Deutsche Bank is in trouble. WSJ in September, December.
The $14bn fine levied on the bank by the US Justice Department has exposed Deutsche’s thin capital cushion. It is retrenching, and struggling to avoid a bailout. The German government’s formal position is against bailouts. But that’s for show: you always deny these things to the last minute, like devaluations. In reality, it could not afford to let the country’s largest bank (and the 11th in the world) crash. We can safely assume Bundesbank and Finance Ministry officials are riding herd on the bank’s every move and keeping up the pressure.
The bank is also the largest creditor of the Trump Organization, to the tune of $364 million. Which creates a very interesting situation for all parties, in the sense of the Chinese curse.
The bank needs cash, lots of it, and therefore must realize some of its assets. Where do they look? Well, one place is high-risk loans to borrowers with a poor record â€“ like Trump.
You may object: these are not callable loans but fixed-term ones like mortgages. Here I call on apparently well-informed commenter MacK at LGM:
In practice, since loan covenant breaches, even â€œtechnicalâ€ ones are so common, a lot of real estate loans can be called anytime. Now consider what that means for Donald Trump, a lot of whose net worth consists of his participation in big real estate projects. Trump has a bad reputation with lenders (they got burned 4 times) â€“ Deutsche Bank was odd in that it was a major bank prepared to lend to Trump â€“ but who knows the details, how the loan was syndicated.
Trumpâ€™s wealth may very much depend on lenders on his projects, but also projects that just have his name on them, not â€œcalling their loans.â€ Consider the leverage that may give the lenders over Trump.
Calling the loans is very much an option. Since Deutsche is the largest creditor, it could spark a panic among other creditors, leading to the bankruptcy of several Trump Organization businesses and, if Trump has issued personal guarantees, of Trump himself. Could he continue in office while fighting a personal bankruptcy action? I doubt it. Ryan and McConnell have a nuclear weapon in that they could threaten to stand aside in an impeachment launched by Pelosi. The situation contains an existential danger to Trump.
Now consider Angela Merkel. She and Wolfgang SchÃ¤uble, the Finance Minister, have enough leverage over the struggling bank to force it to go either way on the Trump loans. They have the power to end the Trump presidency.
Would they do so? They are high-minded Lutherans. She is a pastor’s daughter. His doctoral thesis was on “The public accountant’s professional legal situation within accountancy firms”. They are doubtless imbued with Kant’s extreme valuation of truth-telling and promise-keeping. They would have moral as well as legal and realpolitik scruples about using the weapon. But it does not pay to underestimate the ruthlessness of the most high-minded of politicians, like Guizot, Gladstone and Obama, when push comes to shove. Anybody doubting this should brush up on Germany’s implacably moralistic imposition of austerity on the Greek people, in deterrent retribution for the actions of a few dozen officials and politicians in lying about the Greek public finances to secure entry into the Eurozone, and massive tax evasion by the professional class.
What they do will depend on the national interests at stake. There are two fundamental ones I can see: climate change and eastern Europe. They â€“ and Germans generally – really do not want Trump to blow up the Paris Agreement, and they really do not want Putin to reestablish a zone of kleptocratic Russian influence in Ukraine and the Baltics. Either could be strong enough to trigger the debt bomb, depending on events.
An important wrinkle here is how Trump thinks they will act. A man without honour or scruple himself, he cannot imagine what it is like for honourable politicians like Merkel to have moral hesitations about making such threats. Others are either sheep to be sheared (Trump University marks, Rustbelt WWC American electors) or wolves like himself. He would use the weapon himself, and must assume his opponents would too. So he will overestimate the actual probability. If I am right, he will be very careful in choosing his ambassador to Berlin; it won’t be a gift to a donor, but a close consigliere.
A photo of the Finance Ministry in Berlin. It was built when you think it was, for Goering’s Air Ministry. The Iron Bank of Braavos is not far from the mark.
By the way, this is good news. There is a lot to say against SchÃ¤uble’s policies especially, but he and Merkel are solid democrats, and their leverage could be a vital counterbalance to Putin’s.
24 thoughts on “Trump’s German debt bomb”
While this is some fascinating what-if speculation, I just can't see it happen.
