Over this past summer, I had the pleasure of reading Andrew Ross Sorkin's book 'Too Big To Fail', a beautiful reconstruction of the financial crisis at its roots. The book claims to have been based off of many interviews & previously-secret pieces of knowledge, and the material inside confirms it; it really is a fascinating book about the crisis.
The other day, I received in the mail another book titled 'Too Big To Fail', this one penned by Gary Stern and Ron Feldman, published in 2004. This book was essentially the 'warning shot' for the 2008 financial crisis, as it spoke of the dangers of bank bailouts. I have yet to dive into the book, but I'm very eager to do so. Aside from all the literature, while we thought the era of TBTF was more-or-less over, if not heavily reduced, Deutsche Bank this week proved that this is not the case.
Attached from Yahoo Finance is a chart of Deutsche Bank's stock price from somewhere early in the trading session Tuesday, to the end of the trading session Friday. The Dow Jones Industrial Average is superimposed in green. You don't have to have a paid subscription to fancy charts and graphs to tell that DB was under some intense pressure both Thursday and Friday.
Thursday was not a good day for the banking sector. Two prominent events contributed to this general malaise, the first stemming from Commerzbank and the second from Deutsche Bank. Commerzbank announced that it would be eliminating nearly 10,000 jobs and suspending dividends for its stock on Thursday, news that sent a chill throughout the financial markets. This news came about prior to the start of the trading day, if my phone alerts are to be believed, and more or less set the tone for the financial sector before the American trading had even begun.
Trading kicked off for Deutsche Bank on Thursday pretty stationary from where it had closed Wednesday, hovering right around $12.25 per share. However, at around 12:20 PM ET Thursday, word got out that a handful of hedge funds were either pondering, or already commencing a cut in exposure to Deutsche Bank. This, of course, is not what investors wanted to hear, after the news about Commerzbank was already promoting a little more Advil than normal on this trading day. In a span of 40 minutes, from 12:20 PM to 1:00 PM ET, Deutsche Bank's stock plummeted from $12.22 per share to $11.39 per share, a 5.37% drop. The Dow responded similarly, dropping from 18,315 points to 18,151 points in that same timeframe. It eventually scraped the 18,100 mark right before 2 PM, but bounced back to close down over a hundred points on the day.
There are a lot of editorials out there with far more knowledge and experience than I possess, and that's fine; ideal, actually, as it gives people like me an opportunity to keep learning. And something that's been made a point of in some of these articles is that Deutsche Bank may remain Too Big To Fail. The financial markets certainly believe that; the CBOE'S VIX index jumped over two points in that same 40-minute time span we looked at above.
The nice thing here, though, is that this isn't Lehman Brothers 2.0. You'll notice that DB is sitting on a large quantity of cash reserves, has bonds that can be converted into equity if needed, and after Lehman in 2008, as well as observing the current state of our global economy, it would be nonsense to even imply that a bank as significant as Deutsche Bank would be allowed to fail. Deutsche is not Lehman 2.0, and is far from it.
After Thursday's scare, Friday brought a heavy dose of optimism back to the overall market, and especially Deutsche Bank. Its stock ended the day just over $13, a jump of over 10% compared to its Thursday closing price. This jump came on the heels of reports that the US government's settlement with the bank may come in around $4-6 billion, a fraction of the ~$14 billion charge initially levied against Deutsche Bank. I'm practically hitting my head on the wall at how I didn't realize that the settlement would be lower than the initial charge, leading to a rally like this; the bears got trapped and the bulls are running free in Deutsche Bank's stock, for now.
Technical indicators like the MACD and Bollinger Bands as portrayed above indicate that another, certainly more modest drop could be in the cards over the next couple days until the MACD crosses above the signal line again. What might be a bit alarming is how even despite Deutsche Bank's stock hitting an all-time low Thursday, it still stayed within the Bollinger Bands, which delineate the +2 and -2 standard deviations. Friday's rally has brought the price back just below the middle of these Bollinger Bands, but when you put together the still-iffy MACD and now-very-wide Bollinger Bands, a non-zero chance for further selling remains. I don't see it anywhere as severe as Thursday's selloff, but similar to the gradual downward trend we've seen since about May, depicted in the chart above.
