Company Reports

DB: Dead & Buried?

dhendler@viola-risk.com twitter: @PhatSpock

September 26, 2016

Since early August in a series of articles, Viola Risk Advisors has been warning the Stakeholder Stack (debt & equity investors, counterparty risk and regulatory exposure managers) that major trouble was brewing for Deutsche Bank. Articles included: Deutsche Bank: The Rise & Fall of the Fourth Bkg Reich, Deutsche Bk: Death March Math, Capital Whacked By Level 3s.

And on the macro European banking front, that the pan-European region was on the verge of a contagion with a liquidity crisis just around the corner if the right steps were not taken. These articles include: European Banking Dysfunction: Is There a Way Out?  and Italian Banking: Finito as Financial Intermediaries?

On the recent 8th anniversary of Lehman Brothers Bankruptcy, you would think global regulators and country heads would have a better game plan as to what to do to stabilize global capital markets. It is quite disturbing that the company components of the US S&P Financials were closing all down at this writing and that JPM & GS were the biggest stock losers of the day. Not surprising as these two systemic companies are huge counterparties to DB whether directly or indirectly since they are among the Top 5 counterparties in the world. And guess what? DB is sixth biggest globally and #1 counterparty in Europe.

Back in early - August, Viola Risk pounded the table recommending to investors, risk managers and regulators that they needed to trim back exposures dramatically. We recommended a total exposure Sell on equity and debt/cds(Buy) exposures. For counterparty risk managers a GROSS ZERO exposure to DB.

For regulators and others that DB had the highest systemic risk in the world with an almost 15 year breakeven on their capital shortfall from core operating income. The disagreement between the German government (Chancellor Merkel - won't bail out DB!) and private markets (CIO of Allianz - bail it out!) on DB's destiny is very disturbing as it shows that there is no political consensus in Germany on the imploding DB situation. The tug of war among the German and European Union politicos will just delay and exacerbate the DB resolution.

In the next days, we will be writing more articles on the deterioration of DB's funding strategy, weak core operating units and inability to sell strategic assets to shore up capital. Basically, DB is shut out of the global equity markets in terms of raising outside capital as counterparties and investors continue to step away from exposures to the giant German bank.

To keep our clients well-informed, we will be having IB chats on Bloomberg and other media events to have a rational conversation on the DB situation.