Will the US Bail Out Deutsche Bank?

The Bush administration is proposing a massive $700 billion nationalization of the US banking industry in a "Hail Mary" effort to avoid a global collapse of the capital markets.  Reading the fine print, however, it is clear that the bail-out will also apply to non-US banks:

"In a change from the original proposal sent to Capitol Hill, foreign-based banks with big U.S. operations could qualify for the Treasury Department’s mortgage bailout, according to the fine print of an administration statement Saturday night.

The theory, according to a participant in the negotiations, is that if the goal is to solve a liquidity crisis, it makes no sense to exclude banks that do a lot of lending in the United States.

Treasury Secretary Henry Paulson confirmed the change on ABC's "This Week," telling George Stephanopoulos that coverage of foreign-based banks is "a distinction without a difference to the American people.""

I think what a lot of people have not realized is that Deutsche Bank is even more highly leveraged that Lehman Brothers, and was using guarantees provided by AIG to circumvent European capital regulatory requirements.  In fact, AIG had written over $300 billion in credit insurance policies for European banks, so a bankruptcy of AIG would have created an immediate crisis in Europe.  The Web site Vox has examined the implications:

Thus, a formal default of AIG would have exposed European banks’ large gap of regulatory capital, with possibly devastating effects on their ratings and market confidence. Which explains why AIG’s problems had sent shock waves through the share prices of European banks. Thus, the US Treasury has saved, inter alia, the European banking system. However, as AIG is to be liquidated, European banks will have to quickly shore up their regulatory capital.

In fact, the situation at Deutsche Bank is pretty alarming and requires immediate attention from BaFin and officials in Berlin:

The key problem on this side of the Atlantic is that the largest European banks have become not only too big to fail but also too big to be saved. For example, the total liabilities of Deutsche Bank (leverage ratio over 50!) amount to around 2,000 billion euro, (more than Fannie Mai) or over 80 % of the GDP of Germany. This is simply too much for the Bundesbank or even the German state to contemplate, given that the German budget is bound by the rules of the Stability pact and the German government cannot order (unlike the US Treasury) its central bank to issue more currency.

So the question for US Treasury Secretary Paulson is: WIll US taxpayers have to bail out Deutsche Bank for its reckless mismanagement of its balance sheet?

Comments

[Dennis]

Nice article.
Like to read more on this.
Thanx for posting.

[Detlef]

Kevin Drum wrote a post about that topic too. One of his commenters mentioned different accounting standards:

"As i understand it the main reason for the differences in the leverage ration between the european banks and the US banks is down to the differences between the accounting standards used. The EU uses IFRS which is stricter about which assets are to be carried on the balance sheets (and therefore show up in the leverage ratios) than the GAAP standards used by US banks.

For example Deutsche Bank in 2006 had 448 billion euros in assets on the balance sheet using GAAP but 1010 billion in assets under IFRS."

Don´t know if that´s true. And if true did vox take it into account?

[David]

The point is: DB is so highly leveraged that it used AIG credit guarantees to comply with capital requirements. What will happen once those guarantees are unwound?

[hypotheek lasten]

I have no doubt to believe that the key problem is that the largest European banks have become not only too big to fail but also too big to be saved.I Think the rescue measure like bailout option
is not something like a magic stick for all companies with the threat of bankruptcy.The aim of bailout option is not only to save companies to bankrupt,but its much more use is to break the viscious cycle of global financial recession . And if Deutsche Bank is one among those with no other solution than bailout,Yes I think they should consider it.