Will Deutsche Bank turn out to be Europe’s Lehman Brothers?

Deutsche Bank is in big trouble. But this isn’t another a Lehman moment, says John Stepek. It’s not the start of a new crisis, it's unfinished business from the last one.


Deutsche Bank is in a better position than Lehman was but banks live on confidence

Before I get started today, just a heads up Money Morning next week will be slightly different.

Monday is the MoneyWeek conference, so we'll be focusing on what comes out of that all week. You'll also have the opportunity to buy the DVD recordings of the full day.

I'm looking forward to it we're at a very interesting juncture in financial markets and I'm keen to hear what our guest speakers, including MoneyWeek favourite Russell Napier, have to say.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

I have a hunch just a hunch mind that one bank in particular might come up in the day's conversation.

So let's have a little chat about Deutsche Bank

Deutsche Bank vs Lehman Brothers: spot the difference

That's the general fear. Is it correct?

There are lots of differences between Deutsche Bank and Lehman Brothers. Financially speaking, Deutsche is in a better position than Lehman was. But banks live on confidence, and confidence is low in Deutsche right now.

So the bank can say what it wants about capital raising and whether it needs it or not, and the German government can say what it likes, but if faith goes, or the shock absorbers (the CoCo bonds) end up needing to be converted, then we'll be looking at a scary moment.

So, again, the question is this a Lehman moment?

Well, let's have a very quick reminder of what happened when Lehman Brothers went under. Lehman Brothers went bust because people got scared about its exposure to the tumbling US property market, and subprime mortgage-backed securities in particular.

Put simply, the bank was starved of liquidity (it couldn't get access to any money) because no one believed it was solvent (its assets weren't worth what it said they were because the debt was turning bad).

Once Lehman went bust, that shattered confidence in the entire banking system. Because everyone knew that there was a lot of financial toxic waste out there, but no one knew who was exposed to what. Every financial institution was suspect.

So the banking system had a solvency problem (soaring bad debts meant that no one had any faith in anyone else's balance sheet) but more importantly, the banks had a liquidity problem (no one was willing to give them any money or to leave it with them).

That's what caused the 2008 crisis, and that's what central banks were trying to fix when they underwrote the system in 2009 with essentially unlimited liquidity.

It's also what investors are really worrying about when they use the words "Lehman Brothers" and "Deutsche Bank" in the same headline.

So my straightforward answer is this: if what you're really asking is "will Deutsche Bank cause a repeat of 2008?" then my answer is "no, it won't".

Don't fight the last war

Should you invest in Deutsche Bank? Good Lord, no. If you're a gambler, you might want to watch it, but certainly not as an investor the risk/reward ratio is entirely out of whack.

Does this mean that everything's just fine? Of course not. This is messy. This is a market on the verge of panic. Most markets are expensive right now. It doesn't take much of an excuse to generate a sell-off.

But as an investor, you don't want to make the mistake of constantly fighting the last war in your head. And let's be clear here: the main reason that Deutsche Bank isn't Lehman Brothers is because everyone is talking about it.

Global central banks have spent the last eight years trying to stop the global economy from succumbing to a depression. I'd say that in many ways they've done more harm than good. But they know how to react to a bank going bust you bail it out.

What you have to understand is that we've been here. We've seen this particular crisis before. It's not going to play out the same way as the last one did.

People go on about the European Union (EU) rules that bar bailouts. Forget the rules. This is Europe. And not just Europe, but Germany. Germany is the boss. If a German bank is going to go to the wall, it will get bailed out.

How? Who knows? But it can be done. The state will take a stake. Bondholders will be negotiated with. The European Central Bank (ECB) will print a load of money. The US Federal Reserve will twist as many arms as need twisting behind the scenes to get co-operation it's not going to let some eurotrash bank destabilise the American banking system just as they thought they'd got it fixed.

And yes, any bailout will make it harder for the Germans to get shirty with the Italians and anyone else who wants to bail out their own banking sector. It might make life even more politically difficult for Angela Merkel.

But Europe needs an excuse to get around the table again and sort out its banking sector and this is the perfect opportunity.

In fact, the best way to sort it out would be to delegate the whole business of supporting the banks to the ECB and have the Germans and the Italians (specifically them, as they represent the two "opposing" faces of the eurozone the savers versus the spenders) agree a process between them of cleaning up their domestic banks once and for all.

So, yes, it's a mess. But I don't expect this to turn into 2008 all over again. This is unfinished business from the last crisis rather than the start of a whole new one.

And if you were hoping for fireworks (whether for the investment opportunities produced, or just the sheer drama of it all) then don't feel too deflated.

Believe me, the next crisis the one we'll get when the bond market starts to unravel will be every bit as thrilling and unexpected as 2008 was.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.