Ho Ho Ho It's magic: Deutsche Bank, Market Cap $14B to Spin Off $50B in assets

-edited

Deutsche Bank, with a market cap of under $14 billion looks to spin off $50+ billion in allegedly productive assets.

I am scratching my head a bit over this idea. From the expression on CEO Christian Sewing's face, he is too.

Please consider Deutsche Bank Plans Radical Overhaul With €50bn Hived Off to 'Bad Bank'.

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

  1. Deutsche Bank will spin off $50 billion in productive assets to a bad bank
  2. Deutsche Bank will keep its better performing assets
  3. Deutsche Bank has €260 billion in cash and liquid securities on hand
  4. Deutsche Bank has a market cap of $14 billion

Illusions

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

Comments (41)
No. 1-20
ZZR600
ZZR600

I guess all I want to know is: (1) will this blow up? and (2) how do I profit from it?

KidHorn
KidHorn

We did something similar in the US about 10 years ago. Except banks spun off their 'productive assets' to the FED.

Webej
Webej

Does that look on his face mean he is trying to think through the most perplexing riddle of his life, or are his nuts stuck in a vice? The answer is probably both.

Ted R
Ted R

Enron used to do these kind of things. LoL. Another bank with lots of toxic and bad assets trying to unload their crap on whoever is stupid enough to take it. Pitiful and desperate at the same time. Looks like 2007 is happening again.

Nathan8C
Nathan8C

I do think this is POSSIBLE. Here is how it may work: Entity #1: Good bank with all the good assets, etc. Worth 50 billion dollars. Entity #2: Bad bank saddled with all debts, etc. Worth negative 36 billion dollars.

After the spin-off of good bank, the old entity essentially worth nothing, but the spin-off entity still worth 50 billion dollars.

If this is allowed, then the stock should go to 50 billion dollar first, and then split into two entities, but debt holders will SUE the good bank for their money, unless of course, a government bailout comes in, and save everyone from the negative 36 billion dollars.

This is not just for Deutsche Bank. If you look at Goldman Sachs, their book is so leveraged that they can probably spin off 10 different entities worth various billion dollars, and still have spare ones.

everything
everything

Gotta protect the balance sheet, this will do the trick. It's an easy decision, you put the good stuff over here and the bad stuff over there.

Matt3
Matt3

Who owns the "Bad Bank"? Is government going to buy it?

shamrock
shamrock

I'm not sure why this is so hard to comprehend. If the bank has $200B in assets and approximately the same amount in liabilities then a market cap of $14B is completely reasonable, and so is the idea of selling or spinning off a fraction of the assets.

Runner Dan
Runner Dan

“Deutsche Bank has been beset by a series of crisis in the past year including...concerns about the lender’s dealings with Donald Trump and his son-in-law Jared Kushner.”

LOL!!! Yeah, sure. The bank’s problems are mostly because they dealt with Tump & Co. in the past and only a little due to all the crappy, overpriced assets they have!

Sechel
Sechel

I assume if deutsche bank was in good shape they may not attempted a merger with Commerzbank. I never got how this was considered anything but a bail out and a gimmick

Roger_Ramjet
Roger_Ramjet

If Douche Bank has $232 billion in cash and liquid securities and a market cap of only $14 billion, that would mean that the bank's liabilities exceed its remaining assets by $218 billion.

I think Douche Bank is going to need a bigger bad bank.

(yea, I know I misspelled Deutsche)

JonSellers
JonSellers

The article only mentions assets being spun off. What about liabilities?

Mish
Mish

Editor

I added a note about deposits and liquid "assets"

Mish
Mish

Editor

It's likely too late to profit much from it. By the time something like this is front page news, there might not be much left. Shorting DB a few years ago would have been a good idea. I discussed DB many times before, but I don't generally short.

Mish
Mish

Editor

I do not know the buyer - undisclosed or unknown - I believe the latter

Greggg
Greggg

I wonder who is on the other side of these assets. You can bet they are all unsuspecting schmucks who are depending on these assets for their meager retirement.

Mish
Mish

Editor

"I'm not sure why this is so hard to comprehend. "

Logically it cannot do a thing. To get rid of the bad asset - DB will have to sell it for a loss - It then needs to raise capital for the amount in question

This is all sleight of hand stuff.

Latkes has the right idea. The only exception is if the ECB plays games with the amount of capital DB looses. Very possible.

In that case, if DB can recover, it is undervalued. It could be a buy here

Menaquinone
Menaquinone

If Deutsche Bank is open tomorrow I would run over and take my money out.

FromBrussels
FromBrussels

....a 50 bln bad bank ? That looks like PEANUTS to me ! This monster has got 43 trillion ! in derivatives. I do admit I don tknow much about this extremely complicated shit but according to W Buffet the Great they are supposed to be weapons of financial mass destruction.... 43 TRILLION ! Mind boggling this is...

Carl_R
Carl_R

Sometimes if you put more stuff into the same pot, it becomes worth more. A good example of that was Cisco, during it's rapid growth phase. It overpaid for assets, but was growing very fast, and thus had a very high PE, so the combination was worth more than the two were separately.

Sometimes the reverse is true. If you have an asset that is profitable, but shrinking, and less profitable each year, adding that into the mix reduces the corporate growth rate, and thus the PE. In that case it adds value if it is spun off, leaving a faster growing main corporation, which then gets a higher PE. A good example of that was Alltel, which spun off their land line business into a company called Windstream, leaving them as a fast growing cellular company, which then was grabbed up by Verizon. In due time Windstream ended up bankrupt, but not for a decade or so.

So, yes, sometimes mergers add value, and sometimes spinning off assets adds value. I don't know enough about Deutsche Bank, nor their intended plan, to have a clue whether they can add value by spinning off certain assets. Obviously they can't turn a $14b company into a $50b one, but if you asked if they could split into two companies, one with a market cap of $13b and the other with a market cap of $3b, I'd say that was possible.