Germany's ailing Banks

Looking at the state of foreclosure activity in the US, we came across a recent report in the English-language edition of German news magazine 'Der Spiegel' entitled 'America's Foreclosure King'. This turns out to be none other than Germany's largest bank, Deutsche Bank. The article mainly concerns itself with the damage to the bank's image that results from its role as trustee for mortgage backed securities belonging to other investors – the bank itself wisely reduced its own US mortgage-related risk in time, or so the story goes. Deutsche appears however to have been deeply involved in the financing of the US housing bubble.


As the article notes:


“Deutsche Bank didn't just act as a trustee that – coincidentally, it seems – manages countless pieces of real estate on behalf of other investors. In the wild years between 2005 and 2007, the bank also played a central role in the profitable boom in high-risk mortgages that were marketed to people in ways that were downright negligent. Of course, its bankers didn't get their hands dirty by going door-to-door to convince people to apply for mortgages they couldn't afford. But they did provide the distribution organizations with the necessary capital.

The Countrywide Financial Corporation, which approved risky mortgages for $97.2 billion from 2005 to 2007, was the biggest provider of these mortgages in the United States. According to the study by the Center for Public Integrity, a nonprofit investigative journalism organization, Deutsche Bank was one of Countrywide's biggest financiers. Ameriquest – which, with $80.7 billion in high-risk loans on its books in the three boom years before the crash, was the second-largest sub-prime specialist – also had strong ties to Deutsche Bank. The investment bankers placed the mortgages on the international capital market by bundling and structuring them into securities. This enabled them to distribute the risks around the entire globe, some of which ended up with Germany's state-owned banks.”


Numerous CDO's created by Deutsche Bank and sold to other investors went eventually into liquidation. The state-owned banks were subsequently bailed out at great cost to the tax payer (the total cost probably approaches € 1 trillion by now – it still rises every quarter). They're now in trouble again, or rather in an additional sport of trouble, in the wake of the sovereign debt crisis. A recent wake-up call came in the form of WestLB's earnings report.


As Bloomberg reports:


Germany’s Soffin bank – rescue fund agreed last year to provide WestLB with 3 billion euros in capital to help the lender shift about a third of its assets into a winding-down unit. The bank was ordered to reduce its assets, shed risky businesses and sell itself by the end of 2011 under conditions imposed by the European Commission for approving the state aid. […] WestLB swung to a trading loss of 130 million euros from a profit of 212 million euros after the value of securities, including European government bonds, fell by 95 million euros. Those securities were shifted to the bank’s winding-down unit at the end of April, WestLB said.”


This is the 'double whammy' effect coming into view, as now not only the continued deterioration in the US housing market (along with other former housing bubble markets in Europe, such as Spain and Ireland) continues to bedevil European banks, but also the plunge in the value of the sovereign euro-area debt issued by the PIIGS – debt that was previously classified as 'risk free', which it has in common with the previously 'AAA' rated sub-prime mortgage backed CDOs that have collapsed into worthlessness. These mortgage investments continue to bleed the German treasury. Over the weekend, the NYT marveled over the ownership of the estimated $2,6 trillion that lenders have forwarded to Spain, Portugal and Greece alone – just three of the PIIGS.


It mentions inter alia:


Hypo Real Estate has hundreds of millions in shaky real estate loans on its books, as well as toxic assets linked to the subprime crisis in the United States. In the first quarter, it set aside an additional 260 million euros to cover potential loan losses, bringing the total to 3.9 billion euros. But that amount is a drop in the bucket, a mere 1.6 percent of Hypo’s total loan portfolio. Hypo has not yet set aside anything for money lent to governments in Greece and other troubled countries, arguing that the European Union rescue plan makes defaults unlikely.


Well, as we know, and as evidently Hypo Real is rather confident of, European tax payers will once again be forced by their governments into forking over the money to rescue yet another large number of deals gone bad – this time the willy-nilly lending to sovereign debtors of dubious creditworthiness. However, Hypo's assessment of the situation may turn out to be overoptimistic anyway. There are numerous scenarios in which the bail-out could find itself suddenly derailed.

They range from a sufficiently severe political backlash making further bail-outs impossible (note here that EU president Herman van Rompuy is already talking about increasing the bail-out fund!), to Germany's Constitutional Court surprising everyone by growing a pair of cojones and rejecting further wealth transfers, to the simple 'end of the road' type situation known as 'too big to bail'.


As the NYT further notes, almost offhandedly:


“Hypo reported a pretax loss for the group of 324 million euros in the first quarter, down from 406 million euros a year earlier. At the end of May, the German government raised its guarantees for Hypo to 103.5 billion euros from 93.4 billion. Some analysts say they think the bank may need more aid in the future. “I don’t think it’s over yet,” Robert Mazzuoli, an analyst at Landesbank Baden-Wuerttemberg in Stuttgart, told The Times.”


This, nota bene, is merely due to the continued bleeding in Hypo's mortgage portfolio – which shows that the housing credit bust remains in full swing. We agree with Mr. Mazzuoli – 'it isn't over yet'. Germany's banks have an average leverage ratio (assets/net worth) of about 52:1. This is to say, a mere 2% decline in the value of their assets would wipe out the entire net worth of Germany's banks. How did it come to this?



Deutsche Bank CEO Ackermann trying to look pained.

The sign above him reads: 'passion'

(Photo credit: AP)



Read more in 'The Financial vs. the Real Economy'




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2 Responses to “The Foreclosure King”

  • KB:

    I would like to make an offer to you. I can update you about Brazilian Stock Market and you update me about Europeans markets. Deal?



  • KB:

    Hi! I dont know how you found me in the ciber space. I am an eletroncic engineer, finance and law school. I trade the global markets for 30 years.
    I would like to say to you that the Brazilian Stock Market is a very good gauge to evaluate the international market because usually it leads.
    It is clear to me that we are seeing a countertrend. Volume are so weak in the Brazilian Market and I did not see capitulation.
    Price to book value here is near 2.4 times, not very expensive. Average ROE 15% aa. Analyst estimate ROE 21% aa and I doubt it.

    I suppose you know that Brazilian Stock Market is a high beta and delicious to play. I trade for a living. When you get in early profits skyrocket.

    There is a very stong techincal support between 45K and 51K. It could be a vey good opportunity.
    Let me to say that I am not a pure technician. Instead my focus is in the global leading indicators, valuation and sentiment. But only price action give me the timing.
    (sorry my English is a shame)

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