Washington, DC -- (ReleaseWire) -- 10/06/2016 --In 1969, the psychiatrist Elizabeth Kubler-Ross first laid out her now-famous five stages of grief in the book On Death and Dying. In their usual order, they are denial, anger, bargaining, depression, and acceptance. According to Kubler-Ross, these are the steps we go through when we mourn not only the death of a loved one, but any significant personal loss, from the loss of a job to a divorce. This behavior can be seen in markets, as well, as the individuals and institutions adjust to the realities of change and instability.
Deutsche Bank has been suffering since the International Monetary Fund called it out earlier this year as seeming to be the riskiest bank in the German financial sector in terms of the threat its collapse could pose to the global financial sector. This has been exacerbated by the United States Department of Justice discussing a fine, possibly as large as $14 billion, for their role in the sale of risky mortgages before the financial crisis. Deutsche Bank is touting the latter as the big reason for the jagged downward slope of its stock, and indeed the price seesawed back up some after its recent low last Thursday when figures for the fine more in the range of $8 billion were discussed.
The I.M.F., however, says that Deutsche Bank's problems go far beyond the potential multi-billion dollar settlement. At a news conference on Wednesday, October 5th discussing a recently issued financial stability report that criticized European banks, I.M.F. officials reasserted that Deutsche Bank, along with others, was in trouble because of low capital levels, troubled if not toxic loans, and an outdated business model that cannot show profit in the current zero to negative interest rate and low growth environment.
Because Deutsche Bank has such a risk-taking culture, and because it is deeply connected to other banks and institutions (including 200 institutions in its hedge fund business alone), the risk pointed out by the I.M.F. is real. If the bank fails, the impact will be much, much larger and wider-spread than Lehmann. That risk-taking was pointed out in irony by the German politician Sigmar Gabriel, an important member of German Chancellor Angela Merkel's coalition government. Last week, as Deutsche Bank was bemoaning the fact that hedge funds were betting against its stock, he said, "I don't know whether to laugh or be angry that the bank that declared speculation to be its business model now declares itself a victim of speculators."
Deutsche Bank's assets, they say, are about $1.9 trillion, so from a balance sheet perspective, they have a balance sheet about equal to half of Germany's GDP. In the United States, JP Morgan is in a similar position with $9 trillion on their balance sheet. However, where JP Morgan holds a significant $52 trillion on its derivatives book, while Deutsche Bank's derivatives book is reportedly at nearly $60 trillion. Given the difference in scale, that's huge, especially considering that $60 trillion is about 15% of the estimated worldwide $384 trillion estimate of total derivatives given by the Bank for International Settlements, or BIS.
Angela Merkel has publicly stated that she will neither bail out nor bail in Deutsche Bank. If she actually means that, despite the I.M.F.'s belief that, since Deutsche Bank is of 'systemic importance,' authorities will carefully monitor (and supposedly act upon) the situation, then the fallout could be huge. And she has every reason to mean it. Germany, which has insisted that Italy and other countries in the ECB accept tough conditions in dealing with their problems, can ill-afford being seen as soft on their own flagship bank.
As things progress, with retail depositors beginning to worry and pull out, Deutsche Bank has only a few options. One is to sell their equity in order to provide much-needed liquidity. Another is to approach the European Central Bank (ECB) for a liquidity bridge, an option that has been advocated against by Merkel and denied by the ECB in the case of Greek and Italian banks. A third is that they could eliminate billions in unsecured claims and deposits, which could lead to a full-blown, systemic bank run as depositors everywhere rush to withdraw their savings. No good options here.
And here we are, mired in the throes of Kubler-Ross's stages of grief. Last week, we saw denial as the market wanted to go higher on the belief that there would surely be some sort of bail-out, but ultimately going negative. If Germany does bail out Deutsche Bank when it advocated so strongly against similarly helping Greece and Italy, there may well be a full-blown political mutiny in Europe, and the ECB certainly wouldn't be happy. Of course, the next stage is anger, and that's easy to see. "Who let this situation get so bad? Who can we blame?" Bargaining follows, as investors look for a way to walk away and take their losses without being hurt further. After that comes the depression of seeing all that money just gone, something we remember all too clearly from 2008 and 2009, when many investors lost from 25 to even 70 percent of their portfolios.
What's important, both in Europe and in the United States, is how we all handle the acceptance stage. This, this is the time to figure out a way to rebuild. Systemically, of course, this is a matter for governments and institutions, but markets are made of individuals, and how we each respond is a critical element in how the global economy will respond. If we take a defensive position, focus on assets like gold and silver that are likeliest to hold real value in a collapse or crisis, and then rebuild while demanding free markets that are actually free before we opt back in to the "system" that looks set to fail yet again, then these five stages will not have been in vain.
For over a quarter century, Dawn Bennett has been successfully guiding clients through the complexities of wealth management. Her unique vision and insight into market trends makes Bennett a much sought after expert resource with regular appearances on Fox News Channel, CNBC, Bloomberg TV, and MSNBC as well as being featured in Business Week, Fortune, The NY Times, The NY Sun, Washington Business Journal in addition to her highly regarded weekly talk radio program - Financial Mythbusting. Through prudent and thoughtful advice, Dawn Bennett has strived to consistently provide the highest quality of guidance.
About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com.
She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett.