A reader of this blog wrote to me suggesting that I was being too harsh on Deutsche Bank, in implying that the bank was woefully undercapitalized. After all, unlike Commerzbank, DB has not asked the German government for any bailout funds. DB CEO Josef Ackermann continues to tell investors that he will achieve a 25% return on equity. So what's the problem?
A better question to ask is: what distinguishes DB from other Zombie Banks such as Bank of America and Citibank? Very little, it turns out. By any measure, DB's capital ratio is woefully inadequate to cover loan losses. It's leverage is at least twice that of its Zombie sister, BofA. Of course, with €2 trillion in liabilities (80% of the overall size of the German economy) the bank is too big to fail) but at the same time poses a huge risk:
Eigenkapital von lediglich 35 Milliarden Euro und damit einer
Eigenkapitalquote von unter 2 %, war der Hauptprofiteur der neuen
Bilanzierungsregeln. … Doch die Probleme haben sich hiermit nicht in Luft aufgelöst. In der
Bilanz schlummern fragwürdige Wertpapiere von etwa 90 Milliarden Euro,
die nicht mit Marktpreisen, sondern zu Mondpreisen bewertet werden. Das
Institut ist fast mit dem Hebel 60 geleveraged. Noch beeindruckender
ist das außerbilanzielle Derivatevolumen des Branchenprimus. Es beträgt
das 19-fache des bundesdeutschen Bruttosozialproduktes. Damit ist die
Deutsche Bank (ebenso wie die UBS für die Schweiz) zu einem
unkalkulierbaren Risiko für die Bundesrepublik Deutschland geworden. (DB is a risk. The completely overleveraged DB, with an equity position of €35 billion and thus a capital ratio of unter 2% was the main beneficiary of the new accounting rules…. But the problems have not vanished into thin air. The balance sheet has up to €90 billion of questionable assets that have been assigned fictitious rather than market valuations. The bank is nearly leveraged 60X. Even more concerning it the volume of off-balance sheet derivatives of Germany's biggest bank. This is at 19X of Germany's GDP. In this way DB (like its Swiss counterpart UBS) an incalculable risk for the Republic of Germany,)
Adding to the concern is a new report of the IMF that European banks have written off only 17% of the projected $900 billion in loan losses projected through 2010. Some US investors holding DB preference shares have seen enough and are filing a class action lawsuit against DB
registration statement were: the company failed to properly record
provisions for credit losses, residential mortgage-backed securities,
commercial real estate loans, and exposure to monoline insurers; its
internal controls were inadequate to prevent it from improperly
recording provisions for credit losses, residential mortgage-backed
securities, commercial real estate loans, and the company's exposure to
monoline insurers; the company's internal risk management
systems were inadequate to limit the company's exposure to credit
trading, equity derivatives, and proprietary equity trading; and the
company was not as well capitalized as represented, and,
notwithstanding the billions of dollars raised in the offerings, the
company would have to raise an additional E10 billion by selling equity
in the company to the German government.
In other words, a huge government bailout of DB is still a strong possibility.
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