|Deutsche Bank needs help|
What are the odds that Deutsche Bank will fail and cause a 2008-like collapse? Chicken Little's answer is the the odds are less than zero. This may seem impossible as probabilities are supposed to range from 0% to 100%.
Germans hate the idea of a bailout and, furthermore, recently defeated Chancellor Angela Merkel's party in an election. Doomsdayers predict that Chancellor Merkel will let Deutsche Bank fail to protect her re-election chances.
|Angela Merkel wants to bailout Deutsche Bank & win votes.|
Chicken Little believes that Deutsche Bank will not fail. This argument has a financial and political aspect.
The financial aspect is the Germany currently pays negative interest rates on its government debt. That means the investors pay Germany for the privilege of loaning Germany money.
|Governments can earn money by borrowing|
Here is how works. An investor gives Germany €100 and invests, for example, in a bund (german government bond) that matures in 5 years. Current the 5-year bund pays negative 0.60% a year. That means after five years, the German government pays the investor back €97.
For every €100 bund sold, the government pockets €3.
If the German government uses this neat trick to the tune of €1 trillion, they can earn €30 billion in profit to give the Deutsche Bank. If the German government needs more, they can just borrow more.
The German government can give tens of billions of euros to Deutsche Bank without any increase in the Debt or Deficit. The government simply takes the money from savers via the negative interest rates.
In the crazy world of negative interest rates, the German government has an unlimited ability to paper over any problem. Thus, from a financial point of view, the government of Germany can save Deutsche Bank for free.
The political aspect of the situation considers the impact of taking money from savers and giving it to a giant bank. Chancellor Merkel knows that every euro seen to be given to Deutsche Bank increases the number of people who will vote for her competitors including the Alternative for Germany (AfD).
The answer is simple. Do what the US Federal Reserve did in the last crisis. Give the money secretly.
The US Federal Reserve bought about $4 Trillion in bonds after the collapse of Lehman Brothers. What is less known is that the Fed conducted these purchases in a manner that transferred billions to Wall Street banks.
The Federal Reserve bought its bonds on the open market from firms such as Goldman Sachs. In addition, the Federal Reserve announced its purchases in advance so that Goldman could buy the bonds in advance, increase their price, and then earn a hefty profit selling those bonds to the Federal Reserve. The Federal Research was creating the money for the purchases out of thin air, so did not care what price they paid.
How much money did Wall Street make from the Federal Reserve. I estimate $40 Billion or more. If the Federal Reserve overpaid by 1% on $4 trillion, they gave Goldman Sachs & friends $40 Billion in pure profit.
|Say hello to your money|
Did the Federal Reserve have an alternative source of bonds to buy? Yes. The Federal Reserve could have purchased the bonds directly from US Treasury. If the Fed had purchased the bonds from the Treasury, the total cost to buy $4 Trillion would have been exactly $0.00.
So the Federal Reserve chose to pay billions to purchase their bonds when they could have paid zero. Why? Some people argue the Federal Reserve did not realize they were giving away billions. I believe that they knew exactly what they were doing.
There was an incredible outcry against the direct cash infusions via the TARP bailout, but nary a word about the secret subsidies through buying overpriced bonds.
Chancellor Merkel needs to funnel some serious cash to Deutsche Bank -- and she needs to provide the funds secretly. Fortunately for her, there are an infinite variety of tools to accomplish this steathy goal. These stealthy techniques include secret guarantees to private investors, deals with the ECB to support Deutsche Bank, any many, many more. Such deals are subject of bureaucratic night fantasies.
As long as government can borrow for zero or less than zero, they will choose to secretly steal your money and give it to people who deserve to fail.