WEBVTT - Kroll's Whalen on Deutsche: Banks Are Over Regulated (Audio)

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<v Speaker 1>That's a Bloomberg Business flash. This is taking stock with

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<v Speaker 1>Lean Hayes and pin Box on Bloomberg Radio. Taking stock

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<v Speaker 1>of Deutsche Bank. The cost of ensuring Deutsche Bank subordinated

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<v Speaker 1>that rose to a record all amid growing concerns about

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<v Speaker 1>the lenders of financial health. Here to tell us more

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<v Speaker 1>about Deutsche Bank, It's role in the global financial system,

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<v Speaker 1>and perhaps what happens next, We've got Chris Whalen. He's

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<v Speaker 1>senior managing director and head of research at Kroll bond

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<v Speaker 1>rating agency. Chris Whalen, Thanks very much for being with us. Hey, Hi,

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<v Speaker 1>how are you, pim? I'm I'm fine. How if I

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<v Speaker 1>was at Deutsche Bank, would I be saying that? Probably

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<v Speaker 1>not a tough day. Um. You know the comments from

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<v Speaker 1>Chancellor and la Merkel the other day on not wanting

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<v Speaker 1>to support the bank, we're not helpful. Um. But you know,

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<v Speaker 1>unfortunately all of the leaders in Europe have their eyes

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<v Speaker 1>on elections and politics and they have not been willing

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<v Speaker 1>to really focus on what's needed to get the bank

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<v Speaker 1>king system in their economy straightened out. So it's kind

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<v Speaker 1>of power for the course, I'm afraid. Okay, So give

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<v Speaker 1>us the sort of the the a b cs of

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<v Speaker 1>what's wrong with Deutsche Bank. Besides the fact that they

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<v Speaker 1>may have to pay a US fine. We know that

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<v Speaker 1>to pay a fine, but it could be as much

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<v Speaker 1>as fourteen billion dollars. One of the astute European bank

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<v Speaker 1>watchers I talked to earlier today said, you know, they've

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<v Speaker 1>just never come to grips with recapitalizing their banks. But

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<v Speaker 1>what is you know, if you had to give it

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<v Speaker 1>a talk to your customers right now, you know, thirty

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<v Speaker 1>seconds or less, what's wrong with Deutsche Bank? Well? Two

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<v Speaker 1>little capital number one, a business that is focused primarily

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<v Speaker 1>on the capital markets. They don't have much of a

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<v Speaker 1>lending business in Germany, a traditional banking business, and you know,

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<v Speaker 1>the capital markets have been tough, Kathleen. So all of

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<v Speaker 1>the big banks, universal banks as we refer to them,

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<v Speaker 1>that have both the deposit side and the capital market

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<v Speaker 1>side of really had a tough time making money. I

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<v Speaker 1>think we're going to see foreign any pour into the

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<v Speaker 1>European banking system. Be think Chinese investors might want to

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<v Speaker 1>come and invest in a Deutsche Bank, Well, I think

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<v Speaker 1>they would love to pim But the necessary condition to

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<v Speaker 1>get the party started is for the governments in Europe

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<v Speaker 1>to extend support and mark their assets to to a

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<v Speaker 1>real market. The Europeans tell us that there's a trillion

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<v Speaker 1>euros and non performing loans in Europe, and I think

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<v Speaker 1>the number is two or three times at and no

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<v Speaker 1>investor is going to go diving in there unless they're

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<v Speaker 1>sure that they're seeing a clear picture where the bank

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<v Speaker 1>actually is in terms of net assets. You know, for example,

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<v Speaker 1>in Italy they're trying to convince Jamie Diamond to come

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<v Speaker 1>to the rescue about Monte Depeche and again, you know, no,

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<v Speaker 1>the government's got to go first. And this is what

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<v Speaker 1>you know. I hope the EU leadership is eventually gonna

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<v Speaker 1>come to understand, but they're so focused on elections and

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<v Speaker 1>on politics that they have been unwilling to do it well.

