I got a call, early early this morning from a friend in Tokyo. Actually, it was last night, he's a kind of a specialist, in fact, he doesn't deal with clients, his client is his employer, he works in the equity derivatives risk management team for DB. He got a notification of risk (figure out that a bank like DB would use such convoluted wording) basically he (and his whole team) were told that they were at risk of losing their job pending a complete review.
Basically, its a kindness of sort, it means to prepare yourself, don't buy anything extravagant and work the network because you could be out. His job is fascinating, basically, he manages the bank's derivatives exposure thereby reduce capital utilization. It's a supremely important job since he's basically the reason the bank will make a profit of 12% instead of 6%. Now he doesn't take any risk himself, he's not a trader he's a really really smart guy who's seen this business under all angles.
Initially, he wanted to work out of Frankfurt, but the city is not really his cup of tea nor did his non-german wife like the town!!! So Tokyo was the solution. Because he's so smart and what he does is so important for the bank's balance sheet the ONLY reason the bank would consider getting rid of him is if the equity derivatives business, that has been a huge source of revenues for the bank, is under threat.
He called me because we've been talking about the problems facing European banks in general, and German banks in particular, their still very low level of capital and their high leverage. Nothing about DB itself, frankly the nuts and bolts of the bank's difficulties are not very interesting, in fact rather boring to outsiders
On discussions have been about the fall in true liquidity, one reason capital allocation has grown in his group, because derivatives, although traded instrument can be difficult to unload, especially if there is no market depth, and the markets (most of them now) have been shallow as hell -- talk to trader in almost any market and try to move large trades is now nearly impossible, and that for top of the line traded instruments. When you are talking of some of the more exotic tools that banks have to use to hedge their risk, then all bets are off!
So we were somewhat commiserating since he was going to have to eventually leave Tokyo -- which is a great city and find a new job. His skill sets are such that he reasonably certain that he will find something else relatively shortly, and later this morning it was more or less confirmed that DB is exciting, at least in Asia, of the equity derivatives market -- eventually. My friend will almost be kept on board for the next few months -- until the business is shut down, but all this shows how things are changing.
The changes may allow DB to survive, it was always an odd entity with so many massive businesses that they had no right to "own" their derivatives portfolio was so large that it dwarfed the bank's balance sheet by several orders of magnitude. It was in the early 2000 a very aggressive financial institution -- a few Canadian ones that muscled themselves in the top league by taking massive risks.
I don't know if this latest move will save the bank, my gut feeling is that already the good ones are heading for the door, senior management is not concerned with the business but with the collapse of the operations -- it changes business perspective. Maybe this will allow DB to survive!
Now the next shoe to drop is Commerzbank and what will happen there, because, although at a lesser level, it too is in trouble. Time will tell
P.S. Just thought I would add, I don't think that DB will be the next Lehman,...it's much too big. The issue with DB is that if it has a problem it will result in systemic banking problems. Even when Lehman died most of its counterparts (e.g. other banks) had no idea as to the size and direction of their exposure -- since not all contracts are treated the same...). No, DB is potentially far riskier to the banking system than was Lehman, we can only hope that the Feds and the ECB are fully aware of the risk DB poses (a little sarcasm)
p.s. I hold no position (short, long or deriviatives) on any of the named companies above
Basically, its a kindness of sort, it means to prepare yourself, don't buy anything extravagant and work the network because you could be out. His job is fascinating, basically, he manages the bank's derivatives exposure thereby reduce capital utilization. It's a supremely important job since he's basically the reason the bank will make a profit of 12% instead of 6%. Now he doesn't take any risk himself, he's not a trader he's a really really smart guy who's seen this business under all angles.
Initially, he wanted to work out of Frankfurt, but the city is not really his cup of tea nor did his non-german wife like the town!!! So Tokyo was the solution. Because he's so smart and what he does is so important for the bank's balance sheet the ONLY reason the bank would consider getting rid of him is if the equity derivatives business, that has been a huge source of revenues for the bank, is under threat.
He called me because we've been talking about the problems facing European banks in general, and German banks in particular, their still very low level of capital and their high leverage. Nothing about DB itself, frankly the nuts and bolts of the bank's difficulties are not very interesting, in fact rather boring to outsiders
On discussions have been about the fall in true liquidity, one reason capital allocation has grown in his group, because derivatives, although traded instrument can be difficult to unload, especially if there is no market depth, and the markets (most of them now) have been shallow as hell -- talk to trader in almost any market and try to move large trades is now nearly impossible, and that for top of the line traded instruments. When you are talking of some of the more exotic tools that banks have to use to hedge their risk, then all bets are off!
So we were somewhat commiserating since he was going to have to eventually leave Tokyo -- which is a great city and find a new job. His skill sets are such that he reasonably certain that he will find something else relatively shortly, and later this morning it was more or less confirmed that DB is exciting, at least in Asia, of the equity derivatives market -- eventually. My friend will almost be kept on board for the next few months -- until the business is shut down, but all this shows how things are changing.
The changes may allow DB to survive, it was always an odd entity with so many massive businesses that they had no right to "own" their derivatives portfolio was so large that it dwarfed the bank's balance sheet by several orders of magnitude. It was in the early 2000 a very aggressive financial institution -- a few Canadian ones that muscled themselves in the top league by taking massive risks.
I don't know if this latest move will save the bank, my gut feeling is that already the good ones are heading for the door, senior management is not concerned with the business but with the collapse of the operations -- it changes business perspective. Maybe this will allow DB to survive!
Now the next shoe to drop is Commerzbank and what will happen there, because, although at a lesser level, it too is in trouble. Time will tell
P.S. Just thought I would add, I don't think that DB will be the next Lehman,...it's much too big. The issue with DB is that if it has a problem it will result in systemic banking problems. Even when Lehman died most of its counterparts (e.g. other banks) had no idea as to the size and direction of their exposure -- since not all contracts are treated the same...). No, DB is potentially far riskier to the banking system than was Lehman, we can only hope that the Feds and the ECB are fully aware of the risk DB poses (a little sarcasm)
p.s. I hold no position (short, long or deriviatives) on any of the named companies above
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