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1 Zombie + 1 Zombie equals 1 bigger zombie

I am now back to my Wednesday pattern of devoting more time to non-blog post writing and less time to blog post writing. But I was interested overnight in the news that the German government is trying to force (pressure) the partly-state owned Commerzbank (Zombie 1) into a merger with Deutsche Bank (Zombie 2). The result will probably just be a bigger zombie bank. It is unlikely it will reduce the vulnerability that both banks currently face as a result of poor management, risky loan portfolios (greed over prudence), massive debt burdens, and costly, underperforming branch structures (especially in the case of Commerzbank). Another example of the failure of the European Union to provide policy structures that advance prosperity and reduce the risk of crises.

The German government seems to be bringing the merger to a forced head.

It seems an odd decision given that on February 2, 2019, Peter Altmaier, the German Federal Minister for Economic Affairs and Energy, unleashed his government’s – National Industrial Strategy 2030 – which provides the German view on the “Strategic guidelines for a German and European industrial policy”.

In that document, he touted Deutsche Bank as an “Existing champion” of German industry.

He said that:

The long-term success and the survival of such enterprises is in the national political and economic interest because they make a substantial contribution to value added and in many cases are also jointly responsible for the excellent image enjoyed by the German economy and industry throughout the world.

In that context, the Minister provided a negative view of competition law in Europe and the way the German government is forced to follow that law:

German or European mergers which are useful and necessary with a view to the global market frequently fail due to the focus on national and regional markets in prevailing law. European and German competition law must be reviewed and changed where applicable so that interna- tional competition “at eye level” remains pos- sible for German and European companies.

The proposed merger is likely to come up against EU law given the negative effect on domestic competition within Germany.

So stay tuned for a show down on state aid (the German government will certainly step in to help facilitate the merger) and competition law.

The other problem is that the merger will likely just create a bigger zombie.

Since the GFC, the share price of both banks has plunged.

Deutsche Bank has gone from a high of 112.22 euros on May 11, 2007 to its current price of 7.82 euros (March 15, 2019).

Similarly Commerzbank has fallen from its high of 291.158478 euros on May 9, 2007 to 7.4111 on March 19, 2019.

Domestically, Commerzbank accounts for roughly 30 per cent of the finance provision for Germany’s export sector. It also has a significant network on branch banks in Germany, which are mostly underperforming.

It has had a series of crisis since 2000 resulting in mergers of its division in addition to

The German government owns 15.6 per cent of Commerzbank and is the largest shareholder. This arose from the ‘bailed’ out it provided following the flawed take-over of the Dresdner Bank in 2008

It has also been involved in money laundering scams (flouting US sanctions against Iran, Sudan and Myanmar) as well as a raft of corporate scandals (taz evasion, dividend stripping and the like).

The problems are not going to go away.

The merger will shed more than 20,000 odd jobs and bring industrial conflict to Germany.

It will not solve the poor earnings environment the banks are struggling with at present. Returns on equity for both banks have been very low as a consequence of the low interest rate environment courtesy of the ECBs law-breaking QE programs.

While the merger will probably deliver a solid return for existing Commerzbank shareholders, the opposite is true for equity holders in Deutsche Bank.

The general view is that the larger of the two merger partners is generating very little in the way of profits, is lumbered with an unsustainable business model with huge debts (as a result of ridiculously lax lending strategies – see story about its relationship with Donald Trump, for example – A Mar-a-Lago Weekend and an Act of God: Trump’s History With Deutsche Bank), and huge past losses.

There is also talk of Deutsche Bank’s allied company DWS Group (money management) being sold off to Allianz (insurance) company to give DB a short-run hit to fund the Commerzbank merger.

The problem is that DWS is one of the few profitable areas in the DB group of companies and so stripping out its 78 per share in DWS will worsen its long-term prospects.

So the reasonable assessment is that while the German government is claiming the merger will give Europe a mega financial institution capable of matching the might of the large banks in the US, the reality is that “merger would just create a much larger zombie” (Source).

I agree with Larry Elliot’s assessment in his UK Guardian article (March 18, 2019) – Deutsche’s deal with Commerzbank a sign of sector’s weakness – “that Europe’s banks would be hugely vulnerable to another financial crisis” and this merger won’t really solve that vulnerability.

The problem is that the poor management of the European banking crisis by the European Union has not “cleaned up” the European banks.

They are just languishing in zombie-like states and will cause havoc when the next crisis comes.

Another example of why the European Union is a failure.

Music while working today

I am quite partial to Led Zeppelin One, which I think was a great album – and very innovative.

Those in the know will realise that many of the tracks on that album were not original, despite the inference on the album cover that they were.

One track – Babe I’m Gonna Leave You – was the subject of intense scrutiny as to authorship.

Here is one of the earlier versions from Joan Baez on her 2 CD album – Joan Baez in Concert 1962.

Here is an early version of the song recorded at a conference by Joan Baez in 1962. I generally loved her singing.

It was written in the late 1950s/early 1960s by Anne Bredon. She took Led Zeppelin to task in the late 1980s about their lack of attribution on Led Zeppelin One and subsequently the Zeppelin album credits her work and she received appropriate royalty payments.

