2016 has been an exceptional year in the stock markets. The year started off in the worst possible way because there was distrust in East Asian markets because of China. When that was settled and the stock market was reviving the United Kingdom decided to go nuts and leave the EU. Once again there was panic on the stock market like the world had stopped because the analysts had guest wrong the outcome of the vote. Yet somehow stock markets took off and world continued spinning. Like this was not enough for one year here we go again. The dust has not even settled after Brexit and now we are in the verge of a new bank crisis because one of the largest banks in the EU Deutsche Bank is struggling.
Markets are now clearly in a waiting mode for what will happen next with Deutsche Bank. The news around the bank are not really positive. CEO John Cry promises they won´t need outside help but still they have to sell their insurance company and maybe lay off 1000 workers. Doesn´t sound good to my ears. I won´t disagree with that the all above mentioned actions are necessary for the future of the bank. I won´t either start to speculate what will happen next with Deutsche Bank because if I knew I would be making a lot of money right now and not writing this blog. This outside help what John Cry mentioned is a really interesting topic because it involves us all as tax payers in the EU.
We all remember, or at least most of us, what happened when Lehman Brothers and other institutions fell in 2008 and it caused the collapse of the financial markets. US tax payers were the only source that could bail out financial institutions from a total breakdown. Thanks to FED:s active actions to tackle the crisis the US economy were able to get back on solid ground and is doing pretty good now. EU on the other and ECB weren´t fast enough to react and there is still countries like Finland that has not bounced back to level before the crisis. One common thought after the crisis was that the investors must suffer from the bad they cause to the economy. One thing usually leads to another and after the crisis rational thinking lost all importance and populist became really popular after 2008.
Eventually one harmful thought got a lot of support and it was called investor responsibility. What a wonderful word investor responsibility and no wonder it got so popular. It became such an awesome thing that the EU decided to make a bullet proof mechanism where investors lose their money and only in the worst case possible governments come in the rescue of the banks. This all is guaranteed by a fund that gathers money from banks and only helps in the situation where no private capital is available anymore. Sounds fare that tax payers won´t need to bail out banks and we can all sleep our nights well because our precious tax money is in safe hands.
This is where all the fun, beautiful words and speeches end. The reality is quite simple no matter what in the case of Deutsche Bank. Once again we have a bank that is too big to fall. If you don´t believe me simply compare their liabilities to their equity. According to Société General they would need roughly 20 billion euros more to be a healthy capitalized bank. So if the worst possible scenario becomes true with DB and they need more capital to survive the investor responsibility steps in the scene. The first part is that investors must suffer loses. Sorry if I am stupid or really stupid but in 2007 DB cost over 80 euros per share and now it is worth of roughly 10 euros. Hmm… so in my calculations investors have already made an 70 euro loss per share and during this year only it has dropped from 30 euros to 10 euros. Isn’t that comforting to hear investor responsibility states that investor must suffer loses. So if DB runs out liquid assets I can guarantee no investor will pay 10 euros for their shares. In other words German government lets the share price to drop for zero euros.
The outcome will be that the investors suffer massive loses exactly like the EU wants. The next thing on the bucket list is that bonds are turned in the bank equity. What that means is that 8 % of the liabilities must be turned in to equity before the bank can receive outside help. So outside investors become owners of the DB. I just have to wonder who came up with this idea. On paper it sounds great but the outside investors are not idiots. If there is a risk that your debt is turned to equity you must ask a really high premium because of the risk. If you are a struggling bank like DB your chances of survival are shrinking since your financing costs are increasing rapidly. Here comes the ugly truth as we have seen before what happened with Greece. When the investors will not invest their money anymore in the sinking ship the only possible funding must come from tax payers. We can create systems where investors and creditors lose their money but we cannot create a system where they have to invest their money in the sinking ship. So I hope EU and especially Germany chooses the easy way out and helps DB if necessary as early as possible because it is easier to fix a boat that is on the surface than a sunken one!