Yellen Called Emergency Meeting on Deutsche Bank

March 26, 2023, 2022 (EIRNS)—The now-weekly emergency financial meetings got kicked off on Friday, March 24, when Janet Yellen called an unscheduled and closed meeting of the Financial Stability Oversight Council to deal with the Deutsche Bank (DB) developments. When DB on Friday announced a traditional calming measure, repurchasing some of their own debt, it triggered the opposite result, a sell-off. Then German Chancellor Olaf Scholz, as Deutsche Bank’s stock plummeted on Friday, weighed in: “It is a very profitable bank and there is no reason to be concerned.” Yet another traditional calming measure.

Evidently, for markets to get upset about what is normally a calming measure, it suggests that DB was already being stared at, as it were—and almost any move could trigger panic (e.g., why is DB trying to calm us? They must be in big trouble, etc.). The underlying reality is that DB is known as one of the world’s powerhouses in the derivatives game, and the big question is, when the music stops, who is going to be left with a bunch of promises of making good on the gambling debts and which counterparty is not to be heard from. It seems that contagion is in the house.

This weekend has found the huge DB at the center of that derivatives-based contagion rumor. On Friday, March 24, the credit default swaps for DB, the so-called insurance for investors holding DB debt, soared. That served as the trigger for a DB stock plunge. But analysts this weekend have avoided addressing publicly why those credit default swaps went haywire in the first place.

AP quotes two analysts from the global financial research firm “Autonomous,” Leona Li and Stuart Graham, to say that “Deutsche is in robust shape. We are relatively relaxed in view of Deutsche’s robust capital and liquidity positions.” Since Deutsche Bank’s holdings of derivatives are “well known,” it is “just not very scary, in our view.” However, the same AP article usefully cites the Frankfurt School of Finance & Management professor of finance Sascha Steffen to explain that, when the market values the bank at below the assets put on their balance sheet, “That means investors are still very worried about what are the risks that the bank has on its balance sheet or its earnings potential going forward, and that’s not good.... It’s contagion—it’s lack of confidence, a lack of trust.”

It is the dreaded issue “counterparty risk” that is haunting the scene. It is claimed, in Deutsche Bank’s defense, that it is not Credit Suisse, that DB has much better numbers on paper. But, unfortunately, that DB is not Credit Suisse. Credit Suisse, though seriously involved in derivatives, doesn’t rise to the level of DB, as far as is known or suspected. However DB, as with the big four American banks, are at the center of the derivatives bubble.