Loose Lips Sink Ships…

The above is from a famous propaganda poster from World War II; but, no, this post is not about the travails of much of the global shipping industry, but about how the “velocity of distribution” of what passes for information can damage or destroy business franchises very quickly.

The recent travails of Deutsche Bank are a case in point. We shall not opine on the probability that the concerns expressed about the bank’s viability are valid. Rather, we shall make some observations about the dangers of recent events, and how one can become “collateral damage” because of issues that have nothing to do with one’s own business.

Start with the fact that, somehow, news of a supposed demand from the US Department of Justice (“DoJ”) to Deutsche Bank for a USD 14BN “settlement” was leaked to the media, whereas most US banks have been able to conduct such negotiations quietly and confidentially.

Consider also news of certain hedge fund supposedly withdrawing assets held by the bank; and that the bank’s shares sank to a 30-year (nominal) value, such that their “optionality” became clear, as their market price whipsawed on every scrap of information.

The German Federal government has to issue a denial that it is planning a rescue of the bank; while its CEO is adamant that it does not need additional capital and has more than ample liquidity. Even the IMF had been seen as labelling Deutsche Bank as the world’s “most systemically risky” bank.

Of course, it is a truism that, as (still) highly leveraged entities, banks are inherently vulnerable to a loss of confidence and a “run”, leading to a closing of the doors (literally and electronically) as they become unable to generate liquidity sufficiently quickly to meet obligations when due.

Stir all this together with the bank’s acknowledged difficulties in adjusting its cost base to a world of constrained margins and its continuing struggle to generate sustainable profits and one has the recipe for the sort of frenzy that has taken place recently.

One can certainly make a case for Deutsche Bank being yet another victim of the US’s electoral cycle and dysfunctional and often politicized regulatory and enforcement system, as well as the probability that certain investors (or, rather, speculators) were “talking their own book”; but that does not change the fact that a global bank, with a storied name (it is Deutsche Bank, after all), is perceived at least in some quarters (some 8 years after the crescendo of the Great Financial Crisis) as being on the brink of, at best, a further re-structuring.

Any why is that so?

It is arguable that a significant reason is the fact that “information” flows at the speed of the byte, which has the tendency to cause those who read or see it to act before they think (or algorithms to trigger), and worry about the veracity or relevance of the “information” afterwards. In the meantime, individuals, institutions and even countries have to deal with the consequences of ignorance, mendacity, negligence and greed.

At Awbury, we would never argue that there should be constraints on the concept of free speech, nor on the distribution of information. However, we do believe that, while one has to be nimble and adaptive in light of new information, one should also take the time and intellectual effort to analyze and understand its veracity, relevance and potential impact.

And we are very discrete!

The Awbury Team

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