Deutsche Bank’s position is currently marginal as it is
woefully undercapitalised and has no clear prospect of becoming
meaningfully profitable. As the world’s largest derivative
trader and Europe’s most systemically important bank this is untenable.
Deutsche Bank is three times larger than Lehman Brothers, making the
possibility of an unexpected and uncoordinated failure completely
unacceptable. Deutsche Bank needs substantial time and capital to
execute a turnaround, neither of which it now has. It does not have the
profitability to grow its capital base quickly or to support a capital
raising of the size it needs. Deutsche Bank needs either a bail-in or a
An orderly bail-in process would deliver Deutsche Bank the additional time and capital it needs.
In the first instance, the bank should be declared non-viable with all
equity, additional tier 1 and subordinated debt written off. By
converting 63.1% of long term senior debt to new equity the leverage
ratio would increase to an unquestionably strong 9%. Based on recent
peer comparisons, bailed-in senior debt holders would receive a recovery
of at least 94% of their current position. Using an IPO model, where
management develops and presents a new strategy to potential investors
over a 2-3 month period, would allow the recipients of newly issued
equity an orderly process to sell-down their equity. It also creates the
possibility of a substantial recovery for subordinated debt, additional
tier 1 and equity investors.
* * *
If the Lehman playbook continues to play out as it has done - denials
of any problems... blame speculators... unleash short-squeeze on heels
of rumors of foreign sovereign wealth fund investments... and finally
acceptance - this will not end well...