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Facts about banks
...the total liabilities of Deutsche Bank (leverage ratio over 50!) amount to around 2,000 billion euro, (more than Fannie Mai) or over 80 % of the GDP of Germany. This is simply too much for the Bundesbank or even the German state to contemplate, given that the German budget is bound by the rules of the Stability pact and the German government cannot order (unlike the US Treasury) its central bank to issue more currency. The total liabilities of Barclays of around 1,300 billion pounds (leverage ratio over 60!) surpasses Britain’s GDP. Fortis bank, which has been in the news recently, has a leverage ratio of "only" 33, but its liabilities are several times larger than the GDP of its home country (Belgium).
The Fed has possibly been bailing them out too (not necessarily by intention), as it is likely that some of these institutions had heavy exposure to the weaker U.S. institutions. Here is the link. Those failures should also put the U.S. regulatory failures in perspective. And what would happen if a big U.K. bank were on the verge of failing? Would the Fed have to step in there too? Contagion is contagion, as Aristotle once said...
Posted by Tyler Cowen on September 20, 2008 at 07:32 PM in Data Source | Permalink
Comments
Yet more arguments in favor of obtaining dual citizenship?
Posted by: Mercutio.Mont at Sep 20, 2008 7:37:26 PM
"what would happen if a big U.K. bank were on the verge of failing? Would the Fed have to step in there too?" Oh, why not? If you're going to sink, do it in style.
Posted by: dearieme at Sep 20, 2008 7:41:59 PM
Leverage ratio is not exactly the best measure of risk. At least for the senior debt holders.
Also, in case of emergency, clearly the stability pact would be ignored. It has been ignored already by Germany (for a stupidly minor reason) and it currently is being ignored by France.
Posted by: IWantCookieNow at Sep 20, 2008 7:56:16 PM
- there is probably something wrong with the number, as often in US-Europe comparisons. (statistical definitions are different, accounting terms differ, the german word "Billion" for example means trillion in english, germans use points for digital grouping and commas for decimal places)
- the German government could just let Deutsche Bank collapse. Deutsche is quite a small a player for ordinary citizens and voters who have their money mostly in municipal banks.
-German households have a lot more savings than their US counterparts. German consumer spending is much less cyclical.
- unlike in the US corporations have a lot of debt in Germany, so a lot of their loans are to private companies and little changed in that area. Additionally German companies have a tradition of hiding tons of money in-house. (Siemens is called a giant bank with a small electronics store on the ground floor).
- Lots of Deutsche is of course regulated in the US, and they wanted Deutsche to pony up as much as Goldman or Citigroup.
- German fundamentals are good. A gigantic trade surplus (larger than China's), same for capital account.
- Housing prices in Germany have been flat for more than a decade.
- and don't forget that in Germany by definition everything is bad. That's how Germans define the word bad. Germans will constantly claim that they are facing disaster or ruin. That's why they have all this over-engineering. The latest edition of the Golf (the main car in Germany) has a minimum of 17 airbags. Maybe Deutsche has some,too?
Posted by: Martin S at Sep 20, 2008 8:22:36 PM
As I said in a comment to your last post,since the terms and conditions of the Treasury's purchase of assets are yet to be set, we cannot discuss the consequences of the proposal. In particular, since it is not yet known how the losses will be distributed and since the sale of assets is voluntary, we don't know which type of financial institutions will choose to sell assets to the Treasury. Your post focuses on issues that are secondary.
Posted by: E. Barandiaran at Sep 20, 2008 8:35:17 PM
@Martin It's true that the stability pact has been ignored marginally in the past, but if the numbers on this are even only nearly accurate, I don't think they could do this, even if they wanted to. Also I can't think of any event where they bailed out a bank, the last big bail out I remember from the top of my head was some big construction company, but that got nowhere near the liabilities of Deutsche Bank afaik.
