As the credit crunch unfolded the story so often found its way to the banking sector and the banks. But as we approach a decade from the collapse of Lehman Brothers I doubt anyone realised the story would still so often be about them. A headliner in this particular category has been my former employer Deutsche Bank. It has turned out to be like the Black Knight in the Monty Python sketch where all troubles are “tis but a scratch” and returns to the fray. If we look back it was not explicitly bailed out by Germany although of course there were a range of measures which implicitly helped it. For example the government programme to help interbank lending and the interest-rate cuts and liquidity supply programmes of the European Central Bank ( ECB). Come to think of it we would not have expected the ECB to still be pursuing monetary easing a decade later either. Both sagas are entertwined and indeed incestuous.
As in so many cases Deutsche Bank was able to avail itself of the US bank support structure as Wall Street Parade points out.
According to the Government Accountability Office (GAO), Deutsche Bank received cumulative loans totaling $77 billion under the Federal Reserve’s Primary Dealer Credit Facility (PDCF) and $277 billion in cumulative loans under the Term Securities Lending Facility (TSLF) for a total of $354 billion.
That now seems even more significant as we have had several periods where European and Japanese banks have been singing along with Aloe Blacc.
I need a dollar, dollar, a dollar that’s what I need (Hey Hey),
Well I need a dollar, dollar, a dollar that’s what I need (Hey Hey),
Said I need a dollar, dollar, a dollar that’s what I need,
And if I share with you my story, Will you share your dollar with me?
This is in addition to the gains at the time which were liquidity and US $354 billion is quite a lot of it even in these inflated times and a type of bailout from a below market interest-rate.
On the other side of the ledger Deutsche Bank has provided support to various taxpayers around the world via the fines it has paid as a type of compensation for its many miss-selling scandals. The initial claims that these were a few rotten apples turned out to be an organisation that was rotten to the core. According to FN London it has paid around US $8 billion in fines and agreed to compensate US consumers with US $4.1 billion. So has in a sense made some recompense for the liquidity received in the US although some of the Li(e)bor fines were received by the UK.
This is a signal of trouble again as we see that this week it has spent some time below 10 Euros again.This is significant on several levels. It was considered a sign of trouble in the autumn of 2016 when Deutsche Bank was hitting the headlines for all the wrong reasons. It also pales considerably when we look back as I note this from back in February 2009 from The Guardian.
Deutsche cut the dividend from €4.50
Back at the peak the share price was more like 94 Euros according to my monthly chart. From a shareholder point of view there has also been the pain of various rights issues to bolster the financial position. These tell their own story as the sale of 359.8 million shares raised 8.5 billion Euros in 2014 whereas three years later the sale of 687.5 million was required to raise 8 billion Euros. The price was in the former 22.5 Euros and in the latter 11.65 Euros.
Putting it another way shareholders stumped up 16.5 billion Euros in these two issues more than doubling the number of shares to 2.066.8 million for the company to now be valued at around 21 billion Euros at the current share price. As ever a marginal price may not be a good guide but in this instance I suspect the total price would be less and not more as after all if you wanted to buy the bank it should be relatively easy.
To my mind this is made an even bigger factor by the way that the current situation is so bank friendly. Monetary policy in the Euro area remains very expansionary and we have just seen a phase described as a Euroboom. If we return to Germany’s home base we see an economy that since 2014 has grown by around 2% per annum and according to the German Bundesbank house price index (127 cities) prices rose by 9% in 2016 and 9.1% in 2017, meaning the asset base of the mortgage book has strengthened considerably. Yet in spite of all this good news the share price not only fails to recover it has headed back to the doldrums.
Fixing a hole?
The Financial Times reported this on Tuesday.
To many observers in Frankfurt a tie-up between Deutsche Bank and Commerzbank is not seen as a question of if, but when. The prevailing view among the banking cognoscenti in Germany’s financial capital is that the country’s two largest listed lenders are very likely to merge eventually.
There are two scenarios that could accelerate the potential merger. One is that Deutsche realises that it is unable to turn itself round under its own steam; the other is that a foreign peer tables a bid for Commerzbank, forcing Deutsche’s chief executive Christian Sewing to make a counter offer.
Forcing? I did enjoy the reference to Deutsche turning itself around under its own steam! How’s that going after a decade? As to the second sentence below it is hard not to laugh.
Assuming a 35 per cent premium on Commerzbank’s current market capitalisation, Deutsche would have to pay €14bn for its smaller rival. “There are different ways to structure this deal but it surely would not be in cash,” said a Frankfurt-based investment banker.
If Deutsche had access to €14 billion in cash it wouldn’t need to buy Commerbank.
There is quite a bit to consider here as we see that in spite of an economic environment that is very bank friendly Deutsche Bank never seems to actually recover. More money has been taken from shareholders who must be worried about the next downturn especially as the issue below has continued to fester. From Reuters in June 2016.
“Among the G-SIBs, Deutsche Bank appears to be the most important net contributor to systemic risks, followed by HSBC and Credit Suisse ,” the fund said…….“The relative importance of Deutsche Bank underscores the importance of risk management, intense supervision of G-SIBs and the close monitoring of their cross-border exposures,” the IMF said, adding it was also important to quickly put in place measures for winding down troubled banks.
This is a reminder of the worries about its derivatives book and its global links. It was hard not to think of that yesterday as rumours spread about Germany offering financial aid to Turkey.
As to the proposed merger with Commerzbank has everybody suddenly forgotten the problems of Too Big To Fail or TBTF banks?
With €1900bn in total assets, a merged Deutsche-Commerzbank would be the third-largest European bank after HSBC and BNP Paribas. ( FT)
Oh and as to the question posed by etfmaven in the comments the experience in the credit crunch era is a pretty resounding no.
Do two lousy banks make one good one?
Shareholders of Commerzbank may also acquire a liking for the Pet Shop Boys.
What have I, what have I, what have I done to deserve this?
What have I, what have I, what have I done to deserve this?
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