind of calamitous event over there, although we would also note they’ve been variously accused of just about every kind of malfeasance you can think of and it’s starting to look like the restitution may damn well break the place.

This thing is going to be in the single digits within days most likely and despite assurances from the German government, they cannot - and we mean that - let this thing fail. The counterparty fallout would be a catastrophe; and that’s not us being hyperbolic.

Here are some headlines from Hans Michelbach, a senior lawmaker in Chancellor Angela Merkel’s party bloc:

“It’s unimaginable that the German government would support Deutsche Bank AG with taxpayers’ money. It would lead to a public outcry. ”You can’t compare Deutsche Bank with Lehman. The bank is in a position to get out of this situation on its own.” German govt would lose credibility if it jumped in after “it was always said in the past that Deutsche Bank isn’t affected by the financial crisis.’

But remember, Deutsche Bank was affected by the financial crisis. In fact, it was affected well before Lehman and Bear. According to NYU Courant PhD and veritable mathematical genius Eric Ben-Artzi, Deutsche would have required a German government bailout during the crisis had it properly accounted for losses on a massive leveraged super senior book with Canadian special purpose vehicles as the counterparty.

Financial shorts rose to a seven-month high:

(Chart: Bloomberg)

“Given what’s going on with Deutsche Bank and Wells Fargo, I would expect that weakness to continue with financials as a whole. It could be a headwind to the whole market making an upside move,” Michael James, managing director of equity trading at Wedbush Securities told Bloomberg Monday.

“The spillover from Friday’s weak action, with nothing material coming from overseas other than the Deutsche Bank concerns, it’s not surprising to see the market with a weaker tone,” said James. “There isn’t a lot happening this week, so the presidential debate is likely to have a big impact tomorrow and potentially going forward.”

Well, Michael, just you wait and see what happens if Deutsche Bank collapses.

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1 Comment

  • Rodney Emrick

    September 26, 2016

    Would DB be a candidate for an in/out spread

    BUY +2 VERTICAL DB 100 18 NOV 16 12/11 PUT @.45 LMT

    or a risk twist spread for a black swan event

    SELL -1 1/-3/1 CUSTOM DB 100 16 DEC 16/16 DEC 16/16 DEC 16 11/10/9 PUT/PUT/PUT @-.45 LMT