For starters, Angela Merkel is not the type of politician who goes for this kind of move; if she has a can, her instinct is to look for a road that she can kick it down. She has an election to win next year, and the last thing she wants is to have the Deutsche Bank problem blow up in her face. The same goes for the social democrats, though to a lesser extent; while they could in theory make some political hay out of Deutsche Bank's troubles (they weren't in power during and after the financial crisis), this would be a high risk gamble that would more likely benefit the populist parties. For either party, it would be best if nothing happened until after September 2017.
In addition, the effect of the German government trying to manipulate US politics in such a transparent fashion would be disastrous for US-German relations and the US remains one of Germany's most important political and economic partners. Unseating an elected US president would go well beyond just burning bridges; it'd basically be economic warfare. Remember that even when Bush and Schröder were shouting at each other, Powell and Fischer were busy mending fences in the background.
Now, it's entirely possible that the situation goes south all by itself. In fact, it's hardly unlikely that Deutsche Bank goes belly-up, and then all bets would be off. But I don't see the German government pulling the trigger on Trump's loans intentionally.
The one way such a scenario could come to pass would be if the German government were to nationalize Deutsche Bank (the HRE model) or break it up (the WestLB model). I'm not sure if that would be even possible: despite its name, Deutsche Bank is a vast multinational corporation. But if they did it, the German government would end up holding this particular hot potato, want it or not.
It is an extreme measure. As I said, it would take a fundamental threat to German national interests. But then Trump is outside normal parameters, and his toadying to Putin and the oil industry could lead him to create such a threat.
Also, the fact that the debt bomb exists already changes the calculations on all sides. Suppose Trump's ambassador asks for reassurances that no action will be taken. Does Merkel give them and throw away the weapon? I doubt it. "The handling of the loans is a commercial matter for the management of Deutsche Bank, as part of a recovery programme which is supervised in the normal way by the German financial authorities". In other words "Boy, we hold your paper, and don't forget it".
The timetable of the bailout or other resolution to DB's woes is not under Merkel's control at all. It depends on the financial markets. If other banks smell a rat in the Herstatt risk, they will cut off Deutsche's access to the interbank market. The rescue then has to be done overnight. I recall that when in October 2008 the UK Treasury called in the bosses of RBS and other banks for a late-night working session, the officials ordered in takeaway Indian food – for themselves. The bankers responsible for the mess had to buy their own. I wish the same attitude had held longer.
The bomb can be handed to Merkel even without a bailout. Deutsche's private banking division reaches a business judgement that it should call in some or all of the Trump loans. Knowing that the action would have political consequences, they ask Berlin for clearance. The possible replies are no, go ahead, and wait.
I think that, realistically, Donald Trump's debts are now backed by the full faith and credit of the United States. Whether he uses the power of the federal government to bludgeon his creditors into forgiving or at least rescheduling his debts on immensely favorable terms or he finagles the money to pay them out of the treasury, two things seem very clear. One is that, by hook or by crook, the Donald's debts will be paid or taken care of in some way by the US government.
The second is that while Donald Trump probably wasn't really a billionaire, I think it is very safe to assume that he will leave office as one of the richest men in the world.
Also, the one thing that I would add to Katja's response above, is that as far as Donald Trump is concerned an attack on him is an attack on the United States and would be responded to with everything at the president's disposal. L’état, c’est Donald!
"In addition, the effect of the German government trying to manipulate US politics in such a transparent fashion would be disastrous for US-German relations"
I honestly can't tell if this is a super dry joke.
So assume Trump has put up a personal guarantee. I think this unlikely, but suppose he has. What are the rules? Must the bank foreclose and sell the properties before looking to Trump to make up any deficiency, or does he just have to write the check?
I pass on this one. MacK says that large real estate loans are based on long and complex documents, not like a home mortgage at all. You would need access to the full contracts to reach a clear view what would happen. Schäuble can get them if he wants.
Although Deutsche Bank is the largest creditor, MacK indicates that there are likely to be several lenders for some of these giant real estate loans, all of whom would be affected when a loan is called in, and not all of whom are equally exposed to the consequences of a decision to call in the loan. How much does this complicate the issue, and how much counter-leverage would Trump gain from different lenders having different priorities regarding his loans?
Again, you would need to know the fine print of the loan agreements, any cross-default clauses and the like. Trump knows this, Deutsche knows its own end and can pass it on to Schäuble, we don't. A special prosecutor in the US could also find out. But the issue for the other creditors isn't the fine print, it's whether the hypothetical call by Deutsche could force the borrowing Trump companies into default if they can't raise the cash. That's how runs start. See Hobbes on diffidence.
