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Deutsche Bank, 60 times Over-Leveraged and a $72 trillion Derivative Exposure

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paddle_storeWhoa, how close is Deutsche Bank to causing ABSOLUTE HAVOC in the eurozone? At a capital ratio of just under 1.68%, DB is leveraged up to 60x and with a derivative exposure of over $72.8 Trillion, I think the technical term is “they’re f**ked”.

 

Finally, if anyone is still confused where the pain is headed next, here is a list from Morgan Stanley of all Euro banks with a Core Tier 1 ratio that is so low, that the banks will soon regret not raising more capital in the period of calm that the ECB’s LTRO bought them.

Also, one bank is missing from the list above: Deutsche Bank. CT1/TA: 1.68%. Oops.

That’s right – Deutsche Bank was so bad that it wasn’t even allowed to appear on a screen of Europe’s most undercapitalized banks – and we helpfully pointed out its true capital ratio of just under 2%, and an implied leverage of 60x!

According to FDIC Vice Chairman Tom Hoenig, Deutsche Bank is horribly undercaptialized.

A top U.S. banking regulator called Deutsche Bank’s capital levels “horrible” and said it is the worst on a list of global banks based on one measurement of leverage ratios. “It’s horrible, I mean they’re horribly undercapitalized,” said Federal Deposit Insurance Corp Vice Chairman Thomas Hoenig in an interview. “They have no margin of error.”  Deutsche’s leverage ratio stood at 1.63 percent, according to Hoenig’s numbers, which are based on European IFRS accounting rules as of the end of 2012.

In other words, the slighest systemic shock in Europe and Deustche Bank gets it. And as Deutsche Bank goes, so does Germany, so does Europe, so does the world.

Immediately confirming Hoenig’s (and Zero Hedge’s) observations, was Deutsche’s prompt repeat that “all is well” and that “these numbers” are not like “those numbers.”

“To say that we are undercapitalized is inaccurate because if you look at the Basel framework, we’re now one of the best capitalized banks in the world after our capital raise,” Deutsche Bank’s Chief Financial Officer Stefan Krause told Reuters in an interview, when asked about Hoenig’s comments. “To suggest that leverage puts us in a position to be a risk to the system is incorrect,” Krause said, calling the gauge a “misleading measure” when used on its own.

Of course, DB’s lies are perfectly expected – after all it is a question of faith. So let’s go back to Hoenig who continues to be one of the few voices of reason among the “very serious people”:

Still, equity analysts said that while Deutsche Bank likely will meet regulatory capital requirements, its ratios look weak.

Hoenig pointed to the gain in Deutsche Bank shares in January on the same day it posted a big quarterly loss, because it had improved its Basel III capital ratios by cutting risk-weighted assets.”My other example with poor Deutsche Bank is that they lose $2 billion and raise their capital ratio. It’s – I don’t want to say insane, but it’s ridiculous,” Hoenig said.

A leverage ratio is a better method to show a firm’s ability to absorb sudden losses, Hoenig says, and he has floated a plan to raise the ratio to 10 percent. He said the 3 percent leverage hurdle under Basel was a “pretend number.”

Opponents of using such a ratio say that it ignores the risk in a bank’s loan books, and can make a bank with only healthy borrowers look equally risky as a bank whose clients are less likely to pay back their loans. It also fails to take into account how easily a bank can sell its assets – so-called liquidity – or whether it is hedged against risk.

Still, equity analysts said that while Deutsche Bank likely will meet regulatory capital requirements, its ratios look weak.

But is there anything to really worry about? Well, as ZeroHedge put it….;-)

But just as we were about a year ahead with our warning of DB’s “off the charts” leverage, so we wish to remind readers that some time around June 2014, the topic of Deutsche Bank’s

$72.8 trillion in derivatives, or about 21 times more than the GDP of Germany

, will be the recurring news headline du jour.

Recall from April: “At $72.8 Trillion, Presenting The Bank With The Biggest Derivative Exposure In The World (Hint: Not JPMorgan)” which for those who missed it, we urge rereading:

Source: ZeroHedge

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Finally Detroit To Default

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It was a sad day for Detroit, a once proud American city but the writing has been on the wall for quite some time. Eventually on Friday it was announced that it would stop making payments on $2.5 billion of its total $17 billion dollars of outstanding debt. Kevyn Orr, the Emergency Manager for the City of Detroit, presented to the City’s creditors the plan ahead for Detroit’s future.

DetroitHBFDetroit said Friday

it would stop making payments on about $2.5 billion in unsecured debt and ask creditors to take about 10 cents on the dollar of what the city owes them in a move to avoid what bankruptcy experts have said would be the largest municipal bankruptcy in U.S. history.

Detroit Emergency Manager Kevyn Orr spent two hours with about 180 bond insurers, pension trustees, union representatives and other creditors outlining his plan for the city’s financial future, which includes a moratorium on some principal and interest payments, Reuters reported.

Under his proposal, underfunded pension claims likely would get less than the 10 cents on the dollar.

An assessment of the plan’s progress will come in the next 30 days or so.

Orr also announced that Detroit stopped paying on its unsecured debt Friday to “conserve cash” for police, fire and other services in the city of 700,000 people. The debt not being paid includes $39 million owed to a certificate of participation.

