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 [...] 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.
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.
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 course there’s the 60 trillion or so in derivatives.
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.
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.
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