Posted by: florian Idelberger at Sep 20, 2008 9:16:00 PM
YES. The US should bail out any bank that could significantly damage the US economy. Although, I don't know if there is such a bank outside the US whose failure would significantly damage the US economy besides possibly China? Its a dangerous street we are walking down, but we have been walking it since the 90s, and I'm sure we have learned enough to survive.
Posted by: brainwarped at Sep 20, 2008 10:52:24 PM
The bailout (or whatever you want to call it) of AIG was motivated by AIG having sold $300 billion (notional) of credit default swaps to mostly European banks. These banks use the CDS to hedge their mortgage portfolios and are allowed to use them in regulatory capital calculations.
Without AIG on the other side of the CDS portfolio, $300 billion disappears from Europe overnight.
Posted by: DougM at Sep 20, 2008 11:00:35 PM
Markets finished the week where they started. The world went on.
Warren Buffett made $4.7bn profit by buying a company at half the previous weeks price. I also made a modest profit the same way. What's not to like?
I believe that the U.S. Goverment will eventually make a profit on the AIG transaction. We'll see.
Keep talking doom and destruction- it makes prudence more profitable.
A very recent NBER paper shows that the US home market isn't as bad as some say. It received little publicity. Which is good.
Posted by: Thomas Esmond Knox at Sep 20, 2008 11:21:11 PM
@Florian
And, if the German government simply issues a guarantee that will probably not be counted under the stability pact.
The stability pact has silly rules, like if you sell a government asset (privatize a company) that improves your position under the stability pact! To the best of my knowledge the stability pact does for example not take into account guarantees of Germany for the World Bank. The stability pact is a joke from an accounting point of view. If the World Bank defaulted tomorrow that would cause problems for this year, not in the years the guarantees were issued. So if the German government issued a guarantee for Deutsche's loans it could basically borrow as much as it wanted without affecting the stability pact. That can even solve a solvency problem (as Deutsche can and has to put a value on that guarantee in its books).
Even if the number of their liabilities is correct, what percentage of them come due this year?
And what percentage of that is to the US creditors that are under water? What percentage of it is mortgages in Munich which have all downpayments and there is an efficient system of recourse for mortgages in place in Germany ? For a German mortgage to default you would need not only negative equity (ie housing price decline which is not happening) and the holder of the mortgage to lose their job (unlike in the US where even in recourse states practically there is no recourse in practice [except against rich people]).
Posted by: Martin S at Sep 20, 2008 11:22:38 PM
I'm in the trenches of the debt debacle as a lawyer handling bankruptcies and foreclosures, and I see defaulted mortgages that were included in Deutsche Bank CDOs regularly. They are, invariably, the smelliest, dumbest mortgages I've ever seen, and that's saying a lot. Ridiculously poor credit risks and falsely inflated collateral values are just the start-- they regularly included fraud that a second grader could see through, never mind any minimally trained mortgage underwriter.
Posted by: cyrano at Sep 20, 2008 11:40:09 PM
cyrano, the question is whether Deutsche hung onto their CDOs or not. If not, too bad for the buyer, but caveat emptor, after all.
Posted by: Jay at Sep 21, 2008 2:48:35 AM
Thomas,
I especially enjoyed when McCain said the fundamentals of the economy were strong. I take pleasure when certain politicians are beaten about the head and shoulders for telling the truth.
Posted by: Andrew at Sep 21, 2008 4:21:04 AM
The most fascinating point in the piece Tyler quotes from is its title "The Beginning of the End Game."
Thomas Esmond Knox points up that market mood more briefly and eloquently.
Andrew
Any politician who says "The fundamentals of the economy are strong." should be beaten about the head and shoulders. For more than 30 years it has been pol speak for "OK, the economy is in a mess; but so far as I am concerned it will have to find its own way out because I have no idea of what to do." (On the other hand if and when any politician finally says "The government can't do anything useful for the economy right now." he, she or it should be voted in by acclamation.)
cyrano
Deutsche Bank has been managed like that for years (it has been improving recently). However, see Martin S. There seem to be a lot of fail safes in the way Deutsche Bank is put together.
