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Deutsche Bank’s $7 Billion Loss Is Just the Beginning of Wall Street Woes
By Pam Martens and Russ Martens: October 8, 2015
Our email inbox yesterday and this morning raised more alarm bells for the mega banks – you know the ones we mean; the ones that should have been broken up before we were on the cusp of the next downturn. Here’s a quick rundown before we get into the details:
Let’s start off with the Deutsche Bank writedown. That’s a monster amount: $7 billion exceeds JPMorgan’s London Whale fiasco of $6.2 billion. To put things in perspective, as of yesterday’s close, Deutsche Bank has a market cap (value of all of its shares outstanding) of $39.7 billion versus JPMorgan’s market cap of $229.7 billion. That pretty much tells you that Deutsche will, indeed, have no choice but to eliminate its dividend.
Deutsche Bank’s kitchen sink writedown announcement was big on numbers and light on specifics. Here’s how it described the biggest chunk of the writedown:
“An impairment of all goodwill and certain intangibles in Corporate Banking & Securities (CB&S) and Private & Business Clients (PBC) of approximately EUR 5.8 billion. This is largely driven by the impact of expected higher regulatory capital requirements on the measurement of the value of these segments as well as current expectations regarding the disposal of Postbank.”
There are clearly some ugly details in those “securities” and “business clients” that Deutsche would like to gloss over. There also appears to be more fines and settlements over misdeeds coming: Deutsche says it will take “litigation provisions” approximating $1.35 billion and that “final litigation provisions in the quarter may be affected by further events before we finalize and report third quarter results.” The bank makes its formal third quarter earnings announcement on October 29.
Schwab’s epistle on deflation came with the headline: “Deflation: What Investors Need to Know.” After quickly asserting that they think it is “unlikely” to happen here in the U.S., the author, Michelle Gibley, proceeds to list a dozen horrors that would likely accompany deflation – just in case she is wrong and it does happen here. (We believe deflation is imminently possible given the level of wealth inequality in the U.S.) Among the horrors noted by Gibley: “If consumers and businesses believe prices and demand in the future will be lower, they may postpone spending and investment decisions, creating a downward spiral of economic contraction.”
Gibley also notes that “businesses may start to compete on price due to the dual problems of excess capacity and insufficient demand” and that “borrowers also are hurt” because “incomes shrink but debts don’t.” As we have regularly noted, there is also the horror that the U.S. central bank, the Federal Reserve, has no bullets left in its interest rate gun to fight deflation – having been at the zero bound range since December 2008.
The Office of Financial Research released a paper yesterday worrying about whether banks would actually have enough liquidity to meet a run on deposits. Should we still need to be asking that question seven long years after the greatest financial collapse since the Great Depression?
Glencore’s problems strongly suggest that we will be hearing more about bank or hedge fund losses tied to this commodities behemoth before this cycle ends in the same kind of hubris as the last one – with regulators rolling out the same nonsense that no one could have seen it coming.
And, finally, all of this is hitting the fan when corporate earnings and revenues are slumping on the back of a strong dollar that has crimped export profits and a slowdown in investment banking activity on Wall Street. As this Bloomberg Business report notes, revenue gains for the big Wall Street banks in the third quarter were “probably toast.” We’ll hear more details next Tuesday, Wednesday and Thursday when the major banks report their third quarter results. On deck first is JPMorgan Chase next Tuesday.
Deutsche Bank’s $7 Billion Loss Is Just the Beginning of Wall Street Woes
By Pam Martens and Russ Martens: October 8, 2015
Our email inbox yesterday and this morning raised more alarm bells for the mega banks – you know the ones we mean; the ones that should have been broken up before we were on the cusp of the next downturn. Here’s a quick rundown before we get into the details:
- Deutsche Bank announced it will take an approximate $7 billion writedown in the third quarter and potentially eliminate its dividend;
- Charles Schwab is out with a report on the potential for deflation and what it could do to corporate earnings;
- The Treasury’s Office of Financial Research released a report on big bank liquidity concerns;
- Bank of America released a report on the $100 billion exposure that the troubled commodities firm, Glencore, poses to global financial institutions;
- Bloomberg Business is reporting on the anticipated revenues downturn when big U.S. banks begin to report third-quarter earnings next week.
Let’s start off with the Deutsche Bank writedown. That’s a monster amount: $7 billion exceeds JPMorgan’s London Whale fiasco of $6.2 billion. To put things in perspective, as of yesterday’s close, Deutsche Bank has a market cap (value of all of its shares outstanding) of $39.7 billion versus JPMorgan’s market cap of $229.7 billion. That pretty much tells you that Deutsche will, indeed, have no choice but to eliminate its dividend.
Deutsche Bank’s kitchen sink writedown announcement was big on numbers and light on specifics. Here’s how it described the biggest chunk of the writedown:
“An impairment of all goodwill and certain intangibles in Corporate Banking & Securities (CB&S) and Private & Business Clients (PBC) of approximately EUR 5.8 billion. This is largely driven by the impact of expected higher regulatory capital requirements on the measurement of the value of these segments as well as current expectations regarding the disposal of Postbank.”
There are clearly some ugly details in those “securities” and “business clients” that Deutsche would like to gloss over. There also appears to be more fines and settlements over misdeeds coming: Deutsche says it will take “litigation provisions” approximating $1.35 billion and that “final litigation provisions in the quarter may be affected by further events before we finalize and report third quarter results.” The bank makes its formal third quarter earnings announcement on October 29.
Schwab’s epistle on deflation came with the headline: “Deflation: What Investors Need to Know.” After quickly asserting that they think it is “unlikely” to happen here in the U.S., the author, Michelle Gibley, proceeds to list a dozen horrors that would likely accompany deflation – just in case she is wrong and it does happen here. (We believe deflation is imminently possible given the level of wealth inequality in the U.S.) Among the horrors noted by Gibley: “If consumers and businesses believe prices and demand in the future will be lower, they may postpone spending and investment decisions, creating a downward spiral of economic contraction.”
Gibley also notes that “businesses may start to compete on price due to the dual problems of excess capacity and insufficient demand” and that “borrowers also are hurt” because “incomes shrink but debts don’t.” As we have regularly noted, there is also the horror that the U.S. central bank, the Federal Reserve, has no bullets left in its interest rate gun to fight deflation – having been at the zero bound range since December 2008.
The Office of Financial Research released a paper yesterday worrying about whether banks would actually have enough liquidity to meet a run on deposits. Should we still need to be asking that question seven long years after the greatest financial collapse since the Great Depression?
Glencore’s problems strongly suggest that we will be hearing more about bank or hedge fund losses tied to this commodities behemoth before this cycle ends in the same kind of hubris as the last one – with regulators rolling out the same nonsense that no one could have seen it coming.
And, finally, all of this is hitting the fan when corporate earnings and revenues are slumping on the back of a strong dollar that has crimped export profits and a slowdown in investment banking activity on Wall Street. As this Bloomberg Business report notes, revenue gains for the big Wall Street banks in the third quarter were “probably toast.” We’ll hear more details next Tuesday, Wednesday and Thursday when the major banks report their third quarter results. On deck first is JPMorgan Chase next Tuesday.
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