Is This Crisis Like Lehman Brothers on Steroids?
Deutsche Bank is blood in the water… and the sharks smell it.
Yesterday, Bloomberg reported that major hedge funds were reducing their exposure to the German banking behemoth. The smart money is headed for the exits.
That caused the bank’s U.S.-listed shares to hit a new all-time low of $11.27 yesterday. The stock closed down nearly 7% for the day.
And that’s just the most recent bad news for Deutsche…
Earlier this week, Chancellor Angela Merkel said that Germany wasn’t going to bail it out.
That’s on top of $14 billion fine recently imposed by the U.S. Justice Department that the bank can’t afford to pay. Its current market capitalization is just $16.8 billion.
This torrent of negativity has the talking heads warning that Deutsche Bank is careening toward bankruptcy, bringing back memories of Lehman Bros. in 2008.
But it’s more than that…
Leveraged to the Hilt:
What investors are finally realizing is that Deutsche Bank is insolvent, something I told my Trend Following subscribers back in July.
Deutsche has astounding leverage of 40 times. Leverage is the proportion of debts that a bank has compared with its equity/capital. That means Deutsche has 40 times more debt than equity/ capital.
Remember, Lehman Bros. was only 31 times leveraged when it imploded in 2008.
The huge concern for investors right now is whether the bank can make enough profit to start overcoming its liabilities.
But it’s trapped in a low-growth economic environment. And it’s being choked to death by the European Central Bank’s negative interest rate policy (NIRP).
Because of NIRP, EU banks like Deutsche Bank effectively have to pay the central bank to hold cash on their balance sheets. At the same time, they can’t charge high rates on the loans they make. As a result, they’re getting squeezed on net interest margins, which decimates profits.
Plus, Deutsche has more than $72 trillion of risky derivatives exposure. Derivatives are the complex financial instruments that cratered the global economy in 2008.