Posted by: David Heigham at Sep 21, 2008 6:54:00 AM
For more than 30 years it has been pol speak for "OK, the economy is in a mess; but so far as I am concerned it will have to find its own way out because I have no idea of what to do."
(On the other hand if and when any politician finally says "The government can't do anything useful for the economy right now." he, she or it should be voted in by acclamation.)
The end result is the same, isn't it?
Somewhat analogously, wasn't the news recently filled with how thousands (maybe tens of thousands, maybe hundreds of thousands) of people were "facing certain death" in Gulf coast states due to a hurricane? And the result has been, what, less than 100 deaths?
Seems like many Americans might be starting to ignore the wailing and gnashing of teeth of experts and politicians.
And no, I wouldn't have stayed on Galveston Island, but the point is not that you or I would have stayed, the point is not that there wasn't real risk, the point is that now, when leaders of any stripe are doing the equivalent of yelling "We're all doomed!" (or "You're all doomed! Especially if you don't vote for me."), people are starting to realize that the end of the world isn't occurring every few weeks despite leaders and their partners in the MSM regularly crying "Wolf!".
Not saying there aren't any wolves out there....
Posted by: fish on a bicycle at Sep 21, 2008 7:19:54 AM
I usually find Vox to be very good value but I can't begin to imagine what they are trying to suggest when they say " The total liabilities of Barclays of around 1,300 billion pounds (leverage ratio over 60!) surpasses Britain’s GDP."
Now one of my mortgages is with Barclays and I know that Barclays is only one of the big 6 or 7 UK banks, so what are we supposed to think - the UK is potentially insolvent to an enormous extent?
Well GDP is an annual flow while liabilities are a stock.
So I am disappointed with Vox for senationalising an important issue.
Posted by: disinterested observer at Sep 21, 2008 11:07:00 AM
Despite its name, Deutsche Bank is one of the least German banks in Germany. Of its 80.000 employees, only 25000 are German. And given that those 25000 include its headquarters and other company-wide overhead, the German share of its activities is probably even smaller.
Now, I have no reason to believe DB is going down (its shares are at 50% of their peak, not so unusual for banks in these days). But if it were to fail, Germany might not be the economy most threatened by its collapse, and consequentially the Bundesbank would probably find others willing to share the burden.
Posted by: Zamfir at Sep 21, 2008 11:27:06 AM
@Martin S:
"German fundamentals are good. A gigantic trade surplus (larger than China's), same for capital account."
Germany indeed has a large "trade surplus", more precisely: a large current account surplus. However, that logically implies an equally large capital account deficit. Keep in mind:
current account + capital account = 0.
Some countries have a current account surplus and (hence) a capital account deficit, like Germany. Other countries have a current account deficit and (hence) a capital account surplus, like the US. I wouldn't consider the US scenario necessarily worse than the German one. There are 700 billion dollars of foreign capital inflow into the US every year, providing additional investment funds and keeping interest rates down, while Germany has a huge capital outflow every year, as an inevitable corrolary of their large current account surplus.
Posted by: Economist at Sep 21, 2008 6:52:28 PM
I especially enjoyed when McCain said the fundamentals of the economy were strong.
Andrew, I get your point. However, if one of the fundamentals he's talking about is the flexibility and efficient allocation of resources in a free market, that one's gotten weaker this week. The free market has been scapegoated, shackled and stands accused of witchcraft.
Posted by: Methinks at Sep 21, 2008 7:13:50 PM
@Economist.
Obviously. I meant only to refer to the current situation and who would have an easier time dealing with a crisis of foreign and domestic confidence.
Posted by: Martin S at Sep 27, 2008 12:01:56 PM
assingnment stuff
Posted by: zubair at Sep 29, 2008 10:46:32 AM
