Following the seemingly endless procession of short-squeeze-fueling trial balloons last week – from settlement rumors to German blue-chip bailouts to Qatari investors – Germany’s Bild newspaper confirms the rumors that sparked weakness on Friday:Deutsche bank CEO John Cryan has failed to reach an agreement with the US Justice Department.
Having soared over 25% off the briefly single-digit price levels thanks to well-chosen rumor headlines of an “imminent settlement”, news and facts on Friday started to eat away at that confidence…
And now, as Bloomberg reports, Deutsche Bank’s Chief Executive Officer John Cryan failed to reach an agreement with the U.S. Justice Department to resolve a years-long investigation into its mortgage-bond dealings during a meeting in Washington Friday, Germany’s Bild newspaper reported.
The meeting was meant to negotiate the multi-billion-dollar settlement the bank will have to pay to resolve alleged misconduct arising from its dealings in residential-mortgage backed securities that led to the 2008 financial crisis, according to a Bild am Sonntag report.
The German lender is still considering seeking damages against Anshu Jain and Josef Ackermann, who are both former CEOs of the bank, the newspaper reported. Bild said the bank froze part of the millions in bonus payments to Jain and other former top managers.
A Deutsche Bank spokeswoman declined to comment to Bild about the outcome of Cryan’s Friday discussion or about clawing back former executives’ compensation. Mark Abueg, a Justice Department spokesman, declined to comment.
Cryan, a Briton who speaks fluent German, has sought for the last three weeks to reassure investors that Deutsche Bank can weather the formidable obstacles to its financial health. His arsenal of strawmen include: denials of bailouts, blaming speculators, rumors of informal capital raising talks with Wall Street firms, rumors of capital injections from Germany’s blue-chip corporations, rumors (denied) of Qatari sovereign wealth fund investments, and the sale of key assets and elimination of thousands of jobs.
So what happens next?
1) The “settlement-imminent”-driven 25% short-squeeze in stocks – completely decoupled from credit market’s less optimistic perspective – is going to end badly…
2) Deutsche Bank will need to raise more capital and that just became more problematic after the bank quietly raised $3bn in a senior unsecured bond issue on Friday at a very wide concession…
Some have wondered why the need to sell new paper at such a wide concession: after all as we reported before, DB has no current liquidity constraints courtesy of substantial ECB generosity, which backstop DB’s existing liquidity reserves of just over €200 billion.
… while issuing debt does nothing for the bank’s net leverage, and in fact could lead to an erosion of certain credit metrics.
If anything, the push to obtain cash may be seen by some as an indication that management is taking advantage of the recent stock price rebound window to offload securities to investors, which alone could lead to more pressure on the bank.
After all, the question immediately emerges: “does DB know something investors don’t?.”
3) A “bail-in” is more likely than a ‘bailout’, and as we detailed earlier, and here’s how it can be done… Jonathan Rochford, PM of Australian hedge fund Narrow Road Capital, explains that despite all the recent confidence-building rhetoric and posturing, Deutsche Bank will need a bail-in. In the following analysis he explains how it would (and should) be done.
Following the confirmation that hedge funds have started to reduce their capital and trading with Deutsche Bank its position is now perilous. It is correct to say that Deutsche Bank doesn’t have a liquidity crisis and that even if it did the Bundesbank could provide it with unlimited liquidity. But liquidity alone doesn’t guarantee a bank can continue to operate in the long term, solvency and profitability are essential as well. Deutsche Bank is at best borderline for both solvency and profitability with little prospect of either improving materially in the medium term. Deutsche Bank needs to substantially restructure its business activities and balance sheet, both of those will take time and capital neither of which Deutsche Bank has.
Unlike other global banks Deutsche Bank has failed to adequately lift its capital levels since the collapse of Lehman Brothers eight years ago. It has been allowed to remain undercapitalised due to weak European regulators, which arefighting against global efforts to have all banks increase capital levels. Whilst German and Italian regulators are fighting for lower capital levels and avoiding dealing with their problem banks Switzerland and the US are implementing much higher capital levels, particularly for the largest banks.