Deutsche Bank is the darling of the short-sellers
In a market full of crowded trades, few have become as fashionable as the bet that Deutsche Bank’s stock price will keep on falling.
Hedge funds, large and small, are shorting the stock. Long-term institutional investors are dumping their positions. And Wall Street’s secretive but influential community of independent research providers has been proclaiming for months that Germany’s largest bank does not have enough cash to survive.
Even Tidjane Thiam, the chief executive of Credit Suisse, which itself has been the target of hedge funds, said at a conference on Wednesday that Europe’s banks were “not really investable.”
This echo chamber of doom — fed in recent days by a cycle of reports in Germany that the government might step in, only to be followed by denials by Berlin - brings to mind some of the fears over Bear Stearns and Lehman Brothers before those institutions suddenly lost the trust of investors and clients alike in the dark days leading up to the 2008 financial crisis.
With ^1.8 trillion in assets and ^220 billion of cash on hand, Deutsche Bank, strictly by the numbers, would seem to be in no danger of failing — a point that the bank’s chief executive, John Cryan, has been making repeatedly.
And Deutsche Bank’s shares rallied on Wednesday, when the bank said that it had sold Abbey Life, its British insurance unit, for a little over $1 billion, feeding hopes that a spate of asset sales would bolster its finances.
Still, for a large financial institution like Deutsche Bank, which relies on volatile short-term loans to fund a risky portfolio of derivatives, securitised mortgages and other hard-to-sell assets, market confidence can be fickle — there one moment, gone the next.
That Deutsche Bank, which has one of the thinner cash cushions among its peers, may face a fine of billions of dollars from regulators in the United States has given investors extra incentive to add to their negative bets.
“This trade is getting a lot more popular — no doubt about it,” said Brad H Lamensdorf, who runs the Ranger Equity Bear ETF, an exchange-traded fund that tracks a portfolio of stocks that Lamensdorf believes are going to sink fast.
“Deutsche Bank is a massive hedge fund with lackadaisical compliance and a lot of leverage. I think it’s going to five bucks.” In the United States, Deutsche Bank’s shares closed at $12.30, down from $26.21 a year ago, and it is the top holding in Lamensdorf’s $220 million fund.
According to Thomson Reuters data, investors have borrowed 39 million shares of Deutsche Bank shares to bet against it — or about 2.8 per cent of the total shares outstanding. This so-called short interest in the bank is close to a one-year high and represents around $480 million.