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thomas davison
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Joined: 03 Jun 2005
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Location: northumberland

PostPosted: Wed Apr 22, 2020 9:59 am    Post subject: IS COVID19 A COVER UP FOR BANKS GOING BUST DERIVITIVES Reply with quote

Deutsche Bank – On the Brink of Insolvency
April 21, 2020 by IWB

On this week’s edition of DDDD (Data-Driven DD; yes this is what I’m going to be calling this), we’ll be looking at Deutsche Bank. Once one of the largest banks in the world, it’s now a shell of its former self after the 2008 financial crisis.

Let’s take a closer look at their derivatives. In their annual statement, they mentioned that they were trying to discontinue their derivatives business, which already helped cause one banking crisis a decade ago. They restructured and put all their “bad” capital, like their derivatives, in its own entity, called the “Capital Release Unit”, with the goal of liquidating these assets to release capital and de-leverage themselves. In 2019, their Capital Release Unit lost a total of €3.9B and held the €333B of derivatives. It also looks like they’re doing a bad job of releasing this specific class of capital, because their derivative assets and liabilities actually increased since 2018. That’s because a lot of these derivatives are not traded in exchanges, but instead over-the-counter with parties that have an ISDA agreement. As anyone who’s watched The Big Short can tell you (so literally everyone else on this subreddit), these OTC derivatives tend to be illiquid and difficult to value due to lack of price discovery.

This is why Deutsche Bank’s book value is more than their market cap, even before COVID-19. There’s doubt as to what some of the OTC derivatives are actually worth. They have a book value of €62B with derivatives supposedly valued at €333B, meaning if the actual net value of these derivatives are 19% or more lower than what they say they are, they become insolvent. This is the bank equivalent of buying SPY puts on margin in Robinhood (yes I know you can’t do that), but not knowing how much your puts are worth until you try selling. If you were like most of r/wallstreetbets you probably bought SPY puts when SPY was at 220. You know if you tried to sell your puts you might find out that they’re now worth a lot less than you originally bought them for (in the case of OTC derivatives, they can actually have a negative value!), realizing your portfolio value (equity) is below zero and you get a margin call (insolvent). In fact, they’ve allegedly done something similar in 2008 by failing to recognize losses related to the explosion of super senior tranches of CDOs, which may have led to joining Lehman Brothers in the bank graveyard if they did.

Let’s take a closer look at these derivatives, specifically the ones that mature in 2020.

Derivatives maturing in 2020 by nominal value
Type Bilateral Central Counterparty Exchange Traded
Interest €2.5T €8.7T €4T
Currency €4.3T €95B €17B
Equity €98B 0 €184B
Credit €39B €63B 0
Commodity €2.7B 0 €31.9B

First a few things to clarify. Bilateral Clearing is an agreement between some party with an ISDA agreement with the bank, where the bank acts as the counterparty to the derivative being sold. Central Counterparty Clearing is when an institution facilitates an OTC derivative transaction by ensuring both sides of the transaction are financially sound enough and have enough collateral to not default on the derivative, and if any party defaults on the derivative, the central counterparty is now financially responsible for their side of the trade. This was put into place after 2008 when the risk of counterparties like AIG defaulting on credit default swaps became a huge systematic problem.

Also, a nominal value is different from a derivative’s actual price. For example, if you bought a SPY 4/20 220p, the nominal value of your derivative is $22000 (100 shares * $220 per share) but the actual value of your put is $0.

We know that since Dec 2019

Interest rates got cut all around the world
Currencies exchange rates have dramatically changed since December with oil-exporting countries. For example USD / CAD went from $1.30 to $1.42 during this time period
Equity values exploded, even with the bull run we’re currently in
A lot of BBB-rated companies got downgraded, and we might see defaults come in, even with the Fed buying bonds
Oil is idiot

These recent events will probably change the valuation of these derivatives by a lot, some of which are going to be realized on their balance sheets immediately (eg. exchange traded derivatives) because their valuations can easily be calculated. The key here is that the net losses needs to be below €62B or they become insolvent.

Now, we’re in the age of too-big-to-fail businesses and the US government and Fed bailing out everyone, which is a real risk of taking a short position against $DB, especially considering how connected they are with other US financial institutions by acting as the counterparty or the central counterparty clearing house to many derivatives that they hold. If Deutsche Bank goes under, a lot of other financial institutions are going to have problems. The problem with Deutsche Bank is that it is not a US company and can’t be hence bailed out by the US government. In fact, they weren’t eligible for TARP, the last government-funded bank bailout back in 2008, which is partially why they’ve been a financial mess ever since.

Their Q1 earnings call is on April 29, so we’ll find out how much trouble they are then.

Is Oil the Canary in the Coal Mine for a $640 Trillion Derivatives Disaster?
April 21, 2020 by IWB
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by The Phoenix

Let’s talk about what just happened with Oil prices.

Yesterday, Oil dropped to -$40 per barrel. That is not a typo. Oil was priced at NEGATIVE $40.

On Friday, it was priced at $27 per barrel.

How is this possible?

This is possible because of derivatives: financial instruments that trade in opaque markets, with little oversight, and which regulators, including Congress, have permitted to become a systemic problem.

In its simplest rendering, yesterday oil traders who owned oil derivatives realized that if they continued to hold these derivatives, they (the traders) would have to actually take delivery on the physical oil they owned. We’re talking thousands and thousands of oil barrels being delivered.

The traders don’t want the actual physical oil. They simply want to be able to trade oil prices. So, they dumped their derivatives at any price… including PAYING someone to take the derivatives off of their hands.

This is how you get NEGATIVE oil prices. And it reveals the degree to which the financial system has become totally overrun with derivatives, leverage, and financial trickery.

Even worse, Oil is not the only asset class that has been overrun with derivatives. The bulk of trading in every commodity, including gold, involves derivatives. The same is true of BONDS.

Derivatives are used to hide losses, manipulate prices, and even fake profits. They are a massive problem that nearly blew up the financial system in 2008… and as oil’s implosion yesterday revealed, remain a major problem today as well.

How big a problem are we talking?

The last official data on the global derivatives market puts it at $640 TRILLION, or over SEVEN TIMES GLOBAL GDP.

What happened in oil is a signal that this financial monstrosity is once again rearing its head. The question now is just how horrific the carnage will be.

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