Posted on 02/14/2016 9:00:32 AM PST by Lorianne
When European regulators created a new type of bank debt, the idea was to transfer risk from taxpayers to investors. Now bondholders are learning what that really means.
Yield-starved investors bought $102 billion of the contingent convertible bonds, securities created to help troubled banks hang onto cash in times of stress by skipping coupon payments without defaulting and converting the debt to equity or writing it down. Even though neither of those has yet happened, investors are already feeling the pain, as yields on Deutsche Bank AG’s 4.6 billion euros of CoCos have soared and its shares have plummeted.
“CoCos are a perfect pro-cyclical storm -- you can sell billions of them when investors are yield-chasing and thus careless of risk,†said Karen Shaw Petrou, managing partner of Washington-based research firm Federal Financial Analytics. “In a yield-chasing stampede like that of the last few years compounded by ultra-low rates for other bank funding sources, banking-system risk is dramatically heightened.â€
Rising Yields
The yield on Deutsche Bank’s CoCos rose to about 11.7 percent from 7.5 percent at the start of the year. The bank’s shares are down more than 30 percent in the same period.
(Excerpt) Read more at swissinfo.ch ...
COntingent COnvertible bonds, a worse investment than toilet paper?
Wow, so when the bank’s financial situation becomes very precarious, you switch from creditor to owner.
Yikes.
This is Trump’s main financier (main payer with George Soros on Trump Chicago; main payer for current Trump DC renovation).
He will do anything to help them.
He needs 100’s of millions from them.
They cannot fail.
Quit spamming every thread with anti-trump rhetoric blaming him for the international banking crisis. Cut it out.
People need to know Trump’s association with Deutsche bank.
I did not start the thread about DB.
It is extremely relevant that a Presidential candidate has received billions in credit from them and has currently at least $200 M outstanding.
You just don’t like having Trump’s associations disclosed.
He borrowed money from them. That makes DB dependent on Trump, not the other way around.
Hah!
I agree.
Seems to me that an investor sophisticated enough to opt for CoCo bonds (which I am no expert on) collateralized by the PRICE of an equity would be wise to perform some hedging (which I *do* know a fair amount about) upon his collateral.
It is always amazing to me that yield chasers seem to understand that those yields are higher because risk perception is higher. But they NEVER seem to understand that everyone in the universe wants exactly the same thing at the same time and when these instruments are bid up, they are bid up. And those late to the party get worse pricing. So in this case when risk perception rises and the prices for existing bonds FALL (because WITH that increased risk the old coupon no longer appears adequate) that this will NEVER reflect upon the stock price! It is the drop in the bond pricing which makes them appear “cheap” eg; a bargain. This induces buying interest, but the urge is often naive and executed in haste.
It is kind of like, you see a great price on an old car you are interested in and you know it has a blown engine. Fine. You can deal with rebuilding an engine either yourself or pay others and you think you can replace the engine for $1K. But you fail to assess the rest of the car and come to find out after you buy it, yeah, you can rebuild the engine for $1K but the rest of the car takes $4K to get “shipshape”. A savvy car buff who bought the car with the dead engine probably would not make such a goof. (though they certainly might) Why do allegedly sophisticated investors overlook these types of risks so often?
Answer: Because in large part they are goofball bureaucrats not investing their own money. And wined and dined by massively more sophisticated banksters!
How many times did we see this during the financial crisis 2008-2009. Dozens of times, Jefferson Co debt snafu and Gerlach in Orange Co, CA comes to mind, the major banks (and I’m not scapegoating here but they are nothing if not profit minded) fan out to these municipalities and induce some naif bureaucrat in a city or county to exchange debt they have issued for some arcane piece of interest rate swap on the offer by the bank? What was the idea, that the bank would offer something really, really good to the township or county? Really?
There is no secret about low rates driving yield chasers into higher risk instruments. What’s the action? Just accept the higher risk and think what a smart guy/gal you are or take add’l action to protect your collateral. (Collateral is not exactly the right term in this case)
They aren’t even talking about derivatives either. Which are intangible products based off of the performance and demand of tangible products.
Negative. I don't appreciate people who spam FR threads. And in case you didn't know, what you did (spamming multiple threads) is against FR rules.
Moreover, your entire premise is nonfactual. I am not a Trump bot, but your yarn is ludicrous. DB's coming collapse is in no way Trump's doing. And for a Billionaire real estate developer to have had dealings with one of the largest banks in the world.........gee, what a shocker!
From what I can see, you don't like Trump, and are using whatever spam and posts you can dream up in order to perpetuate your position. You just don't like being called on it.
“DB’s coming collapse is in no way Trump’s doing.”
I did not argue or claim that.
But you wanted to make the thread about your political screed against one of the GOP candidates, and you did so on more than one thread. That's called spamming.
It's very simple. Let us say I had a real problem with ground beef. I just don't like ground beef. I don't like how it's made, and I think it can make people sick.
So I jumped on a threads about foreign policy to state that our military dining facilities serve ground beef, and that's the REAL problem. I find another thread about Valentine's Day recipes, and go off about my war against ground beef.
Do you get it now?
I get that you are smarmy and disingenuous.
Trump has a conflict of interest, as would any president or candidate with respect to Deutsche Bank.
He would be hurt seriously if the bank were to fail.
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