Many of Europe’s banks are sick, and none are sicker than Deutsche Bank, the pride of the German banking industry. Wolfe Richter’s article here is good as far as it goes, but he fails to mention Deutsche Bank’s derivatives book, the world’s largest at an estimated $60 trillion. From Richter at wolfstreet.com:
Deutsche Bank – “the most important net contributor to systemic risks,” as the IMF put it last week after a lag of several years – is having a rough time. Shares dropped 4.2% today to close at a new three-decade low of €11.63, down 48% since July 31 last year, lower even than the low during the doom-and-gloom days of the euro debt crisis and the Global Financial Crisis.
It’s not the only European bank in trouble. Credit Suisse dropped 1.7% today to CHF 9.92, another multi-decade low, down 63% since July 31. Other European banks are getting mauled too. The European Stoxx 600 banking index dropped 3% today to 117.69, approaching the Financial Crisis low of March 2009.
If July 31, 2015, keeps showing up, it’s because this was the propitious day when Draghi’s harebrained experiment with negative interest rates and massive QE came unglued, when European stocks, and particularly European bank stocks began to crash.
Deutsche Bank is so shaky that German Finance Minister Wolfgang Schäuble found it necessary to stick his neck out and explain to Bloomberg in February that he has “no concerns about Deutsche Bank.” Finance ministers don’t say this sort of thing about healthy banks.
At the time, CEO John Cryan – whose main job these days is propping up Deutsche Bank with his rhetoric – explained ostensibly to frazzled employees that the bank’s position was “absolutely rock-solid, given our strong capital and risk position.”
Days later, he followed up his rhetoric with a stunning ruse: On February 12, the bank announced that it would buy back $5.4 billion of its own bonds, including some issued only a month earlier.
“The bank is using market conditions to buy back these bonds at attractive prices and to cut debt,” CFO Marcus Schenck said at the time. “By buying them back below their issuance value, the bank is making a profit. The bank is also using its financial strength to provide liquidity to bond investors in a difficult market environment.”
Shares soared 12% on the spot! Its bonds rocketed higher. Even its contingent convertible bonds, the infamous CoCo bonds, though they weren’t part of the buyback plan, bounced. For example, its €1.75 billion of 6% CoCo notes soared from a record low of 70 cents on the euro on February 9 to 87 cents by March – a 24% move!
The ruse had worked! During the miracle rally, short sellers got their heads handed to them.
But it was one of the silliest, most desperate ways to prop up shares and bonds. And now the bond-buyback miracle-nonsense rally has collapsed, with shares at a new multi-decade low, and with bonds swooning.
To continue reading: I’m in Awe at How Fast Deutsche Bank is Coming Unglued