The Bigger The Short The Bigger The Fail

It is not easy to forget the beginning of the global financial crisis of 2008. The ‘too big to fail’ theory which was quickly proven wrong as some of the largest investment banks in the world disappeared overnight, spiralling the U.S. and Europe into an economic meltdown some countries are still struggling to get out of.

And what was the trigger? Mortgages. Well, more specifically, mortgage backed securities. Sold in excess of their value, triple A rated when in fact most were junk and then oddly enough bet against on the derivatives market, leveraging way beyond the acceptable limits. As Michael Lewis puts it in his book ‘The Big Short – Inside the Doomsday Machine’ “[He] was odd in his belief that the best way to make money on Wall Street was to seek out whatever it was that Wall Street believed was least likely to happen, and bet on its happening.” And we all know how that turned out.

So why aren’t people worrying as much as they should be about Deutsche Bank? According to Bloomberg, Germany’s largest bank has lost 53% of its share value this year alone whilst the cost to protect against it defaulting on senior debt has increased to more than twice its 10-year average.

Europe’s largest investment bank has been requested by the U.S. Department of Justice to pay USD 14 billion in settlement of claims that the bank sold fraudulent mortgage backed securities. It refuses to pay. Interestingly enough, anything in excess of USD 5.4 billion will require a capital increase and the EU’s new banking rules make it clear that bail-ins take precedence over bail-outs. So shareholders and junior bondholders will be the first in line to have to pay up to save the bank. If the bank can be saved.

What is of greater concern is that according to the IMF, Deutsche Bank ‘appears to be the most important net contributor to systemic risks’ among global banks. Sound familiar?

So why, 8 years on, have we not learnt from our mistakes? Why are we still risking a repeat of one of the worst periods in economic history? And why is no one worrying about Deutsche Bank?