Deutsche Bank is in trouble. WSJ in SeptemberDecember.

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 – 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 “technical” 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) – Deutsche Bank was odd in that it was a major bank prepared to lend to Trump – but who knows the details, how the loan was syndicated.

Trump’s wealth may very much depend on lenders on his projects, but also projects that just have his name on them, not “calling their loans.” 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 Schäuble, 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 – 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 Schäuble’s policies especially, but he and Merkel are solid democrats, and their leverage could be a vital counterbalance to Putin’s.

[Cross-posted at The Reality-Based Community]