I'm sure that the Republican congress, which is terrified of its white nationalist fascist base, will not be appointing a special prosecutor to do anything except prosecute Hillary or Obama.
Equally, it would take an awfully brave person to oppose Trump, at this point. Remember that during the campaign, he unleashed his troll army on quite a few people and turned their lives into living nightmares. Even Fox News had to cajole Donald into turning down the heat by point out that if would look bad if he instigated the murder of Megyn Kelly.
It may not have fully sunk in yet but the fact that someone as rich, famous and supposedly well connected/beloved by conservatives basically had to go to Trump Tower and beg for her life is a real game changer. I think Trump's studied Gamergate and also how well Putin has done for himself by arranging for his political enemies to meet horrific deaths so I also think that he had a pretty clear idea of what he was saying when he threatened to unleash his "beautiful Twitter account" on Megyn Kelly.
This is the future of politics in America:
Much fail. The only thing that matters is whether Trump's personal popularity crashes to the point where the Republican Party would regain the ability to act independently of him. No: not the ability, the will; that is a higher bar. It is impossible to foresee Trump lapsing into that kind of total discredit with his base — which is only to say that if it does happen, the cause of it will be something unforeseeable. Meanwhile, although it is obvious that he is probably net underwater across his entire portfolio, it does not matter which lender — known or unknown ($300M is peanuts) — might pull the drop on him; the Republican propaganda machine would paint it as political sabotage. The greater likelihood is that all of Trump's creditors *privately* regard his obligations to them as uncollectable and will therefore try to put up a brave face and string the situation along as long as they can.
$300M is peanuts? (Actually $364m.) It's clearly more than Trump's liquid assets. Perhaps Trump could get a sweetheart bailout loan from Goldman Sachs, or even get the federal budget to underwrite his private business. Either way, the USA will have gone all the way to full banana republic. It's possible the Congressional GOP is so far gone in sleaze and reaction that they would all go along with either, but it's not certain. The coup doesn't need many defectors. Trump has no friends, only allies of convenience. If it looks the better bet for Republicans in Congress to dump Trump (via the abstention route on impeachment) in favour of Pence, that's what they will do. The spin will follow.
Schäuble would have two ways of playing it. One is concealment behind the "just business" façade, bringing in other foreign creditors. The other is principle: it is wrong for a German bank to be lending money to a foreign head of state, and the principle of the US Emoluments Clause is of general application.. I regretfully rule out the option of an upfront assertion by the international community: yes, we are going to bring you down because you are illegitimate and a threat to world peace, and because we can, so there.
It would be – I have no idea what the right word is, or if it even exists – but something, for the Germans to bring down a President who may have been installed by the Russians.
$364M is probably a sliver of Trump's total exposure and for certain a sub-sliver of DB's. Check out @Trumpnado2016's tweetstorm about Trump's (incredibly numerous) LLCs, which asserts that most of his documented deals are underwater. One thing that may be deduced is that each one of those LLCs was created under protest, because at that moment and in that setting Trump saw no simpler option, i.e. his counterparties would not cooperate with financing under the table. His Russian counterparties (if any!) may not have suffered from that particular qualm.
As for the Republicans, right now anyone who tried to put Trump in any serious trouble would need to fear assassination, not just a primary challenge. They would need to wait for a yuuuuuge wave of revulsion, not only among the general population, but among Trump's core of cores. When his favorability polls at 2/98, maybe a few of them will turn against him, but even then most of them will be getting enough death threats from that last 2% to keep them well in line. You don't seem to understand how these things work. Forget everything you've ever learned about American politics, which is all obsolete now.
If what you say about his exposure is accurate, then there are, possibly, many lenders who could call loans and make the empire crumble.
It seems almost unavoidable.
Could be a jam in the lift at Trump Tower if Misha, Kurt, Luigi, Miguel and Cheng all try to get in at once with their pliers and baseball bats.
None of these lenders is going to declare the Donald in default because there would be severe, quite possibly fatal, consequences for such a thing. Their home countries would surely bring immense pressure to bear for the lenders to avoid doing something that would put them squarely in a major, no holds barred conflict with the United States. If the lenders home country is Russia, a bullet in the head would be the likely consequence for trying to take the Donald to court.