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<v Speaker 1>It seems like all they've been able to really to

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<v Speaker 1>do is an exact duration. But in terms of fiscal union,

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<v Speaker 1>banking union in Europe is to build a beautiful building,

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<v Speaker 1>right but when it comes to seriously, but in terms

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<v Speaker 1>of really having a centralized banking authority they can go

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<v Speaker 1>in and make things happen and have the agreements in

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<v Speaker 1>place to do that, they seem like they're still too

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<v Speaker 1>far away from that. Oh completely, Kathleen. I mean, the

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<v Speaker 1>Europeans are where the United States was in nineteen thirty

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<v Speaker 1>prior to nineteen thirty three, when we created the Federal

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<v Speaker 1>Deposit Insurance corporation. If a bank failed, it ended up

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<v Speaker 1>in a state receivership and because of this, the FED

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<v Speaker 1>wouldn't lend to banks. You know, the economists often burate

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<v Speaker 1>the FED for not doing enough during the depression, but

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<v Speaker 1>they would not lend to banks because they didn't think

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<v Speaker 1>they get paid back. They would have been a general

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<v Speaker 1>creditor standing in front of a state court judge. So

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<v Speaker 1>in Europe you have a similar problem right now. If

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<v Speaker 1>you want to fix a bank, it is going to

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<v Speaker 1>be done nation by nation. There is no fiscal mechanism

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<v Speaker 1>in Europe to deal with this, and there is know

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<v Speaker 1>European Wide Banking Authority you know that has the power

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<v Speaker 1>to really act. And that's the trouble. It's a it's

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<v Speaker 1>a nation by nation uh sort of this situation. And

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<v Speaker 1>ultimately I think the Germans and the Italians are going

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<v Speaker 1>to have to provide support, going back to Pim's questions,

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<v Speaker 1>so we can get the party started. It reminds me

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<v Speaker 1>of what happened when Indie Mac failed and the fd

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<v Speaker 1>I C put it in a conservatorship. The room was empty,

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<v Speaker 1>and then Sheila Bear and her colleagues at f d

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<v Speaker 1>I s very astutely through risk sharing on the table

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<v Speaker 1>and suddenly the room was full. The investors showed up.

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<v Speaker 1>And I think that's a good analogy for the Europeans

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<v Speaker 1>to think about, because you've got to get the party

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<v Speaker 1>started as sure. Of course investors want to come in here.

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<v Speaker 1>They see opportunity, but they don't know what the opportunity is.

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<v Speaker 1>Because everything in Europe, you know, international UH financial accounting

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<v Speaker 1>rules are different from the US, very different through the

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<v Speaker 1>opposite of the way a US bank has to deal

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<v Speaker 1>with a bad asset. Hey, Chris said, just a thought

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<v Speaker 1>from you about to knock on effect. Because Germany's biggest

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<v Speaker 1>shipping lender UH North deutsch Landesbank, they they cut their

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<v Speaker 1>plans to sell those euro denominated bonds. Also, Deutsche luftonza

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<v Speaker 1>with through a euro bond deal. I couldn't get the

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<v Speaker 1>desired price, that's right. The lack of purposefulness on the

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<v Speaker 1>part of the European leadership, the lack of of clarity,

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<v Speaker 1>is causing investors to back away, and this is very dangerous.

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<v Speaker 1>If Deutsche Bank gets downgraded again, I think you may

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<v Speaker 1>see of the counterparties back away, and that would be

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<v Speaker 1>most unfortunate. I think Angela Merkel is playing a very

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<v Speaker 1>dangerous game. If she thinks that somehow or another, letting

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<v Speaker 1>the biggest bank in Germany go down is going to

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<v Speaker 1>help her with her election prospects, I would respectfully beg

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<v Speaker 1>to differ. You know, I find it hard to believe

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<v Speaker 1>this isn't this potentially just playing politics. It's Germany's largest bank,

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<v Speaker 1>it's the third biggest bank in Europe. When push comes

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<v Speaker 1>to show, I find it hard to believe they will

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<v Speaker 1>not bail them out. And particularly y'allman owner and you

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<v Speaker 1>know Yeoman, he's our Bloomberg News college who wrote that

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<v Speaker 1>great book that came out in the middle of financial crisis,

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<v Speaker 1>Zombie Banks, And a good part of that book is

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<v Speaker 1>devoted to showing how the Germans bailed out tons of

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<v Speaker 1>those smaller regional lowndes banks that were supported by politicians.

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<v Speaker 1>How could they let Deutsche Bank go down? Well, they

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<v Speaker 1>think they can because it doesn't have much of a

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<v Speaker 1>put print in Germany, Kathleen, As you just said, most

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<v Speaker 1>of the real financing in Germany is performed by London,

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<v Speaker 1>Spunken and various other types of state supported entities, mostly

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<v Speaker 1>at the state level, not at the national level in Germany.

