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Comment by kevindkeogh | Hacker News Reader

This is fundamentally wrong. As Matt Levine said, "proper phrasing is 'DB supports $1.7trn of assets with an equity value equal to SnapChat's'" [1]

[1] https://twitter.com/matt_levine/status/742800372473946112

Edit: For a more complete analysis of DB's capital position, they have published Moody's report on their credit. [2] I don't see much in there that would suggest DB was insolvent, but they do seem to be having some difficulty reorganizing their business.

[2] https://www.db.com/ir/de/download/Moody_s_on_DB_26_May_2016....

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The capitalisation of a bank is not based on its market value but on its accounting value, i.e. how much money shareholders brought in, and how much profits the bank retained over the years.

A falling share price doesn't impact the bank's capital ratios. It does impact however its capacity to raise more capital if required, which is not a good thing.

It was similarly surreal when WaMu disintegrated -- they sold their deposits to Chase for less than the amount of the deposits, which seems odd at first ("they just sold a pile of money for less than the money itself was worth"), but isn't really. WaMu couldn't just spend those deposits, they were only worth the amount of money that could be extracted in fees for holding the accounts and from invested the deposited money, which was naturally less than the value of the pile of money.

Aren't deposits a liability? How can you sell a liability? Do you mean they sold their loans?

WaMu's $170 billion in customer deposits were "sold" to Chase for $1.9 billion (I thought both numbers were bigger, but so says Wikipedia). If you were a WaMu banking customer before the implosion, you were a Chase banking customer afterwards.

Again, you can't sell deposits. Chase assumed the business of WaMu, which included liabilities - mostly deposits. Deposits are a liability and it is impossible to sell a liability. So saying "they sold their deposits to Chase for less than the amount of the deposits" is entirely inaccurate. It's somewhat counter-intuitive because deposits "seem" like assets and loans "seem" like liabilities - but it's actually the other way around on the balance sheet.

In normal circumstances, yes. But DB's solvency is in question. An insolvent bank is worthless.

DB may be insolvent, but to be fair, there aren't many banks that can pay out the figures recorded in the managed accounts. I recall one Utah bank which is supposedly able to, and there may be others, but usually a mainstream bank cannot fulfill 99% withdrawals of assets on short notice.

I don't think any bank can. But it's not a capital problem, it's a liquidity problem. A bank, whether an internationally active, or a mum and pop local bank, is in the business of taking short term deposits and lending the money long term. Banks are required to cover some of their deposits in liquid assets so that it can sustain some level of stress. But a full scale run on the bank where all depositors want their money back would kill any bank, big or small.

Besides being off-the-books and under-the-radar, how was Madoff's operation different than that? Genuinely curious.

A bank is solvent, Madoff wasn't. Madoff didn't have any asset, the cash you would have invested with him had been used to pay off other investors.

A bank has assets, the money you lent the bank (through your deposit) is invested in a mortgage, backed by a property. You will ultimately get your money back. but it is a timing issue (and therefore liquidity), not a solvency issue.

It's a liquidity issue if the bank invested in mortgages (usually), but it can be a solvency issue if they are invested in debt (sovereign or corporate) that can be defaulted on.

Totally different. A bank generates a return on it's deposits.

Madoff just paid a dividend or phony appreciation to investors based on money deposited by new investors -- except for the money he stole it was a closed system with no return generated.

He also concentrated his efforts on courting a relatively insular community (religious Jews) via trusted community figures to avoid awkward questions.

Thats usually a sign of a scam -- banks don't send your priest/rabbi/community leader to hawk CDs. But there are many hustles (Ponzi schemes, pyramid schemes, and various savings clubs) that are common in ethnic and religious communitiesand apread via word of mouth.

Equities are, instead, the sliver of hope between assets and liabilities - Russel Napier

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