It’ll never happen, we get told quite regularly.

“They’ll never let it happen”!

They’ll never let what happen, you may ask.

We ware talking about the inevitable reset in our financial system that is so obviously coming down the pipeline that burying your head in the sand will just get you run over.

There are a growing Chorus of Financial Managers worried about “liquidity events”, especially in Bond markets. This week, Martin Gilbert (runs Aberdeen Asset Management), commented in a Bloomberg interview on the reason he’s added a $500m overdraft to his $1b in cash. “It will get ugly. You want Bank Lines in place in case you have to meet a redemption and there is no market”!!

It really makes one wonder, if Bond Managers are worried about liquidity how would you feel if you ran a book of derivatives as big as the Deutsche Bank one in the chart below?

As we’ve often stated, preparation will be the key in a liquidity event. Lessons painfully learnt in 2007/08. But before one prepares one has to accept what we’re dealing with here and now.

To help understand the why it may be helpful to look the current welfare obligations (and in some cases, warfare but we’ll just deal with the welfare for now) in OECD countries.

The situation “Modern Economies” of the world find themselves in today is a direct result of too much promised to too many to be paid for by too few.

Lee Robinson, of Altana Wealth (a highly successful London based Fund Manager) uses the European position to illustrate the problem as the 7/25/50 problem. 7% of world population, 25% of GDP and 50% of its Social Welfare!

In some way shape or form a new grand bargain will need to be made. A reset.

We do not know how it may look or what the probability of capital controls may be. Even if the possibility of capital controls, as outlined by the IMF and others is “only 30%” you should take precautions.

The other important aspect of this mess is the when and the what of the trigger.

This is why we continue to share the possible pressure points with you. As negative as some find it, opportunity will abound for others.

Greece may be one but as long as NATO refuels its ships in Greece it may remain in the EU.

There can be no doubt all the talk behind the scenes around Greece at the moment is, “who’s going to pay”? And will the default be recognised as a default by the organisation that decides on definitions of default, the promoters of safe and efficient markets, The ISDA. The International Swaps and Derivative Association http://www2.isda.org chaired by the largest participants!

By sharing the story below of “Could Deutsche Bank be the next Lehman Bros”, we are only making the point that this is one of the main pressure points in the system and it warrants some attention.

There are, in fact many pressure points like the one below but, as you’ll read, the goings on of the EU’s largest bank does raise some questions.

We’ll have a great story on further Institutional Gold repatriation later in the week! Can’t wait!

From Zerohedge:

Could Deutsche Bank be the next Lehman Bros?

First, for purposes of drawing a parallel, let’s re-cap the events of 2007-2008:

There were few early indicators of Lehman’s plight.   Insiders however, were well aware:   In late 2007, Goldman Sachs placed a massive proprietary bet against Lehman which would be known internally as the “Big Short”.  (It’s a bet that would later profit from during the crisis).

In the summer 2007 subprime loans were beginning to perform poorly in the marketplace.  By August of 2007, the commercial paper market saw liquidity evaporating quickly and funding for all types of asset-backed security was drying up.

But still — even in late 2007,  there was little public indication that Lehman was circling the drain.

Probably the first public indication that things were heading downhill for Lehman wasn’t until June 9th, 2008,  when Fitch Ratings cut Lehman’s rating to AA-minus, outlook negative.   (ironically, 7 years to the day before S&P would cut DB)

The “negative outlook” indicates that another further downgrade is likely.   In this particular case, it was the understatement of all time.

A mere 3 months later, in the course of just one week,  Lehman would announce a major loss and file for bankruptcy.

And the rest is history.

Could this happen to Deutsche Bank?

First, we must state the obvious:  If Deutsche Bank is the next Lehman, we will not know until events are moving at an uncontrollable and accelerating speed.   The nature of all fractional-reserve banks — who are by definition bankrupt at all times – is to project an aura of stability until that illusion has already begun to implode.

By the time we are aware of a crisis – if one is in the offing — it will already be a roaring blaze by the time it is known publicly.   It is by now well-established that truth is the first casualty of all banking crises.  There will be little in the way of early warnings.   To that end, we begin connecting the dots:

Here’s a re-cap of what’s happened at Deutsche Bank over the past 15 months:

• In April of 2014,  Deutsche Bank was forced to raise an additional 1.5 Billion of Tier 1 capital to support it’s capital structure.  Why?
• 1 month later in May of 2014, the scramble for liquidity continued as DB announced the selling of 8 billion euros worth of stock – at up to a 30% discount.   Why again?  It was a move which raised eyebrows across the financial media.  The calm outward image of Deutsche Bank did not seem to reflect their rushed efforts to raise liquidity.  Something was decidedly rotten behind the curtain.
• Fast forwarding to March of this year:   Deutsche Bank fails the banking industry’s “stress tests” and is given a stern warning to shore up it’s capital structure.
• In April,  Deutsche Bank confirms it’s agreement to a joint settlement with the US and UK regarding the manipulation of LIBOR.   The bank is saddled with a massive $2.1 billion payment to the DOJ.  (Still, a small fraction of their winnings from the crime). 
• In May,  one of Deutsche Bank’s CEOs, Anshu Jain is given an enormous amount of new authority by the board of directors.  We guess that this is a “crisis move”.  In times of crisis the power of the executive is often increased.
• June 5:  Greece misses it’s payment to the IMF.   The risk of default across all of it’s debt is now considered acute.   This has massive implications for Deutsche Bank.
• June 6/7:  (A Saturday/Sunday, and immediately following Greece’s missed payment to the IMF) Deutsche Bank’s two CEO’s announce their surprise departure from the company.  (Just one month after Jain is given his new expanded powers).   Anshu Jain will step down first at the end of June.  Jürgen Fitschen will step down next May.
• June 9: S&P lowers the rating of Deutsche Bank to BBB+  Just three notches above “junk”.  (Incidentally,  BBB+ is even lower than Lehman’s downgrade – which preceded it’s collapse by just 3 months)

And that’s where we are now.  How bad is it?  We don’t know because we won’t be permitted to know.  But these are not the moves of a healthy company.

How exposed is Deutsche Bank?

The trouble for Deutsche Bank is that it’s conventional retail banking operations are not a significant profit center.  To maintain margins, Deutsche Bank has been forced into riskier asset classes than it’s peers.

Deutsche Bank is sitting on more than $75 Trillion in derivatives bets — an amount that is twenty times greater than German GDP.    Their derivatives exposure dwarfs even JP Morgan’s exposure – by a staggering $5 trillion.

With that kind of exposure, relatively small moves can precipitate catastrophic losses.   Again, we must note that Greece just missed it’s payment to the IMF – and further defaults are most certainly not beyond the realm of possibility.

And if the dominos were not adequately stacked already, there is one final domino which perfects the setup.

Meet Tom Humphrey.  He heads up Deutsche Bank’s Investment Banking operations on Wall Street.

He was also head of fixed income at Lehman.

History never repeats.   But it does rhyme.    In market terms, it tends to rhyme just about every 7 years.