While it now seems that Friday’s rumor of a substantially reduced Deutsche Bank settlement with the DOJ, which sent the stock price soaring from all time lows, was false following a FAZ report that CEO John Cryan has not yet begun the renegotiation process, and in the “next few days” is set to fly to the US to discuss the proposed RMBS misselling settlement with the US Attorney General, Germany’s largest lender continues to be impacted by the public’s declining confidence, exacerbated over the weekend by a disturbing “IT glitch.”

For one, it remains unclear if Friday’s report halted, or reversed, the outflow of cash from DB’s prime brokerage clients, which as Bloomberg first reported last week was a major catalyst for the swoon in the stock price. However, as UniCredit’s chief economist Erik Nielsen notes in a Sunday notes, one thing is certain: “so long as a fine of this order of magnitude ($14 billion) is an even remote possibility, markets worry.”

There is also the threat of the bank’s massive derivative book, which despite attempts of many pundits to gloss over, over the weekend none other than JPM admitted that that is what the markets will likely be focusing on for the foreseeable future: “In our opinion it is not so much funding issues but rather derivatives exposures that more likely to trouble markets going forward if Deutsche Bank concerns continue.  This is especially true if these concerns propagate into a confidence crisis inducing more rapid unwinding of derivative contracts.”

Indeed, as we first hinted last Thursday…

Here come novations

— zerohedge (@zerohedge) September 29, 2016

…  and as CNBC’s Jeff Cox correctly observed subsequently, at the core of this week’s investor angst is a word that came up during Bear’s demise: “novation,” or a request by hedge funds that deal with the bank to have others take their place in derivatives trades. In the case of Bear Stearns, word in March 2008 that Goldman Sachs had refused a novation request spread panic through Wall Street.

 

 

A few days later, the erstwhile Wall Street institution was no more. Though Bear was loaded with toxic assets, it was essentially a rapid crisis of confidence that had done in the firm.

 

That’s why Thursday’s news that a couple of hedge funds doing business with Deutsche were trimming their sales caused such a ruckus in the market. A Bloomberg report indicated that three hedge funds that do business with Deutsche were reducing their positions, causing afternoon market hyperventilation that the funds were losing confidence in the bank.

But while DB’s market woes have been duly discussed, at home, the bank is fighting a “rearguard action” as Reuters writes, seeking to shore up confidence among the public, politicians and regulators who say the bank brought many of its problems upon itself by overreaching itself and then reacting too slowly to the 2008 financial crisis.

Making matters even worse, as Reuters and Handelsblatt reported, the bank suffered a further blow to its image this weekend with a third IT outage in the space of a few months on Saturday “that prevented some customers getting access to their money for a short time.”

Handelsblatt adds that “among rumors about state aid, the dramatic fall in its stock price, and an attack by hedge funds on the most important domestic bank, now come reports of a new IT glitch. “Customers can not access their cash because it is blocked”, a customer complained on Saturday morning to Handelsblatt, adding that “I am stunned: I can’t make weekend purchases since I can neither get cash nor pay by card.”

While the bank emphasized that the glitch was temporary, “and only a few customers were affected”, it was still an embarrassing moment as this was just the latest “glitch” to affect the bank.

One week ago, the bank suffered delays and errors in its online banking platform, and in many cases deposits and debits “were displayed twice or not displayed at all.” In June, customers were unable to withdraw money. Also, as reported here, in late August, Deutsche Bank was forced to make a statement after reports emerged that it was unable to provide physical gold upon request for delivery from the Xetra-Gold ETN. This is what DB said:

 

 

As one of the sponsoring financial institutions, Deutsche Bank fulfils the obligations specified in the Xetra-Gold sales prospectus as a matter of course. This includes fulfilling claims to the delivery of physical gold certified by Xetra-Gold. This must take place through the investor’s principal bank where the investor’s securities account is maintained. Deutsche Bank accepts such orders for delivery from its clients. The investor incurs the costs described in the sales prospectus, for example, for the forming, packaging and the insured transport to the place of delivery. For this reason, we recommend in each specific case an individual review of the economic efficiency of a physical delivery. Should an investor’s request for the handover of physical gold not have been complied with immediately in individual cases, this will be reviewed and an individual solution will be found with the client.

Less than a month later, rumors of a state bailout of Deutsche Bank had gripped both the capital markets and the press.

* * *

As a result of the ongoing crisis of confidence, DB has gotten an outpouring of both industry and regulatory support. German business leaders from companies including BASF, Daimler, E.ON, RWE and Siemens lined up to defend the bank Sunday in a front-page article in the Frankfurter Allgemeine Sonntagszeitung. “German industry needs a Deutsche Bank to accompany us out into the world,” BASF Chairman Juergen Hambrecht said. Curiously, a spokesman for a blue-chip company that did not feature in the article told Reuters he had been asked by Deutsche for an executive to provide a similar supportive comment.

It did not stop there: in an interview with the Frankfurter Allgemeine Sonntagszeitung newspaper, the head of Bafin, Felix Hufeld said: “I warn people not to let themselves be drawn into a kind of downward spiral of negative perception. Not every nervous market reaction is backed by objective facts” warning of negative perceptions that could lead to downward spirals on the markets.

Which, perhaps, goes to underscore the biggest problem for Deutsche Bank: the bank and the government in Berlin have had to play a delicate balancing act, emphasizing the substance and importance of the bank without implying any need for state aid or willingness to supply it. Both the bank and Berlin this week denied reports that the government was preparing a rescue plan, even as the outpouring of moral support for the bank continues.

Finally, any negative news in the coming days, whether involving the just filed charges in Italy over the falsification of Monte Paschi accounts and “market manipulation“, more reports of cash outflows, or news of further operational weakness, may lead to a prompt return of the panicked selling. Just moments ago, Bloomberg reported that Deutsche Bank is poised to reach an agreement with labor representatives this week that will pave the way for eliminating another 1,000 jobs in its home market. The cuts will mostly affect back-office staff such as in IT services.

We hope that among those IT specialists laid off are not the ones responsible for keeping the bank’s online bank accounts and ATMs online, because a few more “IT glitches” that prevent depositors from accessing their cash could be all that it takes for DB’s impressive liquidity position as described here first last week, to become rather, well, “deplorable.”