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Deutsche Bank is counterparty to 55 trillion euros of derivatives contracts (about 65 trillion USD). I worked for 3 years on its trading floor. It was Sales-a-g

Deutsche Bank is counterparty to 55 trillion euros of derivatives contracts (about 65 trillion USD). I worked for 3 years on its trading floor. It was Sales-a-gogo. "Print as much as you can". It's one of the very biggest counterparties to derivatives. Imagine if there was basis risk of only one tenth of one percent on those books (ie hedge imperfection usually due to a third factor such as credit quality or geographic mismatch). That would mean a P&L of 32.5 billion dollars. For risk on only one thousandth of the notional value of its derivatives books. Deutsche Bank is only worth 22 billion dollars. Now of course such P&L could be positive too, but inevitably, when the wolves of the markets start hunting, they'll seek out the positions that are "wrong way". Let alone if DBK starts to try to unwind some of these derivatives. I bet it wouldn't be able to unwind even 2% (1.3 trillion!) of the books without blowing itself up. I think this bank is Exhibit A to the catastrophic excesses of the past 20 years.

mohawk 11y ago
You've hit the nail on the head, the derivatives they have on their books are massive compared to shareholder equity. "Counterparty risk" are the words nobody analysing bank's derivatives positions wants to hear. It's a terrible mistake there has never been a separation of investment banking from commercial banking in Germany (i realise the line is hard to draw), because the German taxpayer is essentially guaranteeing this shoddily run bank. Unfortunately German politicians seem to be quite oblivious to this problem. Joe Ackermann (then CEO of DB) was giving Merkel advice on the financial crisis of 2008, so there seems to be some asymmetry of information there...
- binarray2000 11y ago
  Not only giving advice: "Deutsche Bank boss throws party, Merkel foots the bill" (http://www.dw.com/en/deutsche-bank-boss-throws-party-merkel-foots-the-bill/a-4596587 http://www.dw.com/en/deutsche-bank-boss-throws-party-merkel-...).
paganel 11y ago
> I think this bank is Exhibit A to the catastrophic excesses of the past 20 years. Only partially related, I remember one of the German landsbanke (can't remember its name) buying full one-page splashy ads in magazines like The Economist, back in 2007. Only one year later they went catastrophically under because they had bought in into the subprime lending and its derivatives' mania. I remember one of the directors saying something like "we didn't know what exactly we were buying, those products were too complicated for us, we trusted the people who had sold them to us". It's fools all the way down.
dschiptsov 11y ago
>derivatives contracts This is the cause. It is not mere speculation, like it is with commodities trading, it is "trading" of imaginary things with other people's money in a way that it will be other people's problems. Now there is no way to convert these imaginary things back to other people's money, so it became German people's problem.
- mohawk 11y ago
  I would state it differently. Derivatives can be quite useful for the economy, because they allow people to offload risk, e.g. companies can hedge their commodity or exchange rate risks. They become a problem in banks that have a lot of them ("weapons of financial mass destruction") because of their opacity on the balance sheet (DB has one line in their balance sheet for derivatives, ~ 500 billion Euros) and because banks offload their long-tail risks to their depositors and ultimately the taxpayer. The new bail-in rules mean that depositors in banks are essentially guaranteeing the bank's balance sheet. Think about that the next time you look at your bank account.
Havoc 11y ago
So what exactly happens if they go under? All the counterparties are just sht out of luck?
- vegabook 11y ago
  Yes, you're left high-and-dry if your counterparty goes bust, and since this would be such a cataclysmic event in the case of Deutsche Bank, the authorities would be forced to step in (at ginormous cost) to prevent it. It's worth noting that on derivatives, your loss if your counterparty goes bust is not the notional. It's a fraction of the notional. But even a small fraction of 65 trillion is a very, very large number. In fact the number in DBK's case is so large that it might endanger the credibility of the authorities themselves.

mohawk 11y ago

You've hit the nail on the head, the derivatives they have on their books are massive compared to shareholder equity. "Counterparty risk" are the words nobody analysing bank's derivatives positions wants to hear. It's a terrible mistake there has never been a separation of investment banking from commercial banking in Germany (i realise the line is hard to draw), because the German taxpayer is essentially guaranteeing this shoddily run bank. Unfortunately German politicians seem to be quite oblivious to this problem. Joe Ackermann (then CEO of DB) was giving Merkel advice on the financial crisis of 2008, so there seems to be some asymmetry of information there...

binarray2000 11y ago
Not only giving advice: "Deutsche Bank boss throws party, Merkel foots the bill" (http://www.dw.com/en/deutsche-bank-boss-throws-party-merkel-foots-the-bill/a-4596587 http://www.dw.com/en/deutsche-bank-boss-throws-party-merkel-...).

paganel 11y ago

> I think this bank is Exhibit A to the catastrophic excesses of the past 20 years. Only partially related, I remember one of the German landsbanke (can't remember its name) buying full one-page splashy ads in magazines like The Economist, back in 2007. Only one year later they went catastrophically under because they had bought in into the subprime lending and its derivatives' mania. I remember one of the directors saying something like "we didn't know what exactly we were buying, those products were too complicated for us, we trusted the people who had sold them to us". It's fools all the way down.

dschiptsov 11y ago

>derivatives contracts This is the cause. It is not mere speculation, like it is with commodities trading, it is "trading" of imaginary things with other people's money in a way that it will be other people's problems. Now there is no way to convert these imaginary things back to other people's money, so it became German people's problem.

mohawk 11y ago
I would state it differently. Derivatives can be quite useful for the economy, because they allow people to offload risk, e.g. companies can hedge their commodity or exchange rate risks. They become a problem in banks that have a lot of them ("weapons of financial mass destruction") because of their opacity on the balance sheet (DB has one line in their balance sheet for derivatives, ~ 500 billion Euros) and because banks offload their long-tail risks to their depositors and ultimately the taxpayer. The new bail-in rules mean that depositors in banks are essentially guaranteeing the bank's balance sheet. Think about that the next time you look at your bank account.

Havoc 11y ago

So what exactly happens if they go under? All the counterparties are just sht out of luck?

vegabook 11y ago
Yes, you're left high-and-dry if your counterparty goes bust, and since this would be such a cataclysmic event in the case of Deutsche Bank, the authorities would be forced to step in (at ginormous cost) to prevent it. It's worth noting that on derivatives, your loss if your counterparty goes bust is not the notional. It's a fraction of the notional. But even a small fraction of 65 trillion is a very, very large number. In fact the number in DBK's case is so large that it might endanger the credibility of the authorities themselves.