Friday, September 30, 2016

Deutsche Bank Troubles

If you've been following the financial headlines you know what Deutsche Bank is in trouble. The bank poses systemic risks because of its size and interconnectivity. Here is an excerpt from Fortune Magazine focusing on its systemic risk and derivative exposure:
Geoffrey Smith. September 27 2016. 5 Things You Should Know About the Deutsche Bank Train Wreck. Fortune,  
Deutsche Is Too Interconnected to Fail: “It’s a counterparty to virtually every major bank in the world, in virtually all asset classes.”

Deutsche Has an Inconceivably Huge Derivatives Portfoli: “Deutsche has the world’s largest so-called derivatives book—its portfolio of financial contracts based on the value of other assets—in the world. It peaked at over $75 trillion, about 20 times German GDP, but had shrunk to around $46 trillion by the end of last year. That’s around
12% of the total notional value of derivatives outstanding worldwide ($384 trillion), according to the Bank for International Settlements.”

Deutsche Bank should have been broken up a long time ago.

In my book Crisis Communication, Liberal Democracy and Ecological Sustainability (here) I explore a few risks posed by the bank's interconnectivity and address concerns about the bank's mode of conduct. Here are some excerpts:

The financial complex is dominated by the most connected and wealthiest (in terms of ownership) private financial entities, including commercial banks (e.g., J. P. Morgan Chase and Deutsche Bank), investment banks (e.g., Goldman Sachs), brokerage and security firms (e.g., Vanguard), and other institutional investors, including hedge and pension funds. Included also in the financial complex are legal infrastructures and nongovernmental and governmental agencies that oversee and regulate operations (such as, the U.S. Securities and Exchange Commission, U.S. Federal Reserve Bank, The International Monetary Fund, the World Bank, and the Bank of International Settlements). Academic knowledge, professional forms of expertise, and cultural practices define the worldview of the complex, delimiting codes of conduct and habits.

The financial complex began market consolidation at the close of the Nineteenth century, a trajectory that extended across the Twentieth century. At the dawn of the Twenty-first century, financial ownership has become even more consolidated, with the most powerful institutional investors in finance owning majority equity shares in the world’s largest transnational corporations across industries. Network research by Vitali, Glattfelder, and Battison[i] identified the following transnational corporations as among the world’s 50 most connected:

1. Barclays plc

2. Capital Group Companies Inc.

3. FMR Corporation

4. AXA

5. State Street Corporation

6. JP Morgan Chase & Co

7. Legal & General Group plc

8. Vanguard Group Inc.


10. Merrill Lynch & Co Inc.

11. Wellington Management Co LLP

12. Deutsche Bank AG

Deutsche Bank was established in Germany 1870 as a joint-stock bank by a charter from the Prussian government aimed at expanding overseas trade.[ii]

Deutsche Bank has a poor of financial misconduct and was fined extensively in the wake of the financial crisis. Deutsche Bank was fined by the U.K. Financial Conduct Authority (established 2013), the U.S/ Department of Justice, the U.S. Commodity Futures Trading Commission and New York’s Department of Financial Services and received the most severe penalties, including a £1.7bn fine and a requirement that Deutsche Bank admit criminal guilt.[iii] Deutsche Bank was also required to fire seven senior employees.

Deutsche Bank was singled out because of evidence that its employees pleaded with individuals at Barclays, Citibank, UBS, among other banks, to move benchmarks. Deutsche Bank employees “accidentally destroyed hundreds of tapes of phone calls” and lied to the Financial Conduct Authority when telling the agency that the German financial authority had barred Deutsche Bank from disclosing data. It is unclear whether criminal charges will be levied against actual Deutsche Bank employees.

Deutsche Bank also has a poor environmental record. Financial institutions held responsible in 2012 for most substantial environmental damage included French BNP Paribis, the German Allianz, Deutsche Bank, the Dutch ING and UniCredit.[iv] The report singles out Deutsche Bank and Goldman Sachs for promoting the financialization of basic commodities with sometimes catastrophic costs for everyday people.[v]

Deutsche Bank is heavily invested in uranium trading, as is also the case with Goldman Sachs, selling around 10 million pounds of uranium annually: “the annual amount of uranium the two banks traded is 5 million pounds more than all of Canada produces per year—and Canada is the second-largest uranium producer in the world.”[vi]

Why do we allow risk-seeking financial institutions to continue creating global chaos as a result of their heedless pursuit of profit and disregard for social-environmental consequences?