Deutsche Bank is a Too Big To Fail bank, but it's a strong TBTF bank compared to the position Lehman Brothers was in when they started taking big beatings from hedge funds cutting exposure. Even if, for whatever reason, DB ended up needing government assistance to survive, common sense all but guarantees the bank would not go under, unless the end goal here was another significant shock to the system, and we know no one wants that.
Andrew
The other day, I received in the mail another book titled 'Too Big To Fail', this one penned by Gary Stern and Ron Feldman, published in 2004. This book was essentially the 'warning shot' for the 2008 financial crisis, as it spoke of the dangers of bank bailouts. I have yet to dive into the book, but I'm very eager to do so. Aside from all the literature, while we thought the era of TBTF was more-or-less over, if not heavily reduced, Deutsche Bank this week proved that this is not the case.
 |
| Yahoo Finance |
Thursday was not a good day for the banking sector. Two prominent events contributed to this general malaise, the first stemming from Commerzbank and the second from Deutsche Bank. Commerzbank announced that it would be eliminating nearly 10,000 jobs and suspending dividends for its stock on Thursday, news that sent a chill throughout the financial markets. This news came about prior to the start of the trading day, if my phone alerts are to be believed, and more or less set the tone for the financial sector before the American trading had even begun.
Trading kicked off for Deutsche Bank on Thursday pretty stationary from where it had closed Wednesday, hovering right around $12.25 per share. However, at around 12:20 PM ET Thursday, word got out that a handful of hedge funds were either pondering, or already commencing a cut in exposure to Deutsche Bank. This, of course, is not what investors wanted to hear, after the news about Commerzbank was already promoting a little more Advil than normal on this trading day. In a span of 40 minutes, from 12:20 PM to 1:00 PM ET, Deutsche Bank's stock plummeted from $12.22 per share to $11.39 per share, a 5.37% drop. The Dow responded similarly, dropping from 18,315 points to 18,151 points in that same timeframe. It eventually scraped the 18,100 mark right before 2 PM, but bounced back to close down over a hundred points on the day.
There are a lot of editorials out there with far more knowledge and experience than I possess, and that's fine; ideal, actually, as it gives people like me an opportunity to keep learning. And something that's been made a point of in some of these articles is that Deutsche Bank may remain Too Big To Fail. The financial markets certainly believe that; the CBOE'S VIX index jumped over two points in that same 40-minute time span we looked at above.
The nice thing here, though, is that this isn't Lehman Brothers 2.0. You'll notice that DB is sitting on a large quantity of cash reserves, has bonds that can be converted into equity if needed, and after Lehman in 2008, as well as observing the current state of our global economy, it would be nonsense to even imply that a bank as significant as Deutsche Bank would be allowed to fail. Deutsche is not Lehman 2.0, and is far from it.
 |
| StockCharts.com |
After Thursday's scare, Friday brought a heavy dose of optimism back to the overall market, and especially Deutsche Bank. Its stock ended the day just over $13, a jump of over 10% compared to its Thursday closing price. This jump came on the heels of reports that the US government's settlement with the bank may come in around $4-6 billion, a fraction of the ~$14 billion charge initially levied against Deutsche Bank. I'm practically hitting my head on the wall at how I didn't realize that the settlement would be lower than the initial charge, leading to a rally like this; the bears got trapped and the bulls are running free in Deutsche Bank's stock, for now.
Technical indicators like the MACD and Bollinger Bands as portrayed above indicate that another, certainly more modest drop could be in the cards over the next couple days until the MACD crosses above the signal line again. What might be a bit alarming is how even despite Deutsche Bank's stock hitting an all-time low Thursday, it still stayed within the Bollinger Bands, which delineate the +2 and -2 standard deviations. Friday's rally has brought the price back just below the middle of these Bollinger Bands, but when you put together the still-iffy MACD and now-very-wide Bollinger Bands, a non-zero chance for further selling remains. I don't see it anywhere as severe as Thursday's selloff, but similar to the gradual downward trend we've seen since about May, depicted in the chart above.
Deutsche Bank is a Too Big To Fail bank, but it's a strong TBTF bank compared to the position Lehman Brothers was in when they started taking big beatings from hedge funds cutting exposure. Even if, for whatever reason, DB ended up needing government assistance to survive, common sense all but guarantees the bank would not go under, unless the end goal here was another significant shock to the system, and we know no one wants that.
Andrew
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