A few major league hedge funds pulled billions out of Deutsche Bank, citing concerns about the bank’s stability, causing bank shares to fall four percent when the market opened Friday.
The hedge funds include Capula Investment Management LLP, Citadel LLC, Luxor Capital Group LP, and Millennium Management LLC, among others, the Journal reports. Citadel LLC contributed to Speaker Paul Ryan, Senate Majority Leader Mitch McConnell, and many other prominent Republicans as well as Democrats. Millennium Management threw at least $25,000 to the Right To Rise USA PAC.
By either taking steps to pull out of the bank by withdrawing securities or liquidity, or taking measures to ween off trading activities with Deutsche, funds are making their concerns known. Investors are not optimistic about the strength of Deutsche as it faces a $14 billion shellacking from the Department of Justice after probes into Deustche mortgage-backed securities.
Mirroring aspects of the Lehman Brothers debacle, since Lehman failed in no small part from hedge funds panicking and pulling out, Deutsche Bank is facing many similar challenges, according to some in the financial community.
Lehman Brothers experienced a “run on the bank,” an expression dating back to the Great Depression, describing a scenario wherein large financial institutions face calls from every customer demanding the “principal,” or full amount invested. This eventuality is rare, but can be devastating to financial institutions, and in the case of Lehman, the result was catostrophic, with the company even selling the sign hanging out front of headquarters for almost $15,000 to pay down liabilities.
Despite strong similarities between Lehman’s demise, and Deutsche’s instability, Lehman left itself vulnerable by failing to diversify, the Journal reports. Billions of dollars fled the company in a short period of time, and the repo market (Lehman’s primary source of income) couldn’t pay out quick enough for the bank to recover.
For one thing, Deutsche assets are much more diversified than Lehman’s were at the time of going out of business. Also, Deutsche has liquid assets equal to 12 percent of their total assets, a figure 5.5 percent greater than the equivalent holdings for Lehman Brothers in its last month of operations.
Another important fact to consider is that Deutsche Bank has the European Central Bank as an outlet, while the Fed refused Lehman credit, citing the absence of reliable assets (liquid, healthy holdings/investments) with the central bank. In the last few quarters of its operations, Lehman posted losses over a tenth of total shareholder equity, the Journal notes.
Deutsche bank CEO John Cryan met with investors in New York last week to calm nerves following a round of bad press surrounding the proposed fine by the DOJ and falling market value.
“You will have seen speculation in the media that a few of our hedge fund clients have reduced some activities with us. That is causing unjustified concerns. We should consider this in the context of the bigger picture: Deutsche Bank overall has more than 20 million clients,” Cryan said in a statement to his employees.
“It is our task now to prevent distorted perception from further interrupting our daily business. Trust is the foundation of banking. Some forces in the markets are currently trying to damage this trust,” he also said.
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