Indeed, it seems likely that an FSB bullet or radioactive cup of tea would be in the future of anyone who would do the Donald harm. They have a Russian puppet as president, another as Secretary of State and the national security adviser was and probably still is on their payroll. And this guy Gen. Flynn has a history of handing over highly classified documents to his pals.
Russian agents of influence and fellow travelers being everywhere in the Trump administration, this administration is probably going to be the biggest intelligence coup in history. The FSB and GRU will have basically the same access as the president or, more charitably, the very top advisers to the president. Any banker who crashes Trump's house of cards before he's had time to take care of his debts is almost certainly a dead man.
And I would again remind everyone that the Donald's troll army hasn't let up yet. Everyone he's turned them lose on has suffered horribly. There have been reqular threats against the lives of those who fail to show the Donald proper respect. One can only imagine how control of the apparatus of law enforcement and state security will embolden the troll army. Look at the nutcase who shot up a pizza parlor because liberal families liked it. That's America's future.
To foreclose on the Donald is to sign one's own death warrant.
We are living through the plot of a cheap Tom Clancy knockoff, and hardly anything can be ruled out.
Mitch's point that Trump would find a way to get a bailout on a foreclosure from domestic sources is very plausible. It could not be concealed. Abusing the power of his office in this way would be a clear-cut impeachable offence. At that point it depends on the willingness of enough Republicans in Congress to jump ship, and of Ryan and McConnell to use the threat to stand aside. For the Senate, it only takes two, and there is a fair list of Trump opponents, some of whom (McCain, Murkowski, Portman, Lee, Rubio and Paul) were re-eelected in 2016 and need not fear a primary. The House is more difficult because of the shorter term, and it would indeed take a swing in public opinion further against the Prezident – but he is already very unpopular. Trump must, like any tyrant, really fear a palace coup.
I give less credence to the possibility of Mussolini- or Putin- style violence against domestic opponents, and threats of sanctions or even war against foreign ones. Trump's base includes a violent fascistic wing, but it's not organized to take on hard targets like bankers. Academics, journalists, bloggers, maybe. Putin is heir to, and indeed a product of, the 99-year history of the Cheka, a completely different kettle of fish. (Its Tsarist predecessor the Okhrana went back another 36 years, though I doubt if there was any institutional continuity, just of the general idea.)
The apparatus of the American state clearly has the capacity for assassination as for war. Can Trump get sufficient control of it to secure the commission of crimes and acts of war for his own private interests? I may be starry-eyed here, but I doubt it very much. He has already had difficulty in staffing a Cabinet with non-moronic trusties, he can't change the entire government machine. At the very least, there would be dozens of Deep Throats emulating Harry Dexter White and Mark Felt to save the Republic, and mass resignations in refusal of illegal orders as in the Saturday Night Massacre. Comey is a proven Republican partisan, but he got the FBI job because he stood up to Bush in 2006 over the NSA wiretaps.
And whatever Merkel's and Schäuble's faults, cowardice is not among them. If they decide not to use the debt bomb (which is likely) it will be out of scruple or calculation of the German national interest, not fear for their lives.
Agreed that Trump will be careful with Germany for reasons of protecting his personal position. However, I don't see a bankruptcy as leading to impeachment. Trump will split his time, lie about how little time he's spending on his office, and blame the bankruptcy on foreigners interfering in American politics.
It could certainly help tip Rs towards impeachment if he does some other things that drive the Rs from him. Given what he's done so far, I'm not sure what that could be unless and until Rs get creamed in the 2018 elections.
The impeachable offence would be using his office to get a bailout from Wall Street, not going bankrupt, which he would avoid to save his reputation from cratering.
Sorry, I think that you miss the dynamic here. Trump will not be attacked by the bankers because they know that the bedrock supporting their debt is Trump's reputation. Attacking Trump will effectively erode the security for their loans.
Remember, the banking crisis really hit its stride when the banks found themselves unable to get enough cash from the mortgages they held. The more they foreclosed, the more rapidly their existing security base declined in value. At worse, the bankers will hold on for as long as possible with the hope or expectation that, once he retires, the reputation of Donald Trump as a retired senior statesman will pump up the value of the properties.
The point is not that the suggestion at the end of the previous sentence will occur; it's just that the bankers have no reasonable alternative.
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