[i] Stefania Vitali, James B. Glattfelder, and Stefano Battiston, “The Network of Global Corporate Control,” PLOSone 6 (2011), accessed December 3, 2011, doi: 10.1371/journal.pone.0025995.

[ii] “Deutsche Bank History: Under the Empire 1870 –1918,” Deutsche Bank,

[iii] James Titcomb, “Deutsche Bank Hit with Largest Libor Fine in History,” The Telegraph, April 23, 2015, accessed September 17, 2015,

[iv] Ibid., 5.

[v] Ibid., 7.

[vi] Marin Katusa, “The Truth About Goldman Sachs,” Casey Research, February 25, 2014, accessed May 26, 2014,

Thursday, September 29, 2016

Cold War Rising Update

Ben Blanchard. Sep 29, 2016. China armed forces warn Japan against South China sea patrols. Reuters.

Japan is "playing with fire" with plans to step up activity in the contested South China Sea through joint training patrols with the United States, China's Defence Ministry said on Thursday, warning it would not sit watching from the sidelines.



Interesting Development in Efforts to Choke the Oil Glut

Declining oil prices from global over-production have the potential to produce significant financial problems for over-leveraged firms.

Iran's entry into the global market, as a result of normalization of international relations, posed a particular problem because of the country's capacity to produce large amounts of oil at relatively low prices.

It looks as if OPEC is going to pull together to try to limit over-production, with the Saudis potentially absorbing cuts in order to balance overall production:
By Rania El Gamal and Alex Lawler September 28, 2016, OPEC reaches first deal to cut oil output since 2008 - sources. Reuters,

...Saudi Energy Minister Khalid al-Falih said on Tuesday that Iran, Nigeria and Libya would be allowed to produce "at maximum levels that make sense" as part of any output limits which could be set as early as the next OPEC meeting in November.

That represents a strategy shift for Riyadh, which has said it would reduce output to ease a global glut only if every other OPEC and non-OPEC producer followed suit. Iran has argued it should be exempt from such limits as its production recovers after the lifting of EU sanctions earlier this year.

Over the last year I've been covering the financial implications of declining commodity prices, especially oil, resulting from over-production. Here are some relevant headlines and excerpts addressing "souring" energy loans in the context of production practices and norms:

The Wall Street Journal's weekend print edition reported that "More Energy Loans are Turning Sour" (Jan 16-17, 2016, B2).

Tyler Durden, "America's Cash Flow Negative Energy Companies Have $325 Billion In Debt Among Them Submitted ZeroHedge, January 18, 2016, 
Ryan Dezember. 2016, July 22. Oil Pay Plans in Cross Hairs. The Wall Street Journal, C4.
“Moody’s Investors Service said it may begin penalizing oil and gas producers that partake in a widespread industry practice: incentivizing their executives to drill regardless of commodity prices. Most oil-company executives derive part of their annual cash bonuses by hitting production and reserve growth targets. These bonuses, which can amount to millions of dollars, have come under criticism from some shareholders who say the incentives don’t make sense when oil and gas prices are too low for drilling to be profitable”

Sarah McFarlane, Nicole Friedman, and Alison Sider. 2016, July 28. Gasoline Glut Swamps Oil. The Wall Street Journal, C1.
Crude prices fall to a three-month low below $42 a barrel as fuel storage fills up.

Just when it appeared crude oil’s supply problems were easing, a glut of gasoline is drowning the market’s hopes for a recovery. Vast new supplies of gasoline around the world, combined with the overproduction of oil, has sent crude prices sliding.... The result is near-record levels of gasoline put into storage around the world, around 500 million barrels in total, according to Citigroup.

Arthur Berman. 2016, July 28. Oil Industry About To Be Burned Again By Fall In Oil Prices. Zero Hedge

The current oil-price rally is over.

U.S. rig counts have surged as oil prices sink. Capital is driving the oil markets and it enables bad behavior by producers. That is why oil prices will stay low.

The oil-price rally that began in February is over. Prices rose from $26 per barrel to $51 by early June and are now below $42 (Figure 1). If they fall through $40, the next likely support level is at $36 per barrel.
Global energy production is fundamentally irrational when long-term supplies and the environmental costs of extraction and refining are considered. There has to be a better way...


Why I LOVE the Desert!