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This week’s review of Randall Forsyth’s “Up and Down Wall Street” column from Barron’s Magazine, featuring information about Deutsche Bank.

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Overview:

Deutsche Bank equity and debt securities plunged on after reports that “hedge funds had withdrawn money held as collateral at the bank for their derivatives, transactions, and other positions.”
This sounded very Lehman-like to investors.
Deutsche’s Chief, John Cryan has said that DB has strong fundamentals and the reports of hedge funds had aroused unjustified concerns.
WSJ reported that some hedge funds who had pulled money also handsomely profited from by shorting DB.
DB was not and is not going to fail. The DOJ $14B penalty isn’t realistic either.
The big worry is DB’s $60T derivatives book (the gross exposure of the bank’s contracts).
“DB’s net exposures are sufficiently large to blow up the financial system.”
All this could impact U.S. homeowners via interest rates.
“Dollar Funding Stress is Back.”
- Funding Currency
- Currency Carry Trade
- Carry Trade
- The funding costs (rates) for European banks increased due to DB headlines.
- This increased demand for Dollars at low rates.
- U.S. money-fund reforms set for mid-October have already pushed up short-term rates, most notably LIBOR.
- LIBOR is basis for many U.S. loans, including mortgages.
If rising LIBOR impacts housing, could put more stress on Fed to not raise rates.
Bloomberg says 59% chance of raise in Dec., but odds are against chances of rate increase in 2017.