Do we have to worry about European banks? We have a piece on the flagship site which says that Deutsche Bank (DB) could be worse than Lehman because of its leverage. We have the Italian banks, let by the oldest bank in the world, Monte Paschi, clearly on its last legs given its bad loans.
We know the sad shape of Royal Bank of Scotland (RBS).
What's going to become of all of these Lehman situations? First, they are going to scare the heck out of us because that's what people like to do with these situations. You invoke Lehman then you invoke systemic risk.
Second, you try to figure out how in heck they are going to get the equity that is needed -- not debt, but equity -- given the rapid decline of the stocks.
Then, after our banks crater off this and interest rates go even lower, the EU reveals a plan to save them because, alas, this is NOT the United States. There will be no Lehman, let alone Washington Mutual, Wachovia or Freddie Mac or Fannie Mae or AIG (AIG). There will be none of these because the elites who run these countries also run the banks.
Think of it like this. In our country the Fed and the Treasury weren't sure of their mandates. We know that the Fed thought it had no ability to do anything. We know from the autobiography of Tim Geithner that he, too, felt there was nothing that could be done.
So, the unpreparedness left the void and in the void came runs on the banks -- remember WAMU's runs? The Wachovia run? The leverage of AIG was insane and unquantifiable. Plus, the insurance on the debt was enough to bring down a host of counterparties. (I know, I know, I remember the charges by the press about Goldman (GS), but that's not the point of this missive). Of course Lehman said it had multiple deals in place, including a Korean bailout and that's often not mentioned. Lehman was 40-1 (we found that out later) and it was hopeless.
Now, let's go over Deutsche Bank. Here's a bank that failed the U.S. stress test ignominiously last year. And then failed it again. Was it kicked out or shut down?
Now how about in Europe? Do you think that the richest country on Earth, Germany, is going to let Deutsche Bank be Lehman? Do you think they are going to teach Deutsche a lesson, the way that Hank Paulson thought might be the right thing to do when Lehman was on the ropes? I think they ARE Deutsche Bank.
At the last minute they will inject the equity and that will be it. Before that we will have to have one of those nail-biters where George Soros says that this is worse than Lehman, (he has a big short position in it, I notice) and the usual bond guys issue dire warnings. The penultimate moment will come when the 10-year hits 1.2% or something like that and the end of the world sirens will be so loud that you will get a chance to buy everything.
The idea, by the way, that the government will take a stake in Deutsche Bank, which is can do in a heartbeat, solving the problem, will not dawn on anyone until the chaos is too late. But it is fairly logical, isn't it?
So, get ready for the chaotic times, exacerbated by those who are behind the market in performance, and just face it. This is how it has to be.
Oh, and ditto for all the other troubled banks.