Kroll's Whalen on Deutsche: Banks Are Over Regulated (Audio)

The Dial up one hundred twenty six points, up seven tenths of one percent, and Stack up nine tenths of one percent. The Tenure up seven thirty seconds, Zeal one point five six percent, Gold down twelve fifty ounce, the thirteen twenty seven a drop of nine tenths of one percent, and crude oil lower by two point seven percent forty four sixty seven. On w T I I'm Charlie Pellet. That's a Bloomberg Business flash. This is taking stock with Lean Hayes and pin Box on Bloomberg Radio. Taking stock

of Deutsche Bank. The cost of ensuring Deutsche Bank subordinated that rose to a record all amid growing concerns about the lenders of financial health. Here to tell us more about Deutsche Bank, It's role in the global financial system, and perhaps what happens next, We've got Chris Whalen. He's senior managing director and head of research at Kroll bond rating agency. Chris Whalen, Thanks very much for being with us. Hey, Hi, how are you, pim? I'm I'm fine. How if I

was at Deutsche Bank, would I be saying that? Probably not a tough day. Um. You know the comments from Chancellor and la Merkel the other day on not wanting to support the bank, we're not helpful. Um. But you know, unfortunately all of the leaders in Europe have their eyes on elections and politics and they have not been willing to really focus on what's needed to get the bank king system in their economy straightened out. So it's kind

of power for the course, I'm afraid. Okay, So give us the sort of the the a b cs of what's wrong with Deutsche Bank. Besides the fact that they may have to pay a US fine. We know that to pay a fine, but it could be as much as fourteen billion dollars. One of the astute European bank watchers I talked to earlier today said, you know, they've just never come to grips with recapitalizing their banks. But what is you know, if you had to give it a talk to your customers right now, you know, thirty

seconds or less, what's wrong with Deutsche Bank? Well? Two little capital number one, a business that is focused primarily on the capital markets. They don't have much of a lending business in Germany, a traditional banking business, and you know, the capital markets have been tough, Kathleen. So all of the big banks, universal banks as we refer to them, that have both the deposit side and the capital market

side of really had a tough time making money. I think we're going to see foreign any pour into the European banking system. Be think Chinese investors might want to come and invest in a Deutsche Bank, Well, I think they would love to pim But the necessary condition to get the party started is for the governments in Europe to extend support and mark their assets to to a

real market. The Europeans tell us that there's a trillion euros and non performing loans in Europe, and I think the number is two or three times at and no investor is going to go diving in there unless they're sure that they're seeing a clear picture where the bank actually is in terms of net assets. You know, for example, in Italy they're trying to convince Jamie Diamond to come to the rescue about Monte Depeche and again, you know, no, the government's got to go first. And this is what

you know. I hope the EU leadership is eventually gonna come to understand, but they're so focused on elections and on politics that they have been unwilling to do it well. It seems like all they've been able to really to

do is an exact duration. But in terms of fiscal union, banking union in Europe is to build a beautiful building, right but when it comes to seriously, but in terms of really having a centralized banking authority they can go in and make things happen and have the agreements in place to do that, they seem like they're still too

far away from that. Oh completely, Kathleen. I mean, the Europeans are where the United States was in nineteen thirty prior to nineteen thirty three, when we created the Federal Deposit Insurance corporation. If a bank failed, it ended up in a state receivership and because of this, the FED wouldn't lend to banks. You know, the economists often burate the FED for not doing enough during the depression, but they would not lend to banks because they didn't think

they get paid back. They would have been a general creditor standing in front of a state court judge. So in Europe you have a similar problem right now. If you want to fix a bank, it is going to be done nation by nation. There is no fiscal mechanism in Europe to deal with this, and there is know European Wide Banking Authority you know that has the power to really act. And that's the trouble. It's a it's

a nation by nation uh sort of this situation. And ultimately I think the Germans and the Italians are going to have to provide support, going back to Pim's questions, so we can get the party started. It reminds me of what happened when Indie Mac failed and the fd I C put it in a conservatorship. The room was empty, and then Sheila Bear and her colleagues at f d I s very astutely through risk sharing on the table and suddenly the room was full. The investors showed up.

