On a day of largely distracting nonsense, Mrs White House, Brexit and Marmite added the sum total of nothing to human knowledge. But down in the Balkan bowels of Deutsche Bank, things aint wot they used to be even a week ago. The Slog analyses the who and why of it all.
In yesterday’s crop of controlling madness and hypocrisy, Mrs Obama said she was “rendered speechless” by what Trump said about fame, sex and Mrs Slocomb (has she never seen an Eddie Murphy movie?) S&P warned that a Hard Brexit will mean Britain’s place as a reserve currency being threatened (what will they do when the euro collapses, downgrade Draghi to cashier?) and the Tesco/Unilever Marmite crisis ended with the two gangs agreeing to join forces (the better to screw us all in future).
Meanwhile, back on Earth Reality Zone 1, the MSM pretty well entirely missed a change of tone in the debate about Deutsche Bank.
DB’s shares having risen 10% over the last three days, most hacks, multinats and traders have returned to their Day Job of making bad look good. This means that Germany’s biggest bank has now climbed back to being worth the same as our local Bureau de Poste.
But the Establishment narrative has begun to change.
Fully aware at last that bollocks are no longer going to cut it, CEO John Cryan dropped the line about steady restructuring, and enacted a blanket hiring freeze right across the bank. This is a Very Bad Sign because first, it’ll save a trickle of intermediary fees but not much else; second, there aren’t that many employees in the sector left who would risk working there anyway; and the ‘swingeing cuts’ one might have expected have been avoided because there would have been some eye-popping contractual costs involved.
This says to anyone awake that Mr Cryan knows every dollar of liquidity is vital.
Bloomberg TV anchor and part time cattle auctioneer Vonnie Quinn asked a bigwig yesterday whether Cryan’s job was safe. There was half-hearted talk of “we have to give the guy a chance” and some wrinkled noses. Later, Vonnie asked a former federal regulation high-up what she felt about Deutsche Bank. The regulator’s hesitation could perhaps be explained by the fact that Vonnie asked the question in under 1.65 seconds, but it was nevertheless noticeable that the official took a deep breath before saying, “Well, we’ve all known for some time that Deutsche is the weak link. It’s business model makes no allowance for the onset of bad times, so, you know – what can I say?”
Online, a good Bloomberg piece by Mark Gilbert pointed out clinically that, while Draghi’s eurozone QE had meant the cost of banks wanting to borrow money had gone down, Deutsche’s had shot up. ‘….while Deutsche Bank has been reporting a higher funding cost than the consensus for the past couple of years, the gap has more than doubled from five basis points at the beginning of this year to between 11 and 14 basis points in recent months,’ writes Mr Gilbert.
So while Moody’s still rates the bank A3, it’s hard to see why: in sharp-end terms, DB’s borrowing is now the most expensive in the eurozone – bar none.
But the bank is still issuing debt like the clappers: two days ago, it raised an additional $1.5 billion worth of debt, having raised $3 billion last week. On average, Deutsche is offering more than double the yield today that it had to cough up a year ago. This is not my idea of cost-cutting: but it is a sign of waning faith. With not much hope yet, it can’t be long before the bank starts to need charity.
Professional opinion is unanimous, however, that such isn’t going to be forthcoming from public share issues. “It would be expensive for Deutsche Bank to go to the public market for debt issuance now because it has to pay a significant premium and that may shake confidence among investors,” said Ben Sy, head of fixed income, currencies at JPMorgan Chase in Hong Kong.
Ben is making a key point there: it’s not just the premium they’d have to pay: Deutsche’s liquidity is umbilically connected to its share price: if the latter chutes again, the former collapses like a 9/11 skyscraper.
Just instituting the hiring freeze lopped 2.5% off the price on the NYSE yesterday during the afternoon CET time:
The pretty obvious point I’m making here is that, whereas at the beginning of last week it was Don’t Mention the Fine Scam on all fronts, today it’s looking more and more like expectation management.
What happens now is going to hinge on how several doors swing:
However, recent history offers us some clues as to likely outcomes. Right now, Deutsche is morphing into a bank with the business model of Northern Rock and the borrowing credentials of Lehman. I sense that a denialist, overconfident approach to the situation now could set off the sort of nuclear domino chain of collapse nobody inside the 3% bubble wants. And I sense that most of them know this.
But some of the BSDs are unable to grasp that there is no such thing as a gradual panic. Most of them live in Brussels, Berlin, and Frankfurt. They were caught napping by 2008, the Greek “bailout” requirement, rate cuts, the eurozone recession, the failure of austerity and the post-Syrian disaster of migration. Their name is the European Commission in its varied by universally useless forms.
Only America is going to fix this, because only America has the motivation, the money and so much invested in No problems please, we’re tryin’ ter get elected.
My hunch is that if Deutsche shares don’t settle next week – and/or the rate of decline accelerates – fast-moving headless chickens will be at work from Washington to Wall Street.