Is anyone in any real doubt that Deutsche Bank would be bailed out by the German government? Seriously, I mean really?
I think any such doubts can and should be laid to rest right now – regardless of the evolution of bail-in mechanisms and resolution frameworks, and regardless of EU State-aid rules. I’ve been away for a couple of weeks without access to email or Internet. Arriving back at my desk in London today – the morning after the night before for DB – the only story in town is the tortuous story of the fate of what has become Europe’s banking bête noire.
Let’s state the blindingly obvious: Deutsche Bank has too little capital: a) relative to its peers and b) relative to the size of its balance sheet and the quantum of its illiquid derivatives positions. Of all the G-SIBs, it’s the only group whose fate and future causes a genuinely sharp intake of breath. No-one believes the current restructuring plan will go far enough to do what’s necessary. No-one buys whatever the CEO has to say and John Cryan is seen, arguably unfairly, as something of a snake-oil salesman.
The share price, languishing way below book value, has been telling that story for some considerable time, but once again we get the AT1s selling off Monday on fears about the group in general and on specific fears that there won’t be enough cash to cover coupons. The stock gets hammered again while hedge funds ramp up their short positions. In such circumstances, you’d understand why trying to pull off a dilutive rescue rights issue wouldn’t necessarily be top of the board’s agenda.
To be forced to deny that you went cap in hand to the government for support in resolving the RMBS issue – but then no-one believes you and reports suggest those requests were in any case rejected – is a truly ignominious corner to have been backed into. I loved the comment by a DB spokesman who I saw quoted in reports saying Deutsche Bank is fundamentally strong. I’m not entirely sure what that means in the circumstances but it sounds a bit like your wife felling you she’s fundamentally pregnant.
The official spokesman also denied the notion either of a government rescue or of a capital increase. Neither, it appears, is on the agenda. “We comply with all regulatory requirements”, I saw the embattled spokesman quoted as saying. You wonder why he bothered since no-one believed him and this is definitely a case where less is more should have carried the day. I think ‘no comment’ would have been the better option.
That the latest rout was initiated by another example of sleazy state-sponsored racketeering in the form of that U$14bn US DoJ starter claim for fraud related to the issuance and underwriting of RMBS and related securitisation activities between 2005 and 2007 – a claim that lies stratospherically north of the bank’s litigation reserves and close to all of its core capital – is a story for another day even if the bank said it wasn’t prepared to pay anything like that.
Of course, the issue has become painfully political – but that’s part and parcel of the baggage that comes with being called Deutsche Bank. Angela Merkel can’t in all conscience consent to putting public money into propping up a domestic bank while she’s been so critical of public bailouts outside Germany. So she’s done the only reasonable thing – from her perspective – and kicked the can down the road beyond the next federal election this time next year.
So what does it all mean? Public support – which don’t forget is only proscribed under state-aid rules when it is perceived to have illegally enhanced an entity’s competitive position – comes post-election as a matter of preventing a systemic risk event. Such actions will coincide with the end of John Cryan’s tenure and the installation of a German CEO. And bail-in for a systemically significant bank remains stuck in the realm of bank theory. Which is where it probably belongs, given its propensity to make things even worse. I’m a buyer of DB AT1s at any price below 80.
