Submitted by Dave Kranzler, IRD:
That place has been on death-watch forever. However bad it was before Anshu Jain was fired, it has to be worse now. – Former insider
Deutsche Bank stock has popped 6% today and the move was attributed to an announcement in the Financial Times that DB was looking at buying back several billion in senior bonds in the market at a discount – Financial Times
Before I get to the bond buyback farce, it’s safe to say the jump in DB’s stock is fully attributed to the rumor floated in Europe that the ECB was going to consider buying big bank stocks in an effort to shore up the appearance of a “healthy” banking system.
Furthermore, DB has been relentlessly sold and shorted since the beginning of 2016, down 31% in 25 trading days. It was due for a technically-driven, dead-cat, short-covering bounce. Central Bank intervention rumors being the perfect catalyst to frighten hedge fund computers into covering shorts and moronic perma-bulls into buying the dip.
Let’s first examine this notion of a bond buyback. The first item that will be pointed out by Wall Street puppets is that a bond buyback would enable DB to book accounting gains, thereby padding net income and book value. But the idiocy of this logic is that gains recognized from buying back bonds at a discount are 100% non-revenue, non-cash generating events. In fact, a bond buyback is a use cash – it further erodes the liquidity of the entity buying back bonds or stock.
In addition, if DB were to buy back its bonds in the market, why on earth would it pre-announce this? The only result this accomplishes, other than a brief surge in foolish optimism issued by perma-corrupt stock analysts, is to trigger front-running into DB’s bonds thereby increasing the overall cash cost of the bond buyback.
DB’s announcement was first reported in the Financial Times. You’ll note the FT asserts that “banks can generate capital gains my buying back bonds at a discount to their face value.” However this is highly misleading because the only “gains” generated are a non-cash generating accounting “gain” that is now permitted. It was an accounting change that was passed after the 2008/2009 collapse which gave banks the ability to fabricate net income for the purposes of padding their retained earnings and therefore their book value. It’s nothing more than legalized fraudulent accounting.
Curiously, Reuters referred to DB’s announcement as an “emergency buyback plan on senior bonds.”
The FT alludes to DB having 220 billion euros of liquidity reserves with which to use for a bond buyback. However, glancing at DB’s latest balance sheet, I can only find 102 billion consisting of 27 billion euros in cash and cash due from other banks plus 75 billion euros in interest bearing deposits with banks.
Notwithstanding the risk embedded in “cash due from others” plus “deposits” with other banks, if DB truly had 220 billion euros of “reserve” liquidity, we would not be having this conversation, DB’s senior credit default swaps would be trading at +100 spread instead of +250, it’s subordinated CDS would be trading at +200 instead of +450 and the stock would still be well above $20 instead of staring down the barrel at $10.
But let’s take a closer look at DB’s overall balance sheet, something which clearly no Wall Street analyst or financial bubblevision moron has ever experienced. DB’s latest balance sheet from 9/30/15 shows “total financial assets at fair value” of $881 billion euros; 71 billion euros of “assets available for sale; 428 billion euros in “loans:” and 153 billion euros in “other assets.” All told it reports 1.7 trillion euros in total assets, leading to a declaration of 68 billion euros in “total equity” (book value). That’s an eye-watering leverage ratio of 25x.
Now let’s take a look at the quality of the assets listed above. DB has very heavy asset/loan exposure to emerging markets, energy, peripheral European credits (like Greece, Italy and Spain), commodities, Glencore and leveraged finance/high yield. And of course there’s the 60 trillion or so in derivatives. But we are leaving that out for purposes of this analysis.
Although DB made a big production out of the 6 billion write-down and loss it would take in its third quarter, 5.8 billion of that was a write-down of goodwill and intangibles. Considering DB’s exposure to the collapsing asset sectors listed above, this 5.8 billion write-down of what amounts to thin air anyway is nothing short of shocking. I would conservatively estimate that the 1.53 trillion euros of financial assets + for sale assets + loans + other assets should be written down by at least 20%. That would imply that, conservatively, DB could write-down its assets 306 billion euros and likely still be overstating the value of its total asset base. A write-down of that magnitude would imply that DB has negative net worth of 238 billion euros.
In other words, DB is technically insolvent. When I did this exact same analysis in early 2008 on JP Morgan, Lehman, Wash Mutual and Countrywide, my write-down estimates turned out to be exceedingly conservative. I would wager anything that my analysis above is “exceedingly conservative” x 2.
Keep in mind this entire analysis does not include DB’s derivatives. It’s fine with me if DB management wants to puff up its image by taking a few billion of liquidity that it technically does not have and buy back some of its debt. I could care less. But anyone who is not selling their stock into this rally is a complete moron.
The only thing demonstrated to me by DB’s bond buyback bravado is that investors learned nothing from 2008/2009 and bank upper management and directors are even more corrupt now than they were 8 years ago.