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Most observers tend to regard Germany as the strong hub that is holding the rest of Europe together economically, but the truth is that serious trouble is brewing under the surface.
As I write this, the German DAX stock index is down close to 20 percent from the all-time high that was set back in April, and there are lots of signs of turmoil at Germany's largest bank.
There are very few banks in the world that are more prestigious or more influential than Deutsche Bank, and it has been making headlines for all of the wrong reasons recently.
Just like we saw with Lehman Brothers, banks that are "too big to fail" don't suddenly collapse overnight. The truth is that there are always warning signs in advance if you look closely enough.
In early 2014, shares of Deutsche Bank were trading above 50 dollars a share. Since that time, they have fallen by more than 40 percent, and they are now trading below 29 dollars a share.
It is common knowledge that the corporate culture at Deutsche Bank is deeply corrupt, and the bank has been exceedingly reckless in recent years.
If you are exceedingly reckless and you win all the time, that is okay. Unfortunately for Deutsche Bank, they have increasingly been on the losing end of things.
Prior to the "sudden collapse" of Lehman Brothers on September 15th, 2008, there had been media reports of mass layoffs at the firm. To give you just a couple of examples, CNBC reported on this on March 10th, 2008 and the New York Times reported on this on August 28th, 2008.
When big banks start getting into serious trouble, this is what they do. They start getting rid of staff. That is why the massive job cuts that Deutsche Bank just announced are so troubling...
Deutsche Bank aims to cut roughly 23,000 jobs, or about one quarter of total staff, through layoffs mainly in technology activities and by spinning off its PostBank division, financial sources said on Monday.
That would bring the group's workforce down to around 75,000 full-time positions under a reorganization being finalised by new Chief Executive John Cryan, who took control of Germany's biggest bank in July with the promise to cut costs.
Cryan presented preliminary details of the plan to members of the supervisory board at the weekend. A spokesman for the bank declined comment.
Deutsche Bank has also been facing mounting legal troubles. The following is a brief excerpt from a recent Zero Hedge article...
The bank, which has paid out more than $9 billion over the past three years alone to settle legacy litigation, has become something of a poster child for corrupt corporate culture.
In April, Deutsche settled rate rigging charges with the DoJ for $2.5 billion (or about $25,474 per employee) and subsequently paid $55 million to the SEC (an agency that's been run by former Deutsche Bank employees and their close associates for years) in connection with allegations it deliberately mismarked its crisis-era LSS book to the tune of at least $5 billion.
But it was out of the frying pan and into the fire so to speak, because early last month, the DoJ announced it would seek to extract a fresh round of MBS-related settlements from banks that knowingly packaged and sold shoddy CDOs in the lead up to the crisis. JP Morgan, Bank of America, and Citi settled MBS probes when the DoJ was operating under the incomparable (and we mean that in a derisive way) Eric Holder but now, emboldened by her pyrrhic victory over Wall Street's FX manipulators, new Attorney General Loretta Lynch is set to go after Barclays PLC, Credit Suisse Group AG, Deutsche Bank AG, HSBC Holdings PLC, Royal Bank of Scotland Group PLC,UBS AG and Wells Fargo amp; Co.
Of course the legal troubles are just the tip of the iceberg of what has been going on over at Deutsche Bank over the past couple of years. The following is a pretty good timeline of some of the major events that have hit Deutsche Bank since the beginning of last year. It comes from a NotQuant article that was published back in June entitled "Is Deutsche Bank the next Lehman?"...
- In April of 2014, Deutsche Bank was forced to raise an additional 1.5 Billion of Tier 1 capital to support its capital structure. Why?
- 1 month later in May of 2014, the scramble for liquidity continued as DB announced the selling of 8 billion euros worth of stock - at up to a 30% discount. Why again? It was a move which raised eyebrows across the financial media. The calm outward image of Deutsche Bank did not seem to reflect their rushed efforts to raise liquidity. Something was decidedly rotten behind the curtain.
- Fast forwarding to March of this year: Deutsche Bank fails the banking industry's "stress tests" and is given a stern warning to shore up it's capital structure.
- In April, Deutsche Bank confirms its agreement to a joint settlement with the US and UK regarding the manipulation of LIBOR. The bank is saddled with a massive $2.1 billion payment to the DOJ. (Still, a small fraction of their winnings from the crime).
- In May, one of Deutsche Bank's CEOs, Anshu Jain is given an enormous amount of new authority by the board of directors. We guess that this is a "crisis move". In times of crisis the power of the executive is often increased.
