In hindsight there were a few early-warning signs, but the true scale of the disaster publicly unfolded only in the final moments before it became apparent that Lehman was doomed.
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.”
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
A mere 3 months later, in the course of just one week, Lehman would announce a major loss and file for bankruptcy.
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:
And that’s where we are now.
How bad is it?
The trouble for Deutsche Bank is that it’s conventional retail banking operations are not a significant profit centre. 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 Derivitive 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.
Well, if the dominos were not adequately stacked already, there is one final domino which perfects the setup.
Tom Humphrey now heads up Deutsche Banks Investment Banking operation on Wall Street.
Tom Humphrey also just happens to have been the Head of Fixed Income at Lehman when it collapsed.
By Daniel Dungate