By definition a credit crunch involves what Taylor Swift would call “trouble,trouble,trouble” for the banking sector in general and some banks in particular. A feature of the 2007/08 one is that we find that what we might call the bad smell emanating from the banking sector has never really cleared. This is especially true in Europe as Wolf Street pointed out on Friday.
European bank shares – which have been getting crushed and re-crushed for 12 years – are getting re-crushed again. On Friday, the Stoxx 600 Banks index, which covers major European banks, including our hero Deutsche Bank, dropped to an intraday low of 130.5 and closed at 131.2, thereby revisiting the dismal depth of December 24, 2018 (130.8).
European banks did not soar on the first trading day after Christmas, unlike other stocks. Instead they fell further and hit their multi-year low on December 27 (129). The index is down 21.5% from a year ago and 33% from January 2018:
From the point of view of a Martian observing events this would provoke some head scratching, after all there have been reports of recovery for years. He or she would soon note that there is something else going on as the Financial Times points out.
Almost $12tn in bonds trading with sub-zero yield
This poses a problem for banks who essentially live off there being positive interest-rates, as otherwise there is the alternative of cash which suddenly looks rather attractive with its yield of 0%. Anyway our Martian is bright enough to know that it isn’t really necessary to worry too much about the maths as long ago those on Mars learnt that one of the best guides to human behaviour was to head in the opposite direction when we release official denials.
Germany’s premier bank has found itself in the cross hairs of this issue and its travails have become quite a long-running saga. One way of looking at this comes from when we looked at it back on the 29th of August last year.
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.
As you can see one of the most successful trades of the last decade is selling Deutsche Bank shares, especially if you do so in the face of the periodic rallies. So well done to anyone who has. The main danger is that you get called an “evil (usually foreign) speculator by the establishment. Putting it another way this has been the mother of bear markets, Another perspective is pointed out by the fact that Deutsche Bank had a dividend of 4.5 Euros pre credit crunch whereas this month the share price fall below 6 Euros.
Regular readers will be aware of the phase where the apparent plan was to merge with Commerzbank. The catch was that really the only benefit from this would be to muddy the accounts for a year or two. Whereas on the other side of the coin a bank to big to fail (TBTF) would hardly be improved by making it even bigger! In spite of that there were several goes at this but eventually the plan folded like a deck chair.
A New Hope?
Last night the Financial Times published this story.
Deutsche Bank is preparing a deep overhaul of its trading operations including the creation of a so-called bad bank to hold tens of billions of euros of assets as chief executive Christian Sewing shifts Germany’s biggest lender away from investment banking.The plan would see the bad bank house or sell assets valued by the German lender in its accounts at up to €50bn after adjusting for risk.
I can see three initial issues with this.
1 Bad banks are so 2010 and it is now 2019
2.In itself a Bad bank does not solve anything as it is just an accounting exercise. What is needed is a behavioural change. Otherwise the shareholder liability does not change one iota.
3. If those “assets” could be sold as ” valued by the German lender in its accounts” then this would have happened many years ago!
Or as Earth,Wind and Fire put it.
Take a ride in the sky, on our ship fantasii
All your dreams will come true, right away
There is something which leaps of the page at me so here it is.
While the derivatives destined for the non-core unit still provide some cash flow, all the profit on the deals — and therefore the associated bonuses for those who arranged them — were booked up-front.
What could go wrong? Well Enron style accountancy results in another Enron. Or in the UK there was the case of Atlantic Computers some years back which booked profits up front and kicked liabilities forwards in time. So the lesson of not taking profits up front had been learnt but there is a catch. as Enron and Atlantic Computers collapsed but this does not happen to TBTF banks. So those managers who took the bonuses up front have done something which I would make subject to the law of fraud. For them it was something of a perfect crime as years later they have got away with it and we are being told the assets are fine.
Or maybe they are not quite so fine.
In the years since the instruments were first arranged, they have become a major drag on the bank’s capital because of their more stringent treatment under new regulations introduced after the financial crisis, said the people briefed on the plan.
There is an obvious contradiction here as if you sell these assets to someone they too will get “more stringent treatment under new regulations ” and thus will reduce the price, but I guess they are hoping we will not spot that.
Seldom does something in the financial press make me laugh out loud but this did.
The German bank believes it can divest the assets without taking large hits to its profit or capital because the long-dated interest rate derivatives are not toxic and have a predefined run-off plan, one of the people said.
If that were true they would have done it many years ago.
Also this feels like they are seeing if they can find a minimum they can get away with rather than really fixing the hole.
The final scale of the non-core unit has not been decided and the number “continues to oscillate”, but executives are discussing at least €30bn of risk-weighted assets with an eventual size of €40bn to €50bn most likely, two of the people said.
What this how procedure ignores is the rather devastating critique of the credit crunch provided by South Park with an episode based on the three simple words below.
And it’s gone
Whereas Deutsche Bank has been in denial ever since. This has created three main problems.The first is that those who have taken bonuses from the past deals have in my opinion got away with something that would be considered fraudulent in any other industry apart from “The Precious”. Next is that shareholders have stumped up more money for rights issues in return for promises that things could only get better, when they have in fact got worse. So there has been enormous value destruction, or if you prefer a financing of issue one. The third is the impact on the wider economy as Deutsche and the other zombie banks are in no fit state to support it.
The past point is intangible but important. Because in response to that problem we keep getting lower interest-rates and yields which makes the banks weaker and the whole cycle starts again.
This morning’s share price rally has faded a bit and the shares are up 2% at 6.15 Euros, probably because there are as many holes in the new plan as John Lennon sang about.
I read the news today, oh boy
Four thousand holes in Blackburn, Lancashire
And though the holes were rather small
They had to count them all
Now they know how many holes it takes to fill the Albert Hall
On the other side of the coin is the nagging issue that the banking business model has gone too.