CNBC: “German officials could be about to find themselves in an uncomfortable position: Being called on to show they’re ready to rescue a bank in a part of the world where such operations are considered taboo.
In a broad perspective, the move would represent a minor dent in Deutsche’s derivatives clearing business. But at a time when investors are fearing what the future holds for the highly leveraged institution, such news is enough to cause ripples.”
Opinion: European banks, reflecting the weak European (Socialist) economy, have had financial troubles since 2008. But until now, Germany has been the bright spot, even being the lender to Greece to avoid that nation from exiting the EU.
Deutsche, the third largest bank in the EU, posted its first full-year loss since 2008 in January, due to a variety of problems including a €5.2bn (euro) provision for fines and lawsuits, sending its shares lower and pushing its new bonds into a tailspin.
And Deutsche Bank has a problem with derivatives.
Here is the textbook definition: A derivative is a contract that derives its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate, and is often called the “underlying.”
Derivatives can be used for a number of purposes – including insuring against price movements (hedging), increasing exposure to price movements for speculation, or getting access to otherwise hard to trade assets or markets.
If that made no sense – don’t worry – you’re in good company. After a career in the financial industry, I don’t understand it either and any one who tells you they do is either lying or a computer.
There are 6 main classes of investments: stocks, bonds, commodities, real estate, collectibles and cash. A derivative is a play on one of those asset classes with an almost infinite amount of what ifs.
They are invented by financial whiz-kids using computer programs and sold to institutions and unsuspecting retail investors as safe and predictable. They are neither.
Deutsche Bank has $65 trillion in derivative exposure, an almost inconceivable amount of money.
When a hedge fund trades in these instruments they have to put up cash. Yesterday 11 of 200 institutional customers pulled their cash as a show of no confidence in the bank’s reserves.
Unlike the US, the EU frowns on bank bailouts, and yesterday’s drop reflected the fear that another Lehman collapse may be around the corner.
If I had to pick out only 1 cause of the financial collapse described by the Apostle John in Revelation 6:5-6 it would no doubt be a derivative meltdown.
For context, it is estimated by financial experts that there are $1.2 quadrillion in derivatives in existence.
But since I don’t really understand it, and will not be here to see it, there is not much point in worrying about it.