“We will not pay that today,” Orr told reporters after the meeting with creditors at a hotel at Detroit Metropolitan Airport in Romulus.

More than 42 percent of Detroit’s 2013 revenues went to required bond, pension, health care and other payments. If the city continues operating the way it had before Orr arrived, those costs would take up nearly 65 percent of city spending by 2017, Orr’s team said.

The team also said the proposal presented Friday is the one shot to permanently fix fiscal problems that have made the city insolvent.

“We’re tapped out,” Orr was quoted by WWJ-TV as saying. “We need to come up with a plan to restructure our debt obligations and our legacy obligations going forward — that is: pension, other employee benefits, health care, so on and so forth.”

Orr said everyone involved needs to come to grips with Detroit’s dire financial situation that has been worsened by years of procrastination and denial. He said his team is prepared for potential lawsuits from creditors not pleased with the arrangements under the plan.

“If people are sincere and look at this data, you would think a rational person will step back and say, ‘This is not normal … but what choice do we have?'” Orr said.

James McTevia, president of the Detroit-area turnaround firm McTevia and Associates, said once Orr had creditors’ attention Friday, he “drew a line in the sand and said everything behind here is frozen.”

“And going forward he is positioning the city of Detroit in a place where it can pay for goods and services without going into debt,” McTevia said.

Detroit’s fiscal nightmare didn’t occur overnight. It’s been decades in the making as city leaders took out bonds at high interest rates to pay bills Detroit’s general fund couldn’t cover.

“The average Detroiter has to understand this is a culmination of years and years of kicking the can down the road,” Orr said. “We can’t borrow any more money. We started borrowing from our own pension funds.”

The city’s budget deficit could top $380 million by July 1. Orr believes Detroit’s long-term debt is more than $17 billion.

The Washington-based bankruptcy attorney hired by Michigan in March reiterated that the chances of bankruptcy are 50-50 for Detroit, the largest U.S. city placed under state oversight.

Orr is nearly three months into the 18-month job. With little time remaining on his contract, there is no time to lose. The plan creditors received in the closed-door meeting may be the only one they get.

“There may be some room for negotiations, but not a lot,” Orr told reporters. “They need to have some time to digest what they have.”

Swallowing the proposal will be tough, especially for current and retired city workers whose health care and other benefits, as well as pensions, would be cut back.

“The firefighters are going to do what we can to keep the city stable now,” Detroit Fire Fighters Association President Dan McNamara told reporters after Friday’s meeting with Orr.

McNamara said creditors were told by Orr that “we’re in a death spiral.”

The city will not be able to back up some promises related to pension and post-employment health care and benefits. Orr is proposing a $27 million to $40 million health care replacement program that will partially rely on the federal Affordable Health Care Act, health exchanges and Medicare.

He also said $1.25 billion will be set aside from concession savings over 10 years for public safety, lighting and eliminating neighborhood blight. Improving the quality of life in the city will help attract more residents and businesses, which Orr’s team says would bring more tax revenue and increase the potential for creditors to recover more of what they are owed.

Creditors were told about plans to possibly change management of Detroit’s revenue-generating Water and Sewerage Department. A separate, freestanding authority would control the department, with some annual payments coming to Detroit and the city maintaining ownership of the system.

On Friday, Moody’s Investors Service downgraded a number of Detroit bonds, including its general obligation unlimited bonds. As a result, all Detroit bonds are now below investment grade.

Hetty Chang, a vice president with Moody’s, said “the emergency manager’s proposal to creditors indicates further debt restructuring.”

“We also believe the city’s risk of bankruptcy has increased over the last six months,” she said in a statement.

Read more: Fox News

No Bank Collapses Before September?

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bail inThe Cyprus model of theft “bail-in” bank collapses is slowly being adopted globally as the solution to enable bankrupt sovereign nation states deal with bankrupt banks. Japan is the latest country to consider such a move, even the EU is about to adopt the policy, but all eyes will be on the G20 in September. It’s strongly suspected that the G20 will announce theft “bail-ins” as the solution to deal with bank collapses. That countries (New Zealand, EU, Canada, UK) have openly being discussing such a drastic solution shows there is expected to be a raft of banks collapsing in the near future.

I have been reporting for some time now that a number of central banks have already published policy documents detailing how bail-ins would work. The Bank of Canada, Bank of New Zealand, and the FDIC and Bank of England jointly, have all published something on the issue.

At its heart is the idea that savers are, in fact, “unsecured creditors” of the banks, and therefore come second only to shareholders should their assets need to be confiscated in order to keep a failed bank going for a little while longer.

Yesterday, Nikkei highlighted that Japan’s Financial Services Agency will enact new rules to force failed bank losses onto “investors”. 

The Japanese Parliament ratified the proposals yesterday.

Also yesterday, Sergei Storchak, a Russian Deputy Finance Minister stated that there would be a declaration by heads of state attending Septembers G20 meeting in St Petersberg which would bring an end to the policy of taxpayer bailouts. The implications of what he said was that the G20 would also be jumping on the bail-in policy instead.

The preparations for widespread confiscation of assets are nearly complete.

Source: UK Column, ZeroHedge

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