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Today, Deutsche Bank (NYSE:DB) is the issuer of 20 ETNs currently offered to U.S. investors, although only 19 of them are listed for trading.
Sep. 29, 2016 2:59 PM ET| Includes: BDG, DB, DGP, DTO, FIEG, SCO, UGL
Ron Rowland Ron RowlandFollow(36,823 followers)
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Unlike exchange-traded funds (“ETFs”) and mutual funds, which are legally structured as stand-alone entities, exchange-traded notes (“ETNs”) are debt obligations of the issuer. What is more, they are “unsecured” debt obligations without any type of collateral. Therefore, ETNs carry an additional risk, a risk that would be realized if the issuer were to default or declare bankruptcy.
This risk was overlooked in the early days of ETNs for a couple of reasons: (1) Such a default had never happened, and (2) the issuers were banks that most investors considered to be “too big to fail.” Then along came the financial crisis and the collapse of Lehman Brothers. Lehman was the issuer of three U.S.-listed ETNs under the “Opta” brand, including the Opta S&P Private Equity ETN (former ticker PPE). When Lehman declared bankruptcy eight years ago, owners of the three Opta ETNs were left holding the bag.
Today, Deutsche Bank (NYSE:DB) is the issuer of 20 ETNs currently offered to U.S. investors, although only 19 of them are listed for trading. Over the past week or so, legitimate concerns about the financial viability of DB have surfaced. Its stock has plunged 19% in eight trading days, surpassing the 2008 financial crisis low. The company faced credit rating downgrades earlier this year, the U.S. Justice Department is seeking a $14 billion settlement related to mortgage-securities investigations, and the German government is getting nervous.
DB probably falls into the “too big to fail” bucket among European financial institutions, but what if it’s not? If DB has borrowed money from you, then you should be concerned. If you own DB ETNs, then DB has borrowed money from you, and your loan to DB is not secured with any collateral.
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