- June 5: Greece misses its payment to the IMF. The risk of default across all of its debt is now considered acute. This has massive implications for Deutsche Bank.
- June 6/7: (A Saturday/Sunday, and immediately following Greece's missed payment to the IMF) Deutsche Bank's two CEO's announce their surprise departure from the company. (Just one month after Jain is given his new expanded powers). Anshu Jain will step down first at the end of June. Jürgen Fitschen will step down next May.
- June 9: Samp;P lowers the rating of Deutsche Bank to BBB+ Just three notches above "junk". (Incidentally, BBB+ is even lower than Lehman's downgrade - which preceded its collapse by just 3 months)
Are you starting to get the picture? These are not signs of a healthy bank.
What makes things even worse is how recklessly Deutsche Bank has been behaving. At one point, it was estimated that Deutsche Bank had a staggering 75 trillion dollars worth of exposure to derivatives.
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The Regulatory Asset Base expression was defined and established in 1990 in the United Kingdom to avoid financial difficulties of private companies who were in the energy business. It is now the time that this definition should be implemented into the local environment in Turkey to avoid possible bankruptcies. The Regulatory Asset Base (RAB) usually refers to the measure of the net value of a companys regulated assets used in price regulation. It is used in calculating important elements of the revenue requirements (the basis for the tariff calculation), depreciation allowance and return on capital.
An important article was released by The Hurriyet Daily on 8 September titled Growing Financial Difficulties of Private Companies in Local Energy Business.
Let us read the first paragraph of that article:
Companies have paid 21.1 billion USD for the privatization of electricity in Turkey since 2009. However, due to deteriorating economic indicators and extreme value increase in the USD with respect to the Turkish Lira, local companies are in a difficult financial situation in repaying their debts to lenders. Turkish private distribution companies are unable to pay their 7.7 billion USD debt, out of which 7 billion USD belongs to commercial banks. In the case of a collapse in the repayment of their debts to the electricity markets, havoc will occur in the banking sector. Ref. Hurriyet 8-Sep- 2015
Electric distribution companies are in default due to the fact that their debts are in USD but their income is in Turkish lira, which has brought them to the point of bankruptcy. They have asked public sources to help them; however, there is a misinterpretation of the situation. Theres no crisis in this regard. There is a mismanagement and miscalculation of the financial sources of the private companies who were exposed to high debts.
These companies have exaggerated the incident when commenting, saying, Contracts have been made in US dollars, but the collections were in Turkish Lira. The recent exchange rate differences brought financial difficulty. Well, all contracts referenced were written in the tender documents upfront. There is no change later. The companies should make the calculations correctly to avoid such exposure to risk.
Markets regulate the private companies. Wisdom says that our private investors know best, so why didnt these investors avoid the increase in prices before the cutthroat exchange rates were in place, and thus stop moving forward in the tender process? What was preventing them? In the past, our electricity market was owned and operated by public institutions. We used to have harsh criticism of public institutions. Contracts were not progressing properly, they were not completed on time, and they were completed incorrectly with progress lacking. Thus, plants could not be run well.
Because power plants, transmission, distribution, and retail all were in public ownership, they belonged to the public, to the nation, to us. They were as if ours in the end. We, Turkish citizens, saw them as our own property, we wanted them and hoped the best for them. Authorities in the public companies were our friends, they agreed with and accepted our criticism; they brought our feelings, writings, and solutions to their in-house meetings, and they tried their best to make the necessary upgrades.
Now the property has been passed to private investors. It is their property. We have no obligations, no responsibility, no care. They may operate or may not operate; they may shut it down if it is not profitable. If they cannot operate it properly and they lose money and go bankrupt and their property will be taken by the lending commercial bank and resold to another competent company. We have no obligation. So why are we entering such conversation? Why does the regulatory agency EMRA enter into the conversation?
If an electricity generation plant or an electricity distribution system cannot be operated efficiently, loses money or goes bankrupt, then the lending bank gets the ownership and can sell it again to another competent operator. There is nothing lost in the market. There is no need to interfere with the ongoing commercial events outside. We should leave the market forces to regulate the markets.
On the other hand, we do not know any news regarding the necessary rehab works that need to be done in the existing privatized power plants. Environmental exemption continues for the existing plants. Plants are operated at full capacity at their highest availability in order to get high cash income without spending much on necessary environmental equipment. Necessary electrostatic dust filter ESP upgrades and flue gas desulphurisation FGD purchases are ignored. There is almost no additional spending other than operation costs, fuel cost and employee salaries. Most of them have inadequate Ash dams.
