Ghost of Lehman Brothers haunts banks

published 7 October 2016

Eight years after the implosion of Lehman Brothers, a huge bank is once again causing jitters in world markets. Late last week, Germany's Deutsche Bank was hit by reports that hedge funds had withdrawn money they had deposited as collateral for derivatives transactions. "That recalled the exodus by hedge funds from Lehman Brothers shortly before its collapse," says Randall Forsyth in Barron's. Their evident loss of confidence in Lehman sent the bank's shares plunging even further. Similarly, Deutsche's shares hit their lowest level since the 1980s this week, spurring talk of a bailout, which was dismissed.

We learnt in 2008 never to believe the worst until it is officially denied, so the German government's insistence that Deutsche could and would sort itself out has done little to reassure investors. The immediate cause of the latest share-price slide was fear of a $14bn fine for allegedly mis-selling mortgages in the US. Hope that the sum could be reduced has given the stock some respite.

Deutsche Bank is certainly too big to fail.

Deutsche "is not dead", says Lex in the FT, "but it is not rising from its sick bed either". Beyond the US litigation problem, it's struggling to make money in an era of negative interest rates; its costs are high; and most analysts think its turnaround plan is inadequate. Chronic problems can eventually become acute if the share price falls so low that a rights issue to bolster equity becomes impossible, undermining confidence and starving the institution of cash in a classic catch-22.

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If need be, the German government is likely to bail it out, possibly through a face-saving enforced merger with Commerzbank. But this episode is a stark reminder, says Jeremy Warner in The Sunday Telegraph, that European banks, even eight years after the crisis, remain "utterly broken".

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.