The recent news by Bloomberg is now confirmed by the media.

The damage is done. Interestingly enough, the USD 14 bln claim by the US Department of Justice is a spectacular backfire.

Backfire: the term is increasingly on fashion in this tightly interconnected, publicly controlled and ‘nationalized’ world.

Please find further macro-financial perspectives and propositions at the end of this note.

But let us first revert to the immediate news-flow.

Shaky session in NY yesterday, tough day ahead for DB, banks and the markets as a whole.

As the Financial Times reports in ‘Hedge funds pull business from Deutsche Bank’:


“Hedge funds have started to pull some of their business from Deutsche Bank, setting up a potential showdown with German authorities over the future of the country’s largest lender.
As its shares fell sharply in New York trading, Deutsche recirculated a statement emphasising its strong financial position.”

Note the contagion power of the news, even on US banks:


“Shares in the bank, which hit a 33­year­low this week, were down almost 7 per cent in New York in afternoon trading, after closing up 1 per cent in Frankfurt. Concerns about Deutsche rippled through the wider US market, sending US banking stocks down as
much as 1.6 per cent, and the S&P 500 index off more than 1 per cent at one point.”

The Wall Street Journal tempers a bit in ‘Deutsche Bank’s Clients Take Steps to Cut Exposure’:


“The amount of assets recently withdrawn or earmarked for potential withdrawal is in the billions of dollars, one of the people said. That is a small piece of the hundreds of billions in balances analysts say Deutsche Bank has in its so-called prime-brokerage business alone— and a tiny fraction of its more than $600 billion in customer deposits overall.
Still, the retreat by clients is a sign of nervousness about Deutsche Bank’s ability to weather its challenges, some of which are specific to the bank and others wrought by economic conditions plaguing European banks as a group.”

The WSJ makes an interesting distinction between liquidity risk and more tangible, fundamental ones:


“It also has a formidable backstop in the European Central Bank, which provides huge quantities of liquidity on permissive terms. Through an emergency program orchestrated by the ECB, national central banks in the Eurozone can lend yet more—the Bank of Greece provided around €90 billion of emergency liquidity to Greek banks in crisis last year.
But the lack of a convincingly profitable strategy and waning shareholder confidence in the bank are big problems, analysts and investors say. Poor financial results and costly potential fines eat into the bank’s capital cushion, which is already thinner than many of its peers. Fears that the bank might be forced to raise capital, hurting existing shareholders by diluting their stakes, have weighed on shares. The decline in share price, in turn, makes it more difficult to raise fresh capital.”

So yes, dilution is likely to occur – i.e. further capital loss – as a bailout looks extremely unpopular and expensive in political terms:


“The disclosure sparked fears that Deutsche Bank might have to mount a painful capital hike. Bank executives have repeated to investors, clients and employees—and publicly— that the lender has adequate capital and has no plans to sell shares.”

Propositions:

DB is at the cross-roads of the strategic dimensions foreseen in our framework:

– Banks: Incentivised by ultra-low yields and easy monetary conditions, European banks haven’t cleaned their house since the financial crisis
– Public authorities -Central Banks: Negative interest rates are adding to the banking difficulties
– Public authorities – Government: Bailouts bear a high political cost …
– Social unrest: …. that would undoubtedly increase political tensions and polarization.
– Credit: Expect deleveraging to gather speed, as illustrated by cocos and other creative credit vehicles.

We argue:

– The failure of DB reflects the difficulties of a ‘nationalized regime’ to contain systemic risks.
– The latter will force each and every dimension above to normalize towards more fundamental values. We nicknamed this trend ‘systemic convergence’.
– After a bunch of interventions of all kinds, expect financial markets to reprice fundamental risks and work as a powerful normalization vector.

With kind regards,

Jacques

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