And here is the Led Zeppelin version.

Both excellent.

Unlike many of her songs, this one – Diamonds and Rust – was written by her and is about her former lover Bob Dylan.

It is taken from her 1975 album Diamonds and Rust. Her sound certainly matured in the decade or more from the time of her early concerts in the 1960s.

By 1975 she was assembling some of the best players to support her sound.

That is enough for today!

(c) Copyright 2019 William Mitchell. All Rights Reserved.

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    This Post Has 11 Comments
    1. Hello,

      The German govt concern seems to be that the two banks would be taken over by foreign banks and lost to Germany. The concern is even narrower as the neoliberal govt does not want to lose the tax income from the banks to a foreign govt.

      In a fixed exchange rate system every last cent counts as it is like a room with no air, a closed system.

      These immortal words come to mind:

      “If a country or region has no power to devalue, and if it is not the beneficiary of a system of fiscal equalisation, then there is nothing to stop it suffering a process of cumulative and terminal decline leading, in the end, to emigration as the only alternative to poverty or starvation.” (Wynne Godley 1992)

    2. Prof Richard Werner, is reckoned to be the first who developed the concept of QE that was introduced in Japan in the early 2000’s. He considers that the success of the German export economy is due to the availability of credit from its approx. 1500 small community non profit banks.
      They serve the SME sector of Germany and SME’s are Gemany’s largest employer. The EU has introduced heavy bureaucratic regulations in an attempt to strangle this competitor to the mainstream Banking system,
      With small staffs of less than 6 in some cases the Community Banks cannot process the onerous regulatory documentation without punitive costs and are going under. The same attacks are being conducted against Credit Unions and Mutual Building Societies.
      A German community bank has never failed in their over 100 year history.
      The EU weapon of choice to bring recalcitrants to heel has always been its regulatory bureaucracy and its Financial power via the ECB control of bond interest rates in the Eurozone.
      The EU is truly a Financial Totalitarian construct, with a false altruistic face.

    3. Bill’s mention of “Diamonds and Rust” perversely prompted me to play around with the lyrics of this favorite song, putting the words deconstructively into the mouth of an economist who came to see the light of MMT after an infatuation with neoliberal economic theory, and who suddenly now finds herself on the receiving end of recent mainstream attacks. It turned out to be an amusing flight of fantasy, and others might want to pull up the lyrics and give it a whirl.

    4. ‘Diamonds & Rust’ was up with Baez’s best, (though she wasn’t prolific)…this is a gem. If any week needed a quiet contemplative/sad song, it would be this one, for sure. Good choice.
      I think I did my first hammer-ons on a D chord on a then-affordable nylon string, C ’64, trying to emulate her picking on Wild Mountain Thyme.

    5. I once saw DB on a fraud list, sometime soon after the GFC. Its debt was 57 trillion Euros. They then reduced it to 44 trillion Euros partly, I understand, by selling bonds and part of the debt to other countries, like China. Both of these figures are considerably greater than Germany’s entire GDP, or the Eurozone’s GDP. It is ridiculous. The only viable long-term solution seems to me to be a managed dismantling of the investment sector of the bank, while protecting certain creditors like pension funds. Pensioners shouldn’t be punished for investment managers’ greed, however awful the pension fund manager is. But of course none of the EU elite will do this as some of the bigger creditors are either their funders or their mates. It is no different in the US or the UK.

    6. Just re-listened to LZ 1 Babe I’m gonna leave you and Love Forever Changes came to mind. There’s a break that sounds very similar. I am guessing LZ influenced by Love?

    7. Just two days ago, the NYT had an article about the relationship between Trump and Deutsche Bank. It is not a pretty story. Let me quote from the article entitled “A Mar-a-Lago Weekend and an Act of God: Trump’s History With Deutsche Bank” by David Enrich.

      First mention was that a managing director was at Trump’s inauguration. There was a good reason for this, as Trump and DB were financially entwined.

      “Mr. Trump and Deutsche Bank were deeply entwined, their symbiotic bond born of necessity and ambition on both sides: a real estate mogul made toxic by polarizing rhetoric and a pattern of defaults, and a bank with intractable financial problems and a history of misconduct.”

      However, the Bank has been shown to have lied about its relationship to Trump. “Deutsche Bank officials have quietly argued to regulators, lawmakers and journalists that Mr. Trump was not a priority for the bank or its senior leaders and that the lending was the work of a single, obscure division. But interviews with more than 20 current and former Deutsche Bank executives and board members, most of them with direct knowledge of the Trump relationship, contradict the bank’s narrative.” What a surprise.

      What is true of DB in regard to Trump is also true of other TBTFs with other “clients”. And they are not confined to the EU, unfortunately. While DB is now under investigation, so are some TBTFs in the UK. Whether anything will come of these investigations is deeply uncertain.

    8. I agree with your analysis of the potential banking merger in Germany. Deutsche Bank and Commerzbank operate unsustainable business models, thanks in part to government support that they received in the past. For example, Commerzbank received large amounts of government financial support in 2009. This government spending helped to cement an unsustainable business model and thus reduced national income in the long run.

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