
Brexit Is a Lehman Moment for European Banks - vool
https://www.bloomberg.com/view/articles/2016-07-04/brexit-is-a-lehman-moment-for-european-banks
======
bmmayer1
It's completely plausible that the post-Brexit Deutsche Bank is undervalued by
the market due to panic and uncertainty, and Snapchat is overvalued by the
market due to hype.

~~~
jakozaur
In 2007 there was viral video suggesting that Facebook is overvalued at $15bln
comparing to Ford:
[https://m.youtube.com/watch?v=I6IQ_FOCE6I](https://m.youtube.com/watch?v=I6IQ_FOCE6I)

Lets see how the story will unfold.

~~~
mysterypie
> Lets see how the story will unfold

You left it unstated that Facebook is now worth $283bln _more than_ Ford. So,
yes, the video looks silly for crying wolf back in 2007.

But I'm at a loss to draw the correct conclusion from this. Is it rational
that Facebook is now worth 6x as much as Ford?

~~~
GCA10
On Facebook v. Ford, in terms of how shareholder value gets built and
sustained, yes, the market is being as rational as it ever gets. Consider the
following five dimensions:

CREATING THE PRODUCT: Facebook's engineers provide the framework, but each
day's content is created free of charge by 1.5 billion active users. That's
great for profit margins! At Ford, cars don't get built unless the company
buys steel, glass, tires, etc. and pays workers to put it all together. That
really squeezes margins.

GENERATING DEMAND: Facebook's users share content and invite their friends to
join, at no cost. Media companies beg to play in Facebook's ecosystem. By
contrast, Ford needs to spend billions on advertising to get people excited
about cars.

OBLIGATIONS TO CUSTOMERS: Facebook has a modest-sized fraud and security team
that keeps everything tidy. They do heroic work, but there aren't 50,000 of
them. At Ford, the requirements for inspections, safety tests, recalls, legal
settlements when vehicles go bad, etc. are vastly larger.

OBSOLESCENCE: Ford has $58 billion invested in plant and equipment. Every day,
those factories get a little closer to being obsolete. Ford must constantly
either raise cash or reinvest profits to keep its factories competitive. That
means less free cash for shareholders. By contrast, Facebook has just $8
billion invested in server farms, beautiful headquarters, etc. Its asset-
maintenance burden is vastly less -- and should stay that way forever.

MAKING MONEY: Ford's net income zigzags all over the place, jolted by lots of
market/economic issues. Net income was down last year; historically it's
ranged from $11 billion to sizable losses. Facebook's net income totaled $3.7
billion last year and is climbing at a very snappy rate. 35% a year? Doubling?
Still hard to tell, but it keeps going up.

Put all those factors together, and Facebook is a growth stock with a pretty
straightforward path to making its business hum. Ford is a cyclical stock that
may have already posted its peak profits. Ford may be a bedrock part of the
U.S. economy, but that doesn't always get you a lot of love in the stock
market, for reasons above. Yeah, Ford has $150 billion in revenue a year and
Facebook had just $18 billion. But markets value companies on their growth
prospects. I've got no trouble believing that Facebook's overall opportunity
to make money is 6x better than Ford's.

~~~
duncanawoods
Shouldn't this analysis include the level of risk unique to a social network
i.e. a usenet/myspace/digg/frendster crash?

Businesses that rely on and grow from network effects, die from them too at an
even faster rate. A scandal or rival product could take FB to zero. Some would
say that history tells us it is FB's inevitable outcome. I know some believe
that it can't happen and the FB is "the last social network" but that sounds a
little bit like bubble participants claiming "this time its different".

~~~
heurist
They'll switch to business intelligence in that case (like Foursquare).
They've got enough data to last them lifetimes.

