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Deutsche Bank really isn't like Lehman. It's more like Bear Stearns

Deutsche Bank really isn't like Lehman. It's more like Bear Stearns

Market watchers are probably correct in assuming that the problems with Deutsche Bank are not leading to a Lehman Brothers moment .

The better comparison for a worst-case scenario is probably Bear Stearns.

The two stories, both at the crux of the 2008 financial crisis, are important to understanding why the market tends to freak out every time a big bank hits rough waters .

Bear Stearns was the story of a bank that had suffered a crisis in confidence, leading it to be shunned by hedge funds, and which saw JPMorgan Chase (JPM) swallow up the investment bank in a deal that's still controversial. Lehman, conversely, was a firm that not only had seen confidence evaporate but also had core solvency problems that made a rescue, at the time at least, impossible.

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Deutsche is not insolvent or even close. Though it is heavily in debt compared with its equity position, for the bank to go under it would take a cataclysmic series of events, not the least of which being a decision by European banking authorities to simply wash their hands and let the Continent's biggest bank fail.

That doesn't mean, though, that Deutsche is out of the woods completely or that its troubles still can't have market-shaking impacts . Friday's relief rally put the market at ease for the moment , but there remain mountainous challenges ahead.

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.

Buzz quickly flew around a nervous Street that more troubles could be ahead.

"Once investors question their confidence in a financial institution, they've already lost their confidence in it," one Wall Streeter emailed me. "This gets worse before it gets better."

There also was another element to the blood-in-the-water nature of the Deutsche story.

A former Deutsche Bank trader, in a conversation earlier this week, used the word "arrogance" to describe why the bank had found itself in trouble. (This person also cited negative interest rates and a looming U.S. Justice Department settlement.)

There also was a joke circling around social media: "What's the Greek word for 'schadenfreude'?" The allusion is to the heavy-handed approach Germany took toward bailing out Greece during the latter's sovereign debt crisis, contrasted against a German bank's possible need now for a bailout that would be engineered by European Union authorities. (Schadenfreude, of course, is the German term for the delight some take in watching others fail.)

When Bear Stearns began its rapid and precipitous decline, speculation swirled that one of the reasons there were so few banks willing to lend a hand was because Bear itself had opted not to participate in the 1998 Long-Term Capital Management bailout.

Schadenfreude? Perhaps.

But comparing one crisis to another is often futile, particularly in the financial industry. While they all involve debt to some extent, each has its own causes and solutions.

In the case of Deutsche, what stands out most is the abundance of escape valves and backstops a troubled bank has these days.

A repeat of either the Bear or Lehman situations is unlikely. That doesn't mean, though, that there still won't be difficult times ahead.



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