We have now more than 70K MWe installed on the records but most of the public plants are not in operation. For example, 6 units out of 8 total in Afsin Elbistan are not in operation. Rehab investments are necessary for the privatized power plants, but such investments have not yet been made. Yet the investors are going bankrupt in their operation due to unplanned, inappropriate operation. Most of them are operating with an unqualified and inexperienced engineering capacity. Work barely goes ahead or, most of the time, they cannot go forward at all.
In fact, it was a completely wrong decision to privatize the former state power plants. Old power plants would have been run by the public until the end of their useful lives. Private investors would be required to set up a new plant. Existing natural monopolies cannot be open to competition. Investors may win but society will surely lose.
The Minister of Energy of the past government left his job to a new appointee until the snap elections, which are scheduled for 1 November. We had the opportunity to work with an experienced minister who came from the energy business in the past. Now, we are in transition period. If an investor cannot operate a plant or a distribution system, we should let the market forces regulate the plant and we should not interfere. In the meantime, we should learn more about regulatory asset base terminology in order to run the business better in the future.
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A Finance Ministry source said state-run banks would be instructed to lend low-interest loans to grass-roots people nationwide to boost their financial liquidity and create jobs, as such citizens are in a cash squeeze and cannot access formal financial sources.
The Finance Ministry has been meeting with the Government Savings Bank and the Bank for Agriculture and Agricultural Cooperatives (BAAC) to discuss cutting their interest rates for the 40 billion baht in loans to Village Funds to 3% from 5%.
If the banks agree, the loans will be charged at less than the 5% rate of the 15 billion baht in policy loans extended by the Small and Medium Enterprise Development Bank of Thailand.
The Fiscal Policy Office has been meeting with state-owned banks to discuss how they can help grass-roots people and will submit proposals to Mr Apisak today, the source said.
Accelerating public investment in small projects such as water and road construction will be part of the stimulus measures, the source said, adding that cash giveaways would not be included.
The leftover central budget and undisbursed investment budget for fiscal 2015, amounting to a combined 7.91 billion baht, will be used to finance the new measures, the source said.
The National Legislative Assembly has passed a proposal by the Budget Bureau that would transfer the undisbursed investment budget to the central budget, only the second time in the bureaus 51-year history that it has tried such a ploy.
State agencies that fail to draw down their budget as scheduled usually ask the Finance Ministry to carry over the funds to the next fiscal year. The new measure takes effect today.
Meanwhile, BAAC president Luck Wajananawat suggested that financial aid for farmers involve a flexible loan policy to put money in farmers pockets.
Improving irrigation and promoting the growth of economic crops are also important, he said.
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BERLIN/FRANKFURT Aug 17 The DAX top-30 index looked set to open 0.4 percent higher on Monday, according to premarket data from brokerage Lang Schwarz at 0603 GMT.
The following are some of the factors that may move German stocks:
German Chancellor Angela Merkel tried to reassure sceptical lawmakers on Sunday that the International Monetary Fund would take part in a new bailout for Greece, before a parliamentary vote in which many of her conservatives may break ranks and reject the rescue.
SIEMENS, BMW, DAIMLER, VOLKSWAGEN
Siemens indicated 0.5 percent higher
BMW indicated 1.2 percent higher
Daimler indicated 0.9 percent higher
Volkswagen indicated 0.8 percent higher
Germanys exporter-heavy auto industry, home of carmakers such as Volkswagen and Daimler, could be poised for a slowdown next year as demand in foreign markets slows, Siemens Chief Executive Officer Joe Kaeser said in a newspaper interview.
Indicated 0.5 percent higher
Service on the groups Dutch mobile network was restored on Saturday after a software problem disrupted it for almost 24 hours, the company said.
Separately, the operator of Berlins new airport will review payments made to Siemens, Bosch and Deutsche Telekom unit T-Systems to check there has been no overpayments made for their work, a spokesman said on Sunday.
Fitch affirmed Deutsche Telekom at BBB+, with a stable outlook.
Indicated 0.5 percent higher
Selective acquisitions remain part of the consumer goods groups strategy and its 2016 financial targets, CFO Carsten Knobel told Euro am Sonntag. Takeovers are possible in all three business units laundry home care, beauty care and adhesives, he said.