~~~
jsemrau
Interesting that you mentioned Foursquare. I considered them a has been for
such a long time and only recently realized that they are still around being
the geolocation API provider for a bunch of products. Successful pivot, I
think.

~~~
WorldMaker
My assumption was that it was never really a pivot. It seemed that the
geolocation API was always their primary strategy. I thought that was why it
continues to be odd that so much of Foursquare's usage and network loss seems
attributable to their own consumer confusing actions to split out the social
network part into a new brand (Swarm) instead of the other way around.

------
kevindkeogh
This is fundamentally wrong. As Matt Levine said, "proper phrasing is 'DB
supports $1.7trn of assets with an equity value equal to SnapChat's'" [1]

[1]
[https://twitter.com/matt_levine/status/742800372473946112](https://twitter.com/matt_levine/status/742800372473946112)

Edit: For a more complete analysis of DB's capital position, they have
published Moody's report on their credit. [2] I don't see much in there that
would suggest DB was insolvent, but they do seem to be having some difficulty
reorganizing their business.

[2]
[https://www.db.com/ir/de/download/Moody_s_on_DB_26_May_2016....](https://www.db.com/ir/de/download/Moody_s_on_DB_26_May_2016.pdf)

~~~
Spooky23
In normal circumstances, yes. But DB's solvency is in question. An insolvent
bank is worthless.

~~~
cm3
DB may be insolvent, but to be fair, there aren't many banks that can pay out
the figures recorded in the managed accounts. I recall one Utah bank which is
supposedly able to, and there may be others, but usually a mainstream bank
cannot fulfill 99% withdrawals of assets on short notice.

~~~
cm2187
I don't think any bank can. But it's not a capital problem, it's a liquidity
problem. A bank, whether an internationally active, or a mum and pop local
bank, is in the business of taking short term deposits and lending the money
long term. Banks are required to cover some of their deposits in liquid assets
so that it can sustain some level of stress. But a full scale run on the bank
where all depositors want their money back would kill any bank, big or small.

~~~
cm3
Besides being off-the-books and under-the-radar, how was Madoff's operation
different than that? Genuinely curious.

~~~
cm2187
A bank is solvent, Madoff wasn't. Madoff didn't have any asset, the cash you
would have invested with him had been used to pay off other investors.

A bank has assets, the money you lent the bank (through your deposit) is
invested in a mortgage, backed by a property. You will ultimately get your
money back. but it is a timing issue (and therefore liquidity), not a solvency
issue.

~~~
WillPostForFood
It's a liquidity issue if the bank invested in mortgages (usually), but it can
be a solvency issue if they are invested in debt (sovereign or corporate) that
can be defaulted on.

------
palmdeezy
I used to work in the financial institutions group at a buldge bracket bank
doing valuation and M&A on the banks team. The thing about bank valuation
that's weird, is that it's balance sheet valuation and not income statement
valuation. Banks don't sell things, they sell money. The make money off
interest earned on loans - their cost of capital (~interest paid on
deposits=0) - branch/hr overhead (if they have branches). Anyways, to compare
a bank to another company that sells physical goods or widgets is kind of
silly to begin with. They are not valued the same way, and they make money
completely differently.

~~~
cm2187
I like to think that there are two extremes for valuations.

On one side of the range, the consulting firm, which has no assets, and which
value is a pure function of future earnings.

On the other extreme you have an investment fund where the value is purely a
function of the value of the assets which are all liquid financial assets. You
don't buy the fund at a premium, otherwise you might as well buy the
underlying assets yourself.

A bank is somewhere between the two. It has what should be a reasonably
reliable accounting value since at the end of the day, all of its assets are
financial assets that can be sold and aren't highly specialised like a factory
or a hotel building is. But on the other side a large part of the value is not
just the balance between assets and liabilities. It has additional earnings
(fees, trading activities, etc).

~~~
roymurdock
Consulting firms generate revenues. Their assets are mostly human capital, but
their value is generally a multiple of current earnings, not "a pure function
of future earnings".

Most banks hold a decent amount of highly specialized, illiquid debts that
have no active market and could reasonably be compared in terms of liquidity
to real estate or capital goods.

~~~
cm2187
I am not sure I understand your point. How is that different from what I
wrote.

And no, there are no line in an IFRS balance sheet for "human capital".

[edit] and on your second point, I don't think I agree. You will pretty much
always find a buyer for financial assets. Unless they are so rotten that no
one thinks they are worth what you have them in your books for (which may be
the case for some Italian banks).

