ni-co

Two things: DB just announced is rumored to "consider" [edited] to buy back some of its senior bonds. I see why they do it but not how that changes anything. At least they can book a profit for the delta to the par value. https://next.ft.com/content/d2e01b1e-cf57-11e5-92a1-c5e23ef99c77 Then there is this letter of a DB credit analyst that ZH (I know…) just published. It's interesting because it gives a bit of an inside view of DB momentarily: http://www.zerohedge.com/news/2016-02-09/deutsche-bank-terrified-here-what-needs-be-done-its-own-words

Ok. I think his curve fitting test example is just bananas. 30 years is a much too long time frame when you think about the average lifecycle of a company. In 30 years everything can happen.

Will read - but it is curious that Tobin's Q and other basic measures of valuation have similar back-tested predictive records. If they don't, then starting valuation has nothing to do with future returns, in aggregate. Do we really believe that? Are we really suggesting that because CAPE isn't relevant over a 30-year period that it's not relevant over a 7-10 year period either? I guess since stocks have gone up for the last 100 years, there's no reason to every worry about valuation or potential down years. I agree. Sounds like he's really overthinking it. The Shiller PE, that was invented by Ben Graham btw., is just that: a (smoothed) PE. Is he really arguing that a PE is irrelevant for the forward returns of a stock on average?

The DB CoCos wouldn't be directly dilutive because they are not converted but written down in a trigger event. However, regulators could inject additional capital in this event, or DB would have to raise additional equity on its own.

Yeah, I didn't say I don't believe you. But it doesn't really matter in which European bank they are. Btw. I wouldn't like to own any of those "certain eurozone countries'" sovereign bonds listed on this very page. I agree with that. However, the ECB ending up with all the problematic European sovereign bonds can't be qualified as a (long-term) solution – at least not in my mind :)

So?

One additional thought re European sovereign bonds: Why did they rescue Greece? I think the real reason is: bond holders, which are European banks. If they had been forced to write-off Greek sovereign debt, banks would have undershot capital requirements immediately, triggering a death spiral. Well, they still own the Greek bonds, so everything is fine – alright?

I tend to agree with your paragraph describing the "thread's argument". My timing view is – to quote Soros: "I am not predicting it, I am observing it." I think that this process has already started because bond/equity market participants anticipate it and banks are essentially cut-off from capital markets. I read in a FAZ article (in German, sorry) – and FAZ is usually well informed – that DB wanted to become "more active" in the credit markets and "was expected" to issue up to €7bn in new bonds (I guess CoCos). Well, this was on 30th January. How well did the market take this message? They won't be able to do it. Now what? So, yes, I see a death spiral in action. That said, when I say "predict/observe" etc. I always mean probabilities. I think it's highly probable that this is what's going on. Since I have no insight into DBs internals I can't know it – and they certainly wouldn't tell anybody (see their latest statement; what else can they say?). Re Euro sovereign bonds: Are they really "nice and liquid"? Who is the potential buyer (especially for the riskier ones) if there wouldn't be ECB QE?

I don't think they said anything market participants didn't know. I'd be very surprised if this calmed people. Equity/debt plunging at banks is a reflexive process. When people lose trust in the banks' equities and are starting to fear trouble, banks will get into trouble – even if they weren't before. The credit/share price is changing the underlying fundamentals. The dynamics of this are hardly comparable to most other industries.

I'd be careful with this one. Essentially, this is a leveraged bet on the S&P500 and the credit markets.

I'd highly recommend to you: http://www.economicprinciples.org/ Watch it a few times and think again about cycles. Maybe Tepper and some other value investors should watch it, too.

I didn't regard the sheer issuance of CoCos as a red light but I think might be the drop in the bucket for the banking crisis. Banks thought that they'd get around diluting their shareholders with CoCos – well, they don't. http://www.bloomberg.com/news/articles/2016-02-08/deutsche-bank-s-woes-threaten-coco-coupons-creditsights-says I wouldn't be surprised if they stopped paying them in 2016.

Agree completely with your list (though I wouldn't rate the issues necessarily in that order – but I assume that you didn't either). There also is our evergreen: The potential disintegration of the Eurozone and/or the euro.

Keep in mind that the BIS report is from 2013. This is mostly a very recent (2014 and 2015) phenomenon. Take a look at this: For DB: here or here For CS: here For SAN: here or here All the recent large issuances have been done to prop-up T1 capital.

Because experience shows that they can pass on negative rates to depositors only in a very limited way. Their NIM is waning. Take a look at Japanese zombie banks. Exactly, wiping out shareholders is what I'm expecting. That's also why I own LEAP puts (I don't like going short stocks outright). Keep in mind that most of banks' assets are European sovereign debt – they can't follow the US playbook. I think they may follow the Japnese one more or less or they might nationalize the large banks completely. This is the more interesting part for me. Granted commodities, have spiked the last few days, but you get an unwind via a bankruptcy of Glencore/Nobel Group the exposure is going to bring someone down with them. I'm not so sure that bankruptcies in the commodity industry alone would cause a systemic banking failure but, as it is with petro-dollars, it certainly doesn't help. It's an additional headwind in my opinion.