And I think that's a good analogy for the Europeans to think about, because you've got to get the party started as sure. Of course investors want to come in here. They see opportunity, but they don't know what the opportunity is. Because everything in Europe, you know, international UH financial accounting rules are different from the US, very different through the opposite of the way a US bank has to deal with a bad asset. Hey, Chris said, just a thought

from you about to knock on effect. Because Germany's biggest shipping lender UH North deutsch Landesbank, they they cut their plans to sell those euro denominated bonds. Also, Deutsche luftonza with through a euro bond deal. I couldn't get the desired price, that's right. The lack of purposefulness on the part of the European leadership, the lack of of clarity, is causing investors to back away, and this is very dangerous.

If Deutsche Bank gets downgraded again, I think you may see of the counterparties back away, and that would be most unfortunate. I think Angela Merkel is playing a very dangerous game. If she thinks that somehow or another, letting the biggest bank in Germany go down is going to help her with her election prospects, I would respectfully beg to differ. You know, I find it hard to believe this isn't this potentially just playing politics. It's Germany's largest bank,

it's the third biggest bank in Europe. When push comes to show, I find it hard to believe they will not bail them out. And particularly y'allman owner and you know Yeoman, he's our Bloomberg News college who wrote that great book that came out in the middle of financial crisis, Zombie Banks, And a good part of that book is devoted to showing how the Germans bailed out tons of those smaller regional lowndes banks that were supported by politicians.

How could they let Deutsche Bank go down? Well, they think they can because it doesn't have much of a put print in Germany, Kathleen, As you just said, most of the real financing in Germany is performed by London, Spunken and various other types of state supported entities, mostly at the state level, not at the national level in Germany. So they look at Deutsche Banker. What did they see?

They see the big brother of bankers trust, all right, they see a London capital markets operation and they don't see an immediate domestic threat. But what they have to understand is that, you know, being bloody minded and somewhat I think reactionary when it comes to bank solidency issues is very shortsighted because you know, if you go into a deflation after a large bank fails, you have big problems.

Benevolence and a willingness to be flexible is always better because then, as Pim said before, we can get the investors to come in. This is what we did with a I G and City Group, and as critical as I was at the time of those transactions, it was the right thing to do because it saved us from a generalized debt deflation, which is destructive for everyone. Chris, just a little comparison, right, we're talking about a bank. The market cap now, let's call it, what about sixteen

billion dollars? What's the franchise worth? And just to put that in the context for you, Apple's market cap is six and eight billion. Well, at the moment, the markets telling you that the franchise isn't worth a lot, but you know, it's a very important bank. It's a large servicer here in the United States. Deutsche Bank is one of the most important services of commercial real estate. This is not a trivial thing. There are a trustee in

many commercial mortgage backed securities transactions. So the US has a stake here too. And I have to believe the US authorities are talking to their counterparties in Germany and very politely and respectfully, looking them in the eye and saying, really, do you really want to let me bank go? Dan Trulo, the FED governor, who's who's who's you know, who's portfolio really is banking? Comes out yesterday says, hey, I think the bank stress tests are gonna mean show that basically

to have even more capital, our banks holding enough capital? Yet, Chris, is it Are the regulars wrong now to keep piling on higher and our capital requirements at a time when the world is, you know, barely in a strong recovery, let alone a moderate one. Yes, they are the banks in the United States who particularly have vote too much capital. With all due respect to Dan Trulo, I think he's wrong. The stress tests as the FED is operating them are

pretty much useless from an analytical perspective. I don't think they tell you anything, and you know you're right. It's restraining growth. Regulation, over regulation, the demonization of banks instead of punishing bankers, UH is hurting the US economy, It's hurting the global economy, and the whole narrative is politicized and wrong as a result. You know, the politicians caused a crisis, Kathleen, and then they turned around and blamed the bankers. You know, and I Chris, when thanks so much.

I want to point out for our listeners are hard to be listened to Bloomberg Radio watch bloomber TT's seeing Chris. You know that he is a guy who was very critical of bank stopping need more capital for them to say now they've got their overregulated. This is this is an important thing to hear from. Chris Whalen, Senior Managing Director and head of Research at Crowl Bond Reading Agency. I'm Kathleen Hayes along with Pim Fox, and this is Bloomberg