I am scratching my head a bit over this idea. From the expression on CEO Christian Sewing's face, he is too.
Deutsche Bank has drawn up plans for a radical restructuring which will involve the creation of a “bad bank” to hold tens of billions of euros of toxic assets and a round of severe cuts to its investment banking operations, according to reports.
The bad bank would house or sell assets valued at up to €50bn (£45bn) comprising mainly of long-term trades that have been a major drag on the struggling bank’s balance sheet, the Financial Times reported, citing four people briefed on the plan.
Deutsche Bank has been beset by a series of crisis in the past year including money laundering allegations, failed merger talks with Commerzbank and concerns about the lender’s dealings with Donald Trump and his son-in-law Jared Kushner.
Derivatives Spin Off
If the headline sounds preposterous, the derivatives details as described by the Financial Times are even more amazing.
"While the derivatives destined for the non-core unit still provide some cash flow, all the profit on the deals — and therefore the associated bonuses for those who arranged them — were booked up-front."
Supposedly these $50 billion in derivative assets are actually productive, except for the fact that Deutsche Bank booked the profit up front.
Thus, the proposal is to spin off productive assets to the "bad bank" keeping what?
The Financial Times explanation is to keep its better bond business.
To top it off, Deutsche Bank supposedly has €260 billion in cash and liquid securities on hand.
Magic Steps Explained
- Deutsche Bank will spin off $50 billion in productive assets to a bad bank
- Deutsche Bank will keep its better performing assets
- Deutsche Bank has €260 billion in cash and liquid securities on hand
- Deutsche Bank has a market cap of $14 billion
Bear in mind that deposits are liabilities. Banks pay interest on them. But in the topsy-turvy EU world, interest rates are negative. If so, the bank is gaining by holding deposits.
If the liquid securities are government bonds, those are highly likely to have a negative yield and the bank is losing on them. This is the foolishness of the ECB's negative interest rate policy.
The entire impact of item 3 rages from a likely a big nothing to a tiny gain or loss.
As for point one, even if the asset is performing, excess profits were booked on it. Spinning it off should result in a charge, even if someone else is willing to deal with the derivatives mess.
This spin off story makes perfect sense, in some magical alternate universe somewhere.
Mike "Mish" Shedlock