With stunned investors reliving memories of the 2008 crisis as Deutsche Bank, a bank that is half the size of its host, Germany, seemingly on the precipice, and with Angela Merkel vowing as recently as this weekend not to bailout the bank, the market felt paralyzed: should it BTFD as it always has every time in the past 7 years, or should it wait for more clarity from the bailouters-in-chief before allocating capital to another riskless transaction, which may well be the next Lehman brothers.
Not helping matters was Jeffrey Gundlach, who as part of his weekly chat with Reuters' Jennifer Ablan said that should tread lightly carefully when trading Deutsche Bank shares because a government bailout is not out of the question. The problem is how does one get to it.
"I would just stay away. It's un-analyzable," Gundlach said about Deutsche Bank shares and debt. "It's too binary."
Gundlach said investors who are betting against shares in Deutsche Bank might find it futile. Maybe, but not if they cover their shorts before the max pain point, something which the market - where equity/CDS pair trades now allow a "go for default" strategy - will actively seek out.
"The market is going to push down Deutsche Bank until there is some recognition of support. They will get assistance, if need be."
What happens then? "One day, Deutsche Bank shares will go up 40 percent. And it will be the day the government bails them out. That jump will happen in a minute," Gundlach said. "It is about an event which is completely out of your control."
Unless, of course, the government does not bail DB out, as Merkel vowed she wouldn't, in the process painting herself into a corner with only adverse possible outcomes.
What if DB is just the bank that the system will use to teach a world addicted to bailouts a (bail-in) lesson? In that case, being long the CDS would be a far more lucrative option than shorting the stock, or using a straddle to bet on a surge in vol in the coming days.