Trouble Brewing

All eyes are on Deutsche Bank and Turkey this morning.  It’s been a while since I calculated wipeout ratios [see: Banks’ Wipeout Ratios], but DB is in worse shape than any of the other banks I looked at last year, with the possible exception of Goldman Sachs.


Deutsche reported OTC (not total) derivatives in its 2015 annual report of €41.9 trillion, about $47.3 trillion in USD.  With Tier 1 capital of  €48.7 billion, this works out to a multiple of derivatives to Tier 1 capital of 861, or a wipeout ratio of approximately 0.11%.  In other words, a minuscule 0.11% decline in the value of DB’s OTC derivatives portfolio would wipe out all of its Tier 1 capital.

Like every other bank, they’ll tell you the exposure isn’t that great, that almost all of their positions are offset by other positions — what they call “netting.”  Of course, we learned from Lehman, AIG and Bear Stearns that netting out the exposure for balance sheet purposes isn’t the same as eliminating the exposure.

Turkey’s downgrade…what can you say?  Turkey’s a perfectly nice country with lovely people…and, an evil crackpot at the helm.  As we discussed in July [see: Turkey Sinks to New Lows], this was only a matter of time.

This latest action, however, will turn the markets on Erdogan.  With no one to bully, hold accountable or throw into jail until he gets his way, this will cost him dearly.  Unfortunately, it will be the citizens of Turkey who ultimately pay the price.

With the futures off 10 points and USDJPY and CL testing support again, one gets the impression that the rally is hanging by a thread.  That might be a slight exaggeration – but, only slight.

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