Oh really? I don't think they get a lot of attention. My impression is that most people don't have a clue why DB's equity is on a 20 year low and spreads are blowing out (which I wouldn't regard as "not giving a ****"). What's your theory on this? If at all, people are talking about how bond holders might lose the principal of their CoCos but I haven't seen a sensible discussion about the interplay between those bonds and the common share capital – neither here nor in the WSJ, the FT, the Economist or Zerohedge for that matter. But this is my whole point (I couldn't care less about some bond holders losing their money). CoCo nominal vs. Wells Fargo market cap doesn't matter in my opinion. I think what matters is CoCo nominal vs amount of equity capital of the issuing bank and you may know that this is substantial for most of the European banks. Apart from that, size isn't really the biggest problem but that capital markets are closed for now for those banks and they are really in need of equity capital.

Gundlach is "frightened". http://www.bloomberg.com/news/articles/2016-02-05/gundlach-says-frightening-seeing-financial-stocks-below-crisis Does anybody have some or insight what he thought were the causes? (If he has any idea at all)

Dumb question, what exactly do you mean by CoCo's? Contingent Convertible Bonds. Here's a primer on them: http://www.bis.org/publ/qtrpdf/r_qt1309f.pdf

This is also an interesting aspect I haven't thought about. To be clear: I'm not sure that this negative rates, CoCos are the cause – it's only my working hypothesis.

Thank you. Done. See this thread.

[i repost this post about European banks from the "RBS: sell anything" thread to encourage further discussion on this topic in its own thread. I think it's important and being overlooked by most investors at the moment.] Big picture, I think, is negative rates causing banks with thin Tier 1 capital layer to lose money, thereby triggering further regulatory capital requirements. At the same time, from 2014 onwards, they almost all have begun financing their T1 capital requirements with CoCo bond issues. Those bonds are a fucking nightmare. They are accepted as T1 capital because when there is too little T1 capital ("trigger event") the bonds are either written off completely or automatically converted into common shares (this depends on the features of the single issue; most are converted). The thing is, the ones that will be converted give bond holders a huge incentive to short the respective stock. This is a known problem called "the death spiral" (see reverse convertibles in the 1990s). But even the CoCos that are not converted are in danger of being written-off completely when it becomes more clear that the trigger event will actually happen. This is all happening right now. Yields on CoCos just exploded. Consequently, for the next few years there is no chance in hell that banks will be able to sell additional CoCos to prop-up their Tier 1 capital. The only option remaining is therefore the issuance of new equity. Well, good luck with that! It wouldn't be that bad were it not for the fact that capital markets are closing for those banks exactly at the moment when they need them the most (which was completely foreseeable at the point when the CoCos where "invented", s. this FT article from 2009 (!) where one guy therefore calls them "equity time bombs"). Add to this that market participants know that tangible book values of the European banks are phony. The balance sheets are loaded with bad assets that have never been written off during the "last" financial crisis. Nearly all the Europen banks need to be recapitalized and you can kick the can down the road only for so long. Then, have a look at DBs derivative book (mostly obscure OTC derivatives) which is the largest or second largest in the world with a nominal amount close to world GDP. They say it's mostly "netted-off" but this is only true as long as no counterparty's failing. Take all this together and you may see why I don't want to own any of the European banks. I'm worried that, in the event of a systemic crisis, European banks are too big to be rescued by their own countries since their books are several times GDP in a lot of cases. This is completely different from the US financial crisis and I think it's the reason why they haven't been recapitalized so far. It is very comparable to Japan from the 1990s onwards, though.

Big picture, I think, is negative rates causing banks with thin Tier 1 capital layer to lose money, thereby triggering further regulatory capital requirements. At the same time, from 2014 onwards, they almost all have begun financing their T1 capital requirements with CoCo bond issues. Those bonds are a fucking nightmare. They are accepted as T1 capital because when there is too little T1 capital ("trigger event") the bonds are either written off completely or automatically converted into common shares (this depends on the features of the single issue; most are converted). Thing is, the ones that will be converted give bond holders a huge incentive to short the stock. This is a known problem called "the death spiral" (see reverse convertibles in the 1990s). But even the CoCos that are not converted are in danger of being written-off completely when it becomes more clear that the trigger event will actually happen. This is all happening now. Yields on CoCos just exploded. Consequently, for the next few years there is no chance in hell that banks will be able to sell additional CoCos to prop-up their Tier 1 capital. The only option remaining is therefore the issuance of new equity. Well, good luck with that! It wouldn't be that bad were it not for the fact that capital markets are closing for those banks exactly at the moment when they need them most (which was completely foreseeable at the point when the CoCos where "invented", s. this FT article from 2009 (!) where one guy calls them "equity time bombs": https://next.ft.com/content/833b6f8e-ca34-11de-a3a3-00144feabdc0). Add to this that market participants know that tangible book values of the European banks are phony. They are loaded with bad assets that have never been written off. Nearly all the Europen banks need to be recapitalized and you can kick the can down the road only for so long. Then, have a look at DBs derivative book (mostly obscure OTC derivatives) which is the largest or second largest in the world with a nominal amount close to world GDP. They say it's mostly "netted-off" but this is only true as long as no counterparty's failing. Take all this together and you may see why I don't want to own any of the European banks. [Edit: Almost forgot: I'm worried that in the event of a systemic crisis European banks are too big to be rescued by their own countries since their books are several times GDP in a lot of cases. This is completely different from the US financial crisis and I think it's the reason why they haven't been recapitalized so far – it is very comparable to Japan from the 1990s onwards.]

I've been accumulating SAN/BSBR the whole way down through additional purchases and reinvested dividends. I'm short SAN, DB and CS and think Europe is on the verge of a banking crisis.

I'm surprised that nobody's discussing the virtues of European banks here.

Done. This is just hilarious.