Counterparty Risk
Pfäffikon SZ, Switzerland – As before, the financial world is again quite moving. On the one hand Nationale Nederlanden (NN) is trying to acquire rival Delta Lloyd at a bargain price, and on the other hand, Deutsche Bank is fighting for survival. The insane interest rate policies of central bankers are bringing several banks in trouble, not to mention pension funds. It is strange that investors in general still insist that this extraordinary policy makes sense.
Cunning
The move of Nationale Nederlanden is clever and cunning. Delta Lloyd is a beautiful but troubled insurer that has a strong presence in the Benelux. From the perspective of Nationale Nederlanden (NN), a possible acquisition of Delta Lloyd would be an excellent addition to the international portfolio of the insurer. However, the opening bid at Delta Lloyd is a joke and needs to be raised in any case. The fight will undoubtedly be prosecuted. The fact remains that the undervaluation of Delta Lloyd is substantial and in Rotterdam, they know this like no other.
Destruction Weapons
Earlier this year, I have already pointed out the problems at Deutsche Bank. Chancellor Merkel will undoubtedly sit shuffling in her seat because ‘Deutsche’ is a so-called system bank; ‘Too big to fail’ they call it. However, at European level Merkel refuses to assist the beleaguered Italian banking sector. I wonder what they will do if ‘Deutsche’ actually is going to get into trouble. Many fellow bankers are trying to appease the mood surrounding the largest bank in Germany. The bank is robust and would have a wise management. Many investors don’t trust – correctly – these unctuous words. The fact remains that the derivative positions of Deutsche Bank are a fun puzzle for financial scholars. Derivatives are increasingly seen as financial weapons of mass destruction that are becoming active on the most adverse moments.
Sponsor
In any case; for many years, Deutsche Bank is selling all sorts of products to all and sundry. Even though ‘Deutsche’ seems to many a far-off show, the softly ticking time bomb actually may lie under your financial mattress. Especially with Exchange Traded Notes (ETN) and synthetic Exchange Traded Funds (ETF), the prospectus contains the following revealing text; “The swap counterparty is currently Deutsche Bank AG.” The products sponsored by ‘Deutsche’ could lead to an extremely curious conflict at a possible collapse, where you will probably draw the short end.
The more reason to check with your financial advisor how exactly your potential (counterparty) risk behaves compared to the supposedly rock-solid German bank. Prevention is better than cure.
It remains for me to wish you a good weekend.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has position in Delta Lloyd and not in other above mentioned shares and has no intention of doing so in the next 72 hours.