Where I think you are right to be careful with banks is with the size. If you
need to wind down a massive international bank, you need to find buyers for a
awfully large amounts of assets, and that will likely damage their value.

~~~
roymurdock
> I am not sure I understand your point. How is that different from what I
> wrote.

Yeah, we are on the same page, it was just a little nit as it seems weird to
me to state that future revenues are the "pure" base for valuation when future
is informed by current. Just semantics though.

> You will pretty much always find a buyer for financial assets. Unless they
> are so rotten that no one thinks they are worth what you have them in your
> books

At the right price you will find a buyer for _anything_. I was speaking to
your point about liquidity, which is not about price of the asset, but about
the quantity of interested buyers and the ease of structuring and executing a
transaction with a buyer.

~~~
cm2187
But there are buyers for complex financial instruments. There are many hedge
funds around who can do both size and complex products. And other
international banks have the teams and system to buy a portfolio.

But size is a problem. When you have 2 trillions $ of assets to sell, even if
they are simple vanilla mortgages, it will be a buyer's market.

------
cm2187
The guy who wrote that article is such an idiot. A reducing market
capitalisation is not "shrinking the banks". It might mean the banks may be
making less profits, but that doesn't make them safer, rather more dangerous
on the contrary (as they can't climb their way out of a loss through
earnings). Shrinking a bank means reducing its balance sheet, its leverage not
its share price.

~~~
hacknat
Totally, especially with leverage and a large notional insurance/derivitives
liability. If reality moves in the wrong direction against that insurance and
there's nothing but debt at the end to the payees, then too-big-to-fail
cascade effects, ala late 2007, happen in the system again. This is why
derivitives should be heavily regulated.

IMO, even the most libertarian government would not allow a normal insurance
company take on so much leveraged potential liability without at least a
disclosure to the consumer that says, "Hey, this company probably can't payout
the policy you just bought from them." Yet somehow it's okay for financial
instruments? IMO, Dodd-Frank should have forced financial institutions to
calculate their overall liability on derivitives as part of their capital
requirements. This would never happen though, as they trade so rapidly most
banks probably don't even know at any given time what would happen to their
derivitives liability if the market swung wildly, either up or down.

We're going to have another 2007 again, for sure. I have no idea when, but we
did not solve the underlying problem at all.

~~~
atmosx
> This would never happen though, as they trade so rapidly most banks probably
> don't even know at any given time what would happen to their derivitives
> liability if the market swung wildly, either up or down.

I think the technology is there to make it happen automatically. It's a
deterministic system. The problem is the lack of political will to do so,
which is appalling and leads to situations like Brexit and Trump.

~~~
SixSigma
Situations where people realise they have been decieved and decide to do
something about it?

~~~
atmosx
Exactly.

------
TheOtherHobbes
This story has moved on. There's already talk of an urgent need for a 150bn
Euro bailout.

[http://www.welt.de/finanzen/article156924408/Deutsche-
Bank-C...](http://www.welt.de/finanzen/article156924408/Deutsche-Bank-
Chefoekonom-fordert-150-Milliarden.html)

Or the slightly more sensationalised English version:

[http://www.zerohedge.com/news/2016-07-10/deutsche-banks-
chie...](http://www.zerohedge.com/news/2016-07-10/deutsche-banks-chief-
economist-calls-%E2%82%AC150-billion-bailout-european-banks)

Comparisons to $UNICORN are irrelevant. If DB melts down, 2008 will look like
an inconsequential stutter.

~~~
neuromancer2701
Yeah, I like the illustration that Brexit is Bear Stearns especially because
the market has recovered in the last two weeks(as it did with BS in 2007) and
a DB implosion would be the Lehman Brother for the next collapse.

------
coherentpony
> now worth just 17 billion euros

'Worth' as defined by 'what someone is willing to pay'?

Saying Snapchat is 'worth' 17 billion euros is completely and utter nonsense.

~~~
nxzero
Please explain why taking into account sudo comparable sells/offers such as
Slack, WhatsApp, etc.

EDIT: As noted below in the comments, LinkedIn was bought for 26 Billion in
cash by Microsoft.

~~~
Joeri
Why are any of those worth over a billion? Valuation should be assets - debts
+ future profits. In reality, mostly, it's psychology + voodoo magic -
negative press.

~~~
eldavido
I used to think this way, then I spent the last decade watching my friends all
get rich working at these kinds of companies.

