Night of the living banks

Nassim Nicholas Taleb, the author of books such as "The Black Swan" and "Antifragile" that set the benchmark on discussing the fragility of the banking system, recently wrote on his Twitter account: "I wasn't worried about the situation of Deutsche Bank until the German finance minister said that we should not worry".

A similar degree of "confidence" was displayed by David Stockman, former Reagan administration official. "When problems arise, bank executives lie", said Stockman on Bloomberg, and one of the moderators put his hands to his head.

"The reason bank shares are being sold everywhere is that investors once again realize that they don't know what is on the banks' balance sheets", David Stockman further said.

As if Wolfgang Schäuble's statement wasn't enough to increase investors anxiety, shortly after Pierre Moscovici, the European Economic Commissioner also got "involved". "The European banks and the economy are solid", said Moscovici, according to a Bloomberg piece of news. Is there any need for any more "signals" like that to cause investors to panic?

A number of studies posted by Zerohedge have shown, prior to the coming into effect of the bail-in procedure, that the new banking resolution regime "will prove completely incompatible with fractional reserves system, especially one characterized by a high degree of leverage, as is the case in many European countries".

Besides this incompatibility, the optimism around the good functioning of the procedure is being undermined by some of the European governments, which have allowed its arbitrary application, (see the case of Novo Banco in Portugal).

After several failed attempts to calm investors, Deutsche Bank put out a new "proposal": the buyback of several billion Euros of senior bonds. Bloomberg data shows that Deutsche Bank has issued about 53 billion in senior bonds, as the amount of all the bond issues is about 144 billion Euros.

Market analysts think that the buyback amounts to "creating a lower threshold for bond prices, which would discourage selling", according to some statements made for Bloomberg.

"Banks can generate capital gains if they buy back their bonds below their par value", FT further writes. Convertible bonds, which have seen massive drops over the last few weeks, are not included in the buyback plan.

According to FT data, senior bonds issued by DB with a 5-year maturity have been traded at about 97% of their par value over the last few days.

The new proposal by DB has caused an accelerated growth of the price of shares, the greatest in the last seven years, but it did not fully make up for the drop of the first two days of last week.

Before the last trading day of the week, nothing seemed to be capable of stopping the downward trend of the DB shares, as "investors have completely lost their confidence in the bank", one of the top ten shareholders of Deutsche Bank told Reuters.

Across the Ocean, John Mack, executive director with Morgan Stanley back when the banking giant was saved through a loan of more than 100 billion dollars granted by the Federal Reserve, came to the "help" in an interview with Bloomberg. "The notion that DB may not pay the interest on its debt is absurd", said Mack, because "the government would not allow that".

Then new rumors appeared that the ECB would extend the quantitative easing program to include bonds issued by banks, and a piece of news by Bloomberg detailed the buyback plan announced by Deutsche Bank.

The total value of bonds denominated in Euros and dollars could reach 5.4 billion dollars, for a price paid to investors of 97.3% of the par value. Investors who bought the bonds issued just last month do not agree to the DB offer, stating that they have been "misled, because the bank has not presented the real financial situation", according to Bloomberg (author's note: the senior bonds issue was made about two weeks prior to the publication by the bank of its Q4 2015 results). Will DB find itself having to defend itself in a new lawsuit?

A new lawsuit, aside from the thousands hat it already has ongoing, is not, however, the main concern of the German banking giant.

An e-mail by Dominic Konstam, credit analyst with DB, reveals "the pure terror of those who realize the extent of the destruction of the current financial system", according to Zerohedge.

Konstam writes that "the main problem is the accelerated drop in the liquidity offered by the central banks", as well as the "contagion that threatens to include even the banking centers in Singapore and Hong Kong".

The solutions provided by the Deutsche Bank analyst have very serious implications for economic freedom and will lead to the end of what is left of capitalism. These include stopping the raising of interest rates in the United States, new massive liquidity injections in the Eurozone, the acknowledgment of problems by the Chinese authorities, through the devaluation of the yuan and the stabilization of currency reserves, the launch of new fiscal stimulus programs, as well as the postponement of the implementation of the Basel III Capital Agreement.

For the analyst who "realizes how close DB is to the edge", as Zerohedge writes, the solutions mentioned above are still not enough.

Dominic Konstam thinks that the negative interest rates should not be punitive for the banks, like the ones of the amounts deposited with the ECB, but for consumers, so as to "encourage" consumption. Furthermore, all major banknote denominations should be "outfitted" with microchips, and cash withdrawals should be levied.

Does Konstam realize how absurd his proposals are, especially since many of them have been tried and have not worked? According to the definition by Albert Einstein, "insanity is doing the same thing over and over, but expecting different results".

And if this is also the opinion of the management, aren't there any straitjacket makers out there that would donate a few to Deutsche Bank?

"The existential fear of the DB analyst is tangible, as is his implied threat: if you don't do these things, if DB blows up it will be on you", Zerohedge further writes.

In an interview granted to Der Spiegel, Andreas Dombret, a member of the Board of Bundesbank, said that "the ECB is creating zombie banks in Europe", according to the Deutsche Wirtschafts Nachrichten online daily, and they are keeping them alive through cheap money.

"There has been no serious attempt to restructure the banking system", Dombret further said, who says that "this zombification must end".

Apparently the divergence of opinions between the ECB and the Bundesbank has just deepened, and Mario Draghi will have to explain why he is tolerating this phenomenon, while in his speeches he is promoting the need for structural reforms in the economy of the Eurozone.

When and how will Europe exit "the night of the living banks"?