The analogy to Lehman Brothers strengthened overnight (09.28.2016) as Deutsche Bank CEO John Cryan sounded the all clear for the bank in an interview with Germany’s Bild magazine.
So everything must be fine, right?
For those who might be inclined to take Cryan at his word, consider that we’ve seen this exact scenario play out before. In 2008, Lehman Brothers CEO Dick Fuld incredulously bellowed that the bank was fully capitalized and that he would punish the shorts who were betting against the stock. Soon after, Lehman was no more.
But what could we expect Cryan to say?
Earlier this year Deutsche Bank admitted to rigging prices in the precious metals markets. They’ve fired thousands of staff and have seen major changes in the CEO suite. Let’s avoid a lengthy play by play and skip ahead to the here and now. First Deutsche Bank raised eyebrows by not being able to deliver physical gold despite their contractual obligation to do so. Then the US Department of Justice tossed out a $14Bn number as a penalty for Deutsche Bank’s shady – and entirely common – banking practices dating back a decade. Then Angela Merkel proclaimed that Deutsche Bank would not be bailed out prior to the German elections in September 2017. These fresh catalysts pushed the stock down to new all time lows, sent Deutsche Bank’s debt into the tank, and pushed up their credit default swaps to red alert levels.
Notwithstanding, for Cryan to admit that the bank is in trouble would be suicidal in a perception equals reality situation such as this. If investors see a direct warning sign from the CEO that the bank is in trouble, then the remaining confidence in Deutsche Bank would soon be lost. With the German government denying that a bailout is in the cards and that a plan is being formulated, the perceived backstop is now in doubt.
We know that Deutsche Bank is in terminal trouble. Cryan lied because he had no other choice. Fuld faced the same decision. We’re at a point where a mountain of lies risks being undone by a scintilla of truth. However obvious it is to seasoned observers who understand that you can’t ignore reality just because of what some CEO says. That anyone still trusts these people when they obviously must lie out of necessity is shocking even if not entirely unexpected.
Look no further than the President of the European Commission, Jean-Claude Juncker. In a rare truthful statement he admitted that “when it becomes serious, you have to lie.” Historians will likely look back on Juncker’s statement as an epigram – or perhaps an epitaph – that defined our generation’s worldview and approach to all things political.
Nevertheless the ghost of Lehman Brothers seems to come up with fresh ways to haunt Deutsche Bank first by the year, then by the month, and now by the week. We must be acutely aware of the situation and have contingency plans in place for allocating resources and capital in the event that Deutsche Bank goes down. They are in a perilous position, and one sufficient additional catalyst is all it would take to end the facade of solvency.
If you see a headline from me that reads ‘DOWN GOES DEUTSCHE’ then be ready to act immediately. Prepare by minimizing your exposure to the global financial system through the accumulation of tangible assets.
Because a picture says a thousand words – sometimes even 2 quadrillion…