You need to look at the big picture here. Young people aren't watching TV. Ad
spend by the likes of P&G, Nike, and the auto industry is still largely on TV.
Also, Silicon Valley largely hasn't been able to capture brand advertising --
the spend on billboards, sports stadium advertising, etc vs. direct-response
like Google AdWords. Ask anyone in the industry， they'll tell you direct-
response spending is a drop in the bucket compared to spend on brand
advertising.

Now, tell me, one the ad industry wakes up and realizes how absurd it is to
dump billions of ad spend onto a platform with rapidly declining viewership
(linear TV), where is all that ad spend going to _go_?

Maybe a communications platform that's used heavily by young people (great for
advertisers), to send pictures and short videos (ads?) to each other in a
playful, unhurried manner?

I don't know whether that's worth $20 billion or whatever its "valuation" is,
but these dumb cheap shots against ad supported tech company valuation need to
end. These platforms are as big as like, several big TV networks _combined_ in
viewership, with about 100x better ad targeting. How _isn 't_ that worth
billions?

~~~
mkhpalm
"How isn't that worth billions?"

ad blockers

~~~
happyslobro
I wonder if a "scorched earth" plan could be pitched to old school TV
advertising giants, in order to score billions for adblocker research.
Adblocking has "needs AI" written all over it.

------
scribu
> America sorted its banks out swiftly after the 2008 credit crisis.

Is there general agreement that the US government acted effectively in this
matter, not just for bankers, but for society as a whole?

~~~
MagnumOpus
They acted quickly and avoided a worst-case outcome. As such it was effective.

However, arguably the bank bailouts could have had much better terms for the
taxpayer - most of the upside was realised by bank shareholders who were not
wiped out, rather than the taxpayer who bore the risk.

For comparison, Warren Buffet also recapitalised some banks in the depth of
the crisis, demanded and got long-term warrants that paid out truly humongous
amounts of money once bank shares rose back to pre-crisis levels. Tax payers -
in comparison - got a few percent of interest rather than adequate
compensation for the risk they bore.

------
return0
If we follow the cheeky title, snapchat has the chance of a lifetime to buy
its way to profitability.

------
bjornsing
General argument of this story seems to be that "if an industry is not doing
well in the open market it needs taxpayer doleouts to prop up share prices".
Europe has tried that many times before (e.g. with the shipping industry) and
it has always ended in tears... Let's not go down that road yet again!

------
majc2
> When the biggest bank in Europe's biggest economy, with annual revenue of
> about 37 billion euros, is worth about the same as Snapchat -- a messaging
> app that generated just $59 million of revenue last year -- you know
> something's wrong.

More on the Snapchat side, than the DB side.

------
rsp1984
Snapchat is not 'worth' 17 billion. Some investors start to make money on the
investment iff Snapchat exits or IPOs above 17b, but that's about it. The term
'valuation' is completely misleading when applying it to this 17b number.

In fact, due to liquidation preferences in the term sheets Snapchat's true
valuation (i.e. the point at which investors actually lose money) immediately
post investment, according to basic math, is $0.

~~~
jonknee
I think Facebook would make a $17b offer, but that the actual number is
significantly higher. Snapchat is much more of a threat to Facebook than
Whatsapp and FB had no problem opening up the piggy bank to grab it.

------
fharper1961
Another salvo in the continual barrage of "why we always need to bail-out
banks"from the financial media.

------
solidangle
The title seems to suggest that this due to the Brexit, but in reality the
value of Deutsche Bank has been in decline since the financial crisis of
2007-2008.

[http://www.visualcapitalist.com/chart-epic-collapse-
deutsche...](http://www.visualcapitalist.com/chart-epic-collapse-deutsche-
bank/)

------
abpavel
*Current market valuation.

I think it's an important differentiation.

The underlying dynamics of the two companies are quite different, and I'm not
sure their "worth" can be directly compared.

One is worth a lot to the granny taking out cash from her pension fund, the
other is worth a lot to the advertisers wanting to cash in on the cloud social
services.

------
adrenalinelol
The pessimism around Snapchat in this thread is reminiscent of the negativity
surrounding Facebook. Advertising is moving to social media, Snapchat is
currently the best platform for targeting the demographic advertisers value
the most (young people).

------
dschiptsov
Since when Snapchat is a publicly traded corporation?

Snapchat valuation is nonsense.