Indicated 0.6 percent higher
The fashion house will expand its presence in China, key shareholder Gaetano Marzotto said in an interview in newspaper Welt am Sonntag.
Despite slowing growth in the worlds second-largest economy, Marzotto told the paper that he saw the potential for higher sales in China.
Indicated 0.1 percent higher
Nestle said on Friday it was suing Suedzucker and two other sugar refiners for 50 million euros ($55.7 million) in damages, joining peers in trying to claw back money from firms that were found to have participated in a price rigging cartel.
Indicated 4.9 percent higher
The automotive and industrial supplier Stabilus raised its 2015 guidance after reporting an 11 percent jump in third-quarter operating profit.
AIR BERLIN, TUI
Air Berlin indicated 1.6 percent lower
No indication available for TUI
TUI has sold off the rest of its stake in Air Berlin, a spokesman said, confirming a report by Wirtschafts Woche magazine. The stake was already below 3 percent in November 2014.
Separately, The Times reported that TUI was considering spinning off non-core assets with a turnover of about 3 billion euros.
HHLA - HSBC raises the stock to hold from reduce
OVERSEAS STOCK MARKETS
Dow Jones plus 0.4 pct, SP 500 plus 0.4 pct, Nasdaq plus 0.3 pct. at Fridays close.
Nikkei plus 0.5 pct at Mondays close. Shanghai stocks plus 0.5 pct at 0607 GMT.
BHF KLEINWORT BENSON
French bank Oddo Cie is examining a counter offer for BHF Kleinwort Benson, which Chinese Fosun aims to take over, Frankfurter Allgemeine Zeitung said on Saturday, citing financial sources. Oddos counter offer has been worked out, but is not on the table yet, the paper cites a source.
MANN + HUMMEL
German car parts maker Mann + Hummel is buying US firm Affinias auto filter unit for $1.3-1.4 billion, a person familiar with the transaction said on Sunday.
GERMAN ECONOMIC DATA
No economic data scheduled.
EUROPEAN FACTORS TO WATCH
REUTERS TOP NEWS (Reporting by Andreas Cremer, Kirsti Knolle and Maria Sheahan)
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Central Bank of Nigeria
The Central Bank of Nigeria (CBN) and the International Finance Corporation (IFC), a member of the World Bank Group, have said that the current difficulties being faced by the countrys micro, small and medium enterprises (MSMEs) in accessing funds to develop their business will be greatly reduced by the strengthened credit reporting system and the launch of a national collateral registry (NCR) for moveable assets before the end of the year.
The assertion was made during the workshop for the Working Group of the Credit Reporting and National Collateral Registry Education and Awareness programme held in Lagos recently.
The workshop, held to update members of the working group on the status and the mechanics of the credit reporting system and the collateral registry in Nigeria, also highlighted various ways parties within the credit system lenders and borrowers could leverage the strengthened credit infrastructure in Nigeria.
The Deputy Governor, Financial System Stability (FSS), CBN, Dr. Okwu Nnanna, described the collateral registry, the single central and electronically driven database where all moveable assets to be pledged as collateral for credit are registered in order to avoid the re-pledging of the same encumbered assets that have existing liens, as the missing link needed to connect the MSME sector in the country to financial sources.
According to Nnanna, who was represented by a Deputy Director in the Financial Policy and Regulation Department of CBN, Udofia Obot : A collateral registry is needed to assist in converting moveable assets into effective and risk-free collateral for use to obtain loan from financial institutions in the country, making those assets useful by linking their owners to sources of financing for the growth of their businesses.
A statement quoted him to have explained that the establishment of the collateral registry for moveable assets became imperative to curb the challenges being faced by MSMEs as a result of their lack of access to financing.
These challenges, according to him, had manifested in the crippling of the sectors growth, and led to loss of latent innovation, creativity and productivity.
He further noted that the collateral registry for moveable assets had improved MSMEs access to financing in China, Vietnam and Ghana, recording disbursements to the tunes of $3.5 trillion in five years, $600 million in three years and $3.5 billion in seven years, respectively.
In her presentation, IFCs Principal Credit Bureau Specialist in Sub-Saharan Africa, Ms. Luz Maria Salamina, highlighted the benefits of a functioning credit system to any economy. For her, a responsible credit system is enabled by the interplay of credit bureau, collateral registry and insolvency/creditors rights for enhancement of access to credit for MSMEs and individuals.