Deutsche, Barclays suffering under dark clouds

I have been following Deutsche Bank and Barclays as bellwethers for the troubled uber banks as global interest rates begin to climb.

I have written much about Deutsche Bank’s troubles with Libor manipulation and the strange circumstances of key executives allegedly taking their own lives.

Well, now I see that Barclays has its own strange circumstances for the bank’s Libor executives final demise. More on this in the future.

Over the last year, DB shares are down -21%, while Barclays is down only 3 percent over the same time frame. But Barclays shares followed DB’s downward trend line until very recently.

Barclays CEO Jes Staley had his pay in 2017 cut by 8.5 percent to $5.39 million, the bank reported Thursday morning. We have not seen DB’s Jon Cryon’s compensation package for 2017.

Staley’s 2016 bonus is still under pending the outcome of the Financial Conduct Authority (FCA) probe into his handling of the whistleblower incident.I am looking into whether one of the strange deaths is connected to this action.

Allegedly Staley ran his own investigation in order to identify the whistleblower.

I’ll be keeping an eye on these two banks to see. But I believe one or both could be this year’s Lehman Bros.

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Deutsche is walking dead, but may not fall

When the markets question the viability of a financial institution, then that firm is toast.

The capital markets were the ultimate forum for picking winners and losers, that was until 2008, when the term “Too Big To Fail” came into vogue.

Once a firm is tagged with the TBTF label, markets no long can become efficient and take the financial institution out through bankruptcy or merger.

This is where you see Deutsche Bank today. In the past before TBTF, Deutsche would be in a liquidity squeeze as markets question the viability of the firm ( see Lehman).

However, there has to be an explicit backing by the German government in order for Deutsche to still have its doors open.

Yes we get headlines that Deutsche’s borrowing costs are going up, that other firms are poaching Deutsche’s bankers and that its derivative book has been reduced to 43 trillion euros from 75 trillion euros.

But let’s work the notional value of a 50 trillion euro book, which conservatively could be 5 trillion euro in exposure. Deutsche’s current book value would have trouble covering the $14 billion Justice Department fine for mortgage security fraud charges. So how can the bank cover a 1% move on 5 trillion euro?

If the market could clean out a troubled firm (see Citigroup), then we would not have had to go through the last eight years of economic malaise. But that’s not to be, as governments and central banks — not the markets — pick winners and losers.

So if the Merkel government has given the markets a thumbs up in backing up Deutsche, which is the only explanation, then we can welcome back the zombie banks in Europe.

Cryan has to know when to Fuld 'em

The similarities between Deutsche Bank and Lehman Bros. grow by the day.

CEO John Cryan is pulling out the Lehman playbook used not so effectively by ex-Lehman CEO Dick Fuld.

Layoffs abound as the German bank cuts losing divisions, just like Lehman.

Defections of the top traders and execs continue across the globe, just like Lehman.

The bank just completed a sale that it said lost the bank more than $100M, but it brings capital in, which is the much-needed life blood right now, just like Lehman.

Cryan also professed that the bank does not need a bail out since it has “plenty of liquidity,”  just like Lehman.

However the German financial press has reported that plans are being drawn up, despite German Chancellor Angela Merkel saying on Monday no bail out would come.

Why am I continuing to write on Deutsche’s troubles?

Because unlike Lehman’s demise, there is no central bank cure for this catastrophe.

The size of its derivative book, which is conservatively $50T notionally, could create a $2T shortfall and a huge drain on global liquidity at a time when central banks have record debt.

Deutsche Bank's pan-European bail out

As I have been writing about Deutsche Bank since 2012 as an alleged criminal enterprise that had a number of bankers associated with it mysteriously die in suicides, I can’t say I am surprised by the events recently.

And recent market moves on its stocks and bonds show the bank is in bigger trouble than Germany can handle.

  • On Tuesday Deutsche has a market cap of $16B, just above the $14B amount the Justice Department is looking to claw back in fines as a result of peddling fraudulent mortgage paper.
  • And the short interest on the bank is growing. The total number of Deutsche shares out on loan rose from 1.72 per cent of its issued shares to 3.07 per cent over the past week, according to data from Markit, as Deutsche has seen its shares fall 55 per cent in the last year.
  • It’s CoCo bonds — contingent capital bonds — issued earlier this year, to bring in some much-needed capital, are trading well below par. The last price I could find was $0.77 on the dollar in July.

So for German leader Angela Merkel to say Deutsche will not get a government bailout tells me one thing. She is putting the ECB and Mario Draghi on notice that this is their tar baby. You want negative interest rates, which cripple banks, then you bail out Deutsche.

All of Europe will need to prop up this bank, because Germany can’t do it alone, especially with upcoming elections next year.

I would go so far as to say Janet Yellen and the Federal Reserve will be part of the bail out as pressure mounts.

Just like in 2008 when Deutsche was one of the global banking firms getting easy money from the Fed after Lehman Bros.’s collapse.

Merkel won't bail out Deutsche: report

German Chancellor Angela Merkel has nixed any bail out for Deutsche Bank prior to the national election next September, Focus magazine reported, citing unidentified government officials.

The German leader has also ruled out helping the bank’s with its legal imbroglio with the US Justice Department, which is seeking  $14 billion in sanctions against the bank’s mortgage-backed securities business, the magazine said.

Deutsche’s shares are down 5.5% in pre-market trading in the US on the report.

The similarities between Deutsche and Lehman Bros. keep coming up. Lehman was forced into bankruptcy before Washington got into picking winners in 2008, now Deutsche is being brought to its knees as its stock price will open at an all-time low of $12 a share.

I’m not alone in seeing the similarities, European bourses are down more than 1.5% on the news that Germany’s largest bank is on its own.