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<v Speaker 1>So they look at Deutsche Banker. What did they see?

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<v Speaker 1>They see the big brother of bankers trust, all right,

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<v Speaker 1>they see a London capital markets operation and they don't

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<v Speaker 1>see an immediate domestic threat. But what they have to

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<v Speaker 1>understand is that, you know, being bloody minded and somewhat

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<v Speaker 1>I think reactionary when it comes to bank solidency issues

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<v Speaker 1>is very shortsighted because you know, if you go into

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<v Speaker 1>a deflation after a large bank fails, you have big problems.

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<v Speaker 1>Benevolence and a willingness to be flexible is always better

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<v Speaker 1>because then, as Pim said before, we can get the

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<v Speaker 1>investors to come in. This is what we did with

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<v Speaker 1>a I G and City Group, and as critical as

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<v Speaker 1>I was at the time of those transactions, it was

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<v Speaker 1>the right thing to do because it saved us from

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<v Speaker 1>a generalized debt deflation, which is destructive for everyone. Chris,

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<v Speaker 1>just a little comparison, right, we're talking about a bank.

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<v Speaker 1>The market cap now, let's call it, what about sixteen

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<v Speaker 1>billion dollars? What's the franchise worth? And just to put

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<v Speaker 1>that in the context for you, Apple's market cap is

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<v Speaker 1>six and eight billion. Well, at the moment, the markets

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<v Speaker 1>telling you that the franchise isn't worth a lot, but

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<v Speaker 1>you know, it's a very important bank. It's a large

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<v Speaker 1>servicer here in the United States. Deutsche Bank is one

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<v Speaker 1>of the most important services of commercial real estate. This

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<v Speaker 1>is not a trivial thing. There are a trustee in

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<v Speaker 1>many commercial mortgage backed securities transactions. So the US has

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<v Speaker 1>a stake here too. And I have to believe the

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<v Speaker 1>US authorities are talking to their counterparties in Germany and

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<v Speaker 1>very politely and respectfully, looking them in the eye and saying, really,

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<v Speaker 1>do you really want to let me bank go? Dan Trulo,

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<v Speaker 1>the FED governor, who's who's who's you know, who's portfolio

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<v Speaker 1>really is banking? Comes out yesterday says, hey, I think

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<v Speaker 1>the bank stress tests are gonna mean show that basically

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<v Speaker 1>to have even more capital, our banks holding enough capital? Yet, Chris,

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<v Speaker 1>is it Are the regulars wrong now to keep piling

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<v Speaker 1>on higher and our capital requirements at a time when

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<v Speaker 1>the world is, you know, barely in a strong recovery,

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<v Speaker 1>let alone a moderate one. Yes, they are the banks

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<v Speaker 1>in the United States who particularly have vote too much capital.

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<v Speaker 1>With all due respect to Dan Trulo, I think he's wrong.

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<v Speaker 1>The stress tests as the FED is operating them are

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<v Speaker 1>pretty much useless from an analytical perspective. I don't think

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<v Speaker 1>they tell you anything, and you know you're right. It's

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<v Speaker 1>restraining growth. Regulation, over regulation, the demonization of banks instead

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<v Speaker 1>of punishing bankers, UH is hurting the US economy, It's

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<v Speaker 1>hurting the global economy, and the whole narrative is politicized

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<v Speaker 1>and wrong as a result. You know, the politicians caused

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<v Speaker 1>a crisis, Kathleen, and then they turned around and blamed

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<v Speaker 1>the bankers. You know, and I Chris, when thanks so much.

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<v Speaker 1>I want to point out for our listeners are hard

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<v Speaker 1>to be listened to Bloomberg Radio watch bloomber TT's seeing Chris.

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<v Speaker 1>You know that he is a guy who was very

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<v Speaker 1>critical of bank stopping need more capital for them to

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<v Speaker 1>say now they've got their overregulated. This is this is

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<v Speaker 1>an important thing to hear from. Chris Whalen, Senior Managing

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<v Speaker 1>Director and head of Research at Crowl Bond Reading Agency.

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<v Speaker 1>I'm Kathleen Hayes along with Pim Fox, and this is

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<v Speaker 1>Bloomberg