------
acd
Central banks does not fix the economy. Maybe the Brexit was a analogy to
poker play call on central bank strategy whatever it takes print new money as
central bank debt.

Central bank balancec sheet vs inflation expectation
[http://www.zerohedge.com/news/2016-07-05/central-bank-
death-...](http://www.zerohedge.com/news/2016-07-05/central-bank-death-cross)

------
oneloop
What does this have to do with Brexit? The graph on Italy's banking system bad
loans starting rising during the 2008 crisis.

------
ChuckMcM
Thanks for updating the title. I wonder sometimes if the residual malaise in
the economy is about _not_ writing off the bad loans. Cancel the loan, roll up
the debt. Painful yes, and disruptive, but one way to recalibrate investment
risk and to normalize capital flows more accurately.

~~~
WillPostForFood
That's pretty much the classic Keynes vs Hayek debate.

[https://www.youtube.com/watch?v=d0nERTFo-
Sk](https://www.youtube.com/watch?v=d0nERTFo-Sk)

~~~
ChuckMcM
Pretty much, I love that video btw.

------
bogomipz
It was much more than just the failure of Lehman Brothers that brought the
financial world to its knees in 2008. This article is rubbish.

Comparing a Banks market cap to Snapchat? You can't take this seriously. I
thought more of Bloomberg.

------
joeyspn
Comparing Snapchat with Deutsche Bank sounds like a (bad) joke. Snapchat could
go bankrupt and everyone would laugh at it... DB will never go bankrupt and
here's a simple pic that explains why:

[https://pbs.twimg.com/media/CbBMXbTWAAAl-
PG.png](https://pbs.twimg.com/media/CbBMXbTWAAAl-PG.png)

It's another league. That could cause a x10 times Lehman. Too big to fail. If
DB falls, the rest of the world follows suit...

Another pearl from the article:

 _> If the rot isn't stopped soon, Europe will have found a novel solution to
the too-big-to-fail problem -- by allowing its banks to shrink until they're
too small to be fit for purpose._

Really? and what about the derivatives exposure?

~~~
adrenalinelol
A bank failure doesn't have to happen overnight (Lehman), it can happen over a
protracted period of time, in which there will be no systemic risk to the
global banking establishment. In 2007, every bank was playing dirty w/Credit
Default Swaps + CDOs -> "if our balance sheet is loaded with garbage, then the
other guy's is too" -> no lending -> credit crisis. The only thing the DB
"has" that is toxic is crappy management. BoA won't reconsider it's lending to
JPM Chase because of DB, as would've been the case in 2007.

~~~
joeyspn
_> A bank failure doesn't have to happen overnight_

A confirmed bankruptcy of Deutsche Bank would be followed by the collapse of
10s of banks, not in a day but maybe few weeks. Quick enough for unleashing
the biggest financial armageddon in the western world.

 _> there will be no systemic risk to the global banking establishment [...] _

Are you sure? on June 30th the IMF said exactly the contrary: "Deutsche Bank
Poses Greatest Risk to Financial System"

[http://www.nasdaq.com/article/deutsche-bank-poses-
greatest-r...](http://www.nasdaq.com/article/deutsche-bank-poses-greatest-
risk-to-financial-system-imf-says--2nd-update-20160630-00064)

or in a simple pic:

[http://cf.broadsheet.ie/wp-
content/uploads/2016/06/risks.jpg](http://cf.broadsheet.ie/wp-
content/uploads/2016/06/risks.jpg)

------
idong1veafu
Yes, I wonder what's going to happen to those VC money poured into unreal
valuations in Silicon Valley, if the banks in the Eu start imploding...

~~~
rorykoehler
Logic would have it that more money would pour into SV and VC in general. Say
€500B new money is pumped into the Eurozone banks, where is that money going
to go? The boom in VC financing post 2007 is by in large due to the surplus
'free' cash that was floating around the US and global economies due to
quantitive easing. More money means more competition for equal amount of
startups which points towards valuations being pushed even higher.

------
beedogs
It's pretty annoying when the discussion here revolves around the title of the
article, and then the admins go and change the title on HN.

Stop doing that.

------
roymurdock
Can anyone who uses snapchat speak to how effective the introduction of the
"Discovery" ads section has been.

