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Sunday, August 21, 2011 7:35 PM

Is Germany's Commerzbank in Need of Another Bailout?

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Inquiring minds are looking at a chart of Commerzbank for clues about the health of the bank, if not the entire banking system.

CBK.DE - Commerzbank Weekly

A friend "JMC" writes ...

Hello Mish

In 2009 the German Government put 10 billion Euros into Commerzbank to keep it alive. Its market cap is now far less than the government (taxpayers) put in.
Flashback January 9 2009: German government injects €10bn into Commerzbank
The German government has stepped in to salvage a multibillion-euro merger between two of the country's largest banks, Commerzbank and Dresdner Bank, with a €10bn (£9bn) cash injection.

The announcement, in effect a partial nationalisation of the combined group, came after several days of tense negotiations between executives from the two banks and state officials. "The government just couldn't afford to let this deal fail," one insider said.
Yahoo!Finance now cites CBK.DE market cap as 9.75 Billion. But that is as of June 30, when share prices were 3.18 EU. Now share prices are 1.91 EU so you can lop off about 40% of that market cap, which means after an injection of 10 billion EU, the bank is now worth approximately 5.85 billion EU.

Last week an unidentified bank needed to tap the ECB for $500 million in emergency funds at a penalty rate, something that only happens when liquidity dries up and banks are distrustful of lending to each other, even overnight.

"JMC" wonders if Commerzbank is the bank needing emergency funds. I don't know because the ECB refuses to say. However, note the result. All banks are suspect because the ECB won't say. Actually, all banks are suspect anyway, but hiding problems acts to enhance large and growing distrust.

I have to laugh at the PE of Commerzbank, listed at 2.2. With the collapse in share price, its PE is now under two. This is what's known as a "value trap". Share prices seem attractive at a PE of 10, then 8, then 6, then 4, then 2.

On June 20, I discussed "value traps" in Value Traps Galore (Including Financials and Berkshire); Dead Money for a Decade.

In retrospect, many financials may head to zero. If so, it will not be dead money for a decade, but rather plain dead money.

Mike "Mish" Shedlock
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