Rudi Fronk and Jim Anthony, co-founders of Seabridge Gold, discuss Deutsche Bank’s latest movements and what a bailout could look like.
When financial systems begin to fail, the banks are always at the center. When your assets are mostly tied up in long-term, relatively illiquid transactions while your funding is mostly of the overnight variety, from depositors, money market funds and other banks, trouble is never far away. Banks are the perfect stress indicator within the system.
Deutsche Bank (DB) became the story last week as its $14 billion market cap would be wiped out by a proposed $14 billion fine from the U. S. Justice Department for various transgressions going back to the financial crisis. Most expect the eventual settlement will be much less. For a better perspective, DB’s $14 billion market cap should be compared to its debt, which totals around $160 billion. The markets may not be able to pull apart a typically labyrinthine bank balance sheet, but extreme imbalances like this can be understood. To put this ratio in context, Citicorp, hardly a paragon of virtue, has a market cap of around $130 billion backing its debt of $163 billion.
The CEO of Deutsche Bank has a message for us: The balance sheet is strong, liquidity is more than adequate and there is no need of an equity infusion. He may be right, but does it matter? Once a bank loses confidence, the worst fears are almost always realized. Your stock falls, your bonds drop, depositors leave, other banks refuse to do business with you, and down you go. That’s the reality of a banking system dependent on the overnight interbank market and depositor funds to meet daily requirements.
Do you remember Lehman Brothers? On June 11, 2008, after moves to shore up the balance sheet and increase capital, …read more