The Too Big to Fail Collision Course

And the unsuspecting consumers in harm’s way

As NASCAR fans fill the stands on race day, many of them anxiously await the excitement of the first crash where no one is hurt yet the wreckage is colossal, cheering when the driver walks away unscathed.  From its earliest races, fans have lined up to see the carnage of twisted metal, but no one wants to see the drivers injured.  That is why safety precautions have been instituted on the track, in the cars, the driver’s flame-retardant suits, protective headgear, etc.   Even the fans are protected with reinforced steel fencing.

Similarly, banks are supposed to have safeguards built in to protect the financial system (drivers) and the depositors (spectators in the stands).

Unfortunately, sometimes safety measures fail.  It happens on the racetrack when a driver becomes too aggressive or the equipment fails, and it happens in the banking system when unrestrained greed encourages too much risk.  The reality is a crash always affects someone.  Even if a driver isn’t injured in a NASCAR accident, someone must pay for the repairs.

It’s the same with banks.

Sometimes, real injuries occur on the racetrack.  It’s always a tragedy when it happens, but it does happen.  Drivers are aware of the risk.  However, spectators should never be placed in harm’s way, but sometimes they are – like the injuries sustained by fans from the crash at Daytona highlighted in the video above, despite all the safety precautions.

It’s the same with banks.

Despite regulations at the local and international levels, and despite significant regulatory oversight, bankers still find ways of placing the financial markets and their depositors at risk.

In 2017, Canada faced the potential for significant turmoil in its financial markets when one of its too big to fail institutions, Home Capital Group, Inc., was under scrutiny for potential fraud due to its sub-prime lending exposure, resulting in massive depositor withdrawals, a precipitous decline in its (stock) share value, and the need to secure a $2 Billion emergency line of credit.  Back then, analysts were drawing parallels to the 2008 financial crisis that started with our own housing market and sub-prime lending failures.

That scare was minor compared to news today rattling financial markets in Europe and around the globe due to Deutsche Bank’s recent restructuring announcement.  On Sunday, July 7, 2019, Deutsche Bank, Germany’s largest, confirmed it was shrinking its entire workforce by nearly 25% (18,000 workers), according to Fortune, as it pulled out of the global equities market while scaling back other portions of its business portfolio to reduce risk.

What’s at risk?

According to an April 2019 article from Pam and Russ Martens at Wall Street on Parade, Deutsche Bank has roughly $49 Trillion in notional derivatives exposure, according to their 2018 annual report.

During 2018, the serially troubled Deutsche Bank – which still has a vast derivatives footprint in the U.S. as counterparty to some of the largest banks on Wall Street – trimmed its exposure to derivatives from a notional €48.266 trillion to a notional €43.459 trillion (49 trillion U.S. dollars) according to its 2018 annual report. A derivatives book of $49 trillion notional puts Deutsche Bank in the same league as the bank holding companies of U.S. juggernauts JPMorgan Chase, Citigroup and Goldman Sachs, which logged in at $48 trillion, $47 trillion and $42 trillion, respectively, at the end of December 2018 according to the Office of the Comptroller of the Currency (OCC). (See Table 2 in the Appendix at this link.)

Granted, the amount at risk is substantially less than $49 Trillion, but given the intertwined nature of the exposure all the big banks share, the actual global risk exposure is still in the trillions.  That is a contributing factor as to why Deutsche Bank was labeled the world’s most dangerous bank by the International Monetary Fund (IMF) in 2016.  And, that was after receiving a secretive $354 Billion (bailout) loan from the U.S. Federal Reserve during the 2008 financial crisis, which was caused, in part, by the collapse of Lehman Brothers and their sub-prime mortgage exposure.

The chain reaction of Lehman’s bankruptcy filing in 2008 impacted the derivatives markets and shadow banking industry (money markets), causing the financial crisis.  As a comparison to Deutsche Bank’s $49 Trillion derivatives exposure today, it is estimated that Lehman only held roughly $35 Trillion globally.

While the exact size of LBSF’s derivatives portfolio in September 2008, on a prebankruptcy basis, has not been published, Lehman Brothers’ global derivatives portfolio was estimated to be $35 trillion in notional value, representing about 5 percent of derivatives transactions globally. (Summe, Kimberly Anne. An Examination of Lehman Brothers’ Derivatives Portfolio Postbankruptcy: Would Dodd-Frank Have Made a Difference?. p. 88)

Lehman Bankruptcy


Compounding the risk, the shadow banking industry has also increased roughly 75% – to $52 Trillion – since the 2008 financial crisis, according to CNBC.

Along with the unintended consequences of another global financial crisis potentially orders of magnitude more significant than 2008 if Deutsche Bank collapses, is it possible for collateral damage beyond the financial sector?  Absolutely!  Just like the unsuspecting spectators at a NASCAR race, if Deutsche bank crashes, the shareholders and depositors will be impacted through no fault of their own as the fallout destroys all the protections put in place.  Even with deposit insurance like the FDIC, depositors may not be made whole due to changes in banking guidance provided by the Financial Stability Board after 2008.

Seemingly unrelated, there may be another casualty if the Deutsche Bank contagion spreads.

President Trump has heralded the success of his presidency directly as it relates to the apparent success of the U.S. economy, and, more specifically, the U.S. financial markets.  That is very dangerous.  He has had a tremendous impact on the economy due his trade policies and negotiations, along with his restructuring of onerous regulations.  He should take credit for that.  But, the financial markets are manipulated beyond his control and are completely detached from economic realities today.  There, he needs to tread especially carefully.

If we witness another financial collapse on the scale of 2008 (or worse) between now and election day 2020, President Trump will almost certainly be voted out of office.  Despite his re-election hopes, he needs to prepare the American public now for that potentiality.

Whenever the next collapse happens, whether it’s triggered by Deutsche Bank or some other too big to fail institution’s mismanagement, the stakes are much higher because the global debt is much higher and there is already too much money in circulation globally for central banks to simply print more in hopes to paper over the mess.  Sooner or later, the financial markets will be forced to reflect reality.  When that happens, the entire globe will be impacted in ways no one has ever witnessed, and it may finally give the few at the top who control international monetary policy the opportunity to usher in their utopian one-world currency.

Time will tell how it all plays out, but a reckoning is coming eventually.  Who it impacts along the way is yet to be seen.

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  1. Depositors beware of placing all your money in banks. Each day, as I see what is going on in the world, I see the prophecy of the last days being fulfilled. The Bible has given us all the information we need, if we search for it. Thanks again for the very informative article.

    1. Thanks, Grace. Without the manipulation of central banks, the coming collapse would have happened long ago. How long it will be is still an unknown. But, as you indicated, it is foretold for the last days. Reader beware…

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