Hackepeter! Deutsche Bank To Set Up €50 Billion ‘Bad Bank’ As Part Of Overhauls (Largely Long-dated Derivatives)

Like the Led Zeppelin song “Good times, Bad times,”  German mega bank Deutsche Bank is trying to save itself by splitting into a good bank and a bad bank.

Why is my former employee doing this? Deutsche Bank was a high-flyer back in May 2007 when it was trading at over $120 per share. It is now trading at an anemic $6.79 per share. And the trend is miserable.

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The good bank / bad band model had
been discussed widely during The Great Recession. In the US, Treasury and Congress decided to purchase troubled assets from bank balance sheet (TARP). This approach helped removed “toxic” assets from US banks’ balance sheets, so the US government became the bad bank.

But Deutsche Bank is doing this one their own, rather than having the German government and the European Central Bank

From Financial Times: Deutsche Bank is preparing a deep overhaul of its trading operations including the creation of a so-called bad bank to hold tens of billions of euros of assets as chief executive Christian Sewing shifts Germany’s biggest lender away from investment banking.

The plan would see the bad bank house or sell assets valued by the German lender in its accounts at up to €50bn after adjusting for risk.

Deutsche’s equity and rates trading businesses outside continental Europe will be severely shrunk or closed entirely as part of the revamp, although the final decision is pending, according to four people briefed on the plan. Managers are also set to unveil a new focus on transaction banking and private wealth management.

The proposed bad bank, which is known internally as the non-core asset unit, will comprise mainly of long-dated derivatives, the people said. 

Well, Deutsche Bank has been shrinking its derivatives liabilities from over 1 trillion to a more modest 316 billion. But apparently this amount will be unwound, partly using the non-core asset unit.

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Deutsche Bank represents a clear and present danger to the international banking system including US banks (and investment banks).

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Consider Deutsche Bank to be like the unappetizing German dish Hackepeter (raw pork) that even the European Union warns against. [I actually ate this dish thinking it was beef tartare like they serve in Paris].

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I wish Deutsche Bank all the best in its efforts to escape investment banking and return to core banking. Let’s see if Deutsche

 

Puerto Rico Moves Toward Plans to Cut Pensions, Government Bonds (8% Coupon GO Bond Trading At 47.75 And Yielding 18%)

Despite wishful thinking by pensioners, courts can actually cut pensions. Take a look at the Commonwealth of Puerto Rico.

(Bloomberg) — Puerto Rico’s oversight board struck a tentative pension-cutting deal with retired government employees and plans to propose a debt restructuring for a major chunk of its bonds within a month, moving it a step closer to dealing with the biggest issues left in the territory’s record-setting bankruptcy.

The restructuring plan will include how to write down $17.8 billion of general-obligation bonds and other debt guaranteed by the commonwealth, as well as how to deal with $50 billion owed to the territory’s broke retirement system.

Those obligations are the largest and among the most contentious still pending two years after Puerto Rico filed for bankruptcy, seeking to recover after years of runaway borrowing to stay afloat during a long-running economic contraction.

The release of the next debt cutting plan will set off negotiations with bondholders. Its timing was disclosed by Martin Bienenstock, a partner at Proskauer Rose LLP who represents the federal board, in court Wednesday in San Juan. That came as the board also announced a tentative deal with pensioners that would cut some benefits by as much as 8.5%, which drew stark opposition from Governor Ricardo Rossello’s administration even though it protects those with lower monthly checks.

“Our position is, and will continue to be, zero cuts to pensions and we have the legal and fiscal mechanisms to do so,” Christian Sobrino, executive director of Puerto Rico’s Fiscal Agency and Financial Advisory Authority, said in a statement.

U.S. District Court Judge Laura Taylor Swain, who is overseeing the bankruptcy, said she expects the board to attempt to negotiate deals with each of the major creditor groups that are likely to oppose the next restructuring plan. Bienenstock said the board would use the mediation process set up early in the nearly two-year-old case to reach settlements where possible.

Any changes to pension benefits will need to be approved by the court. Puerto Rico’s retirement system has run out of assets , forcing the commonwealth to direct about $2.5 billion a year to cover pension payments to retirees, according to the board. That’s left its retirees at loggerheads with bondholders, who are also vying for a share of the island’s cash.

Retirees receiving pension benefits below $1,200 will see no reduction, with a maximum cut of 8.5% on retirees above that threshold, according to a statement Wednesday from the Official Committee of Retired Employees. The deal would create a pension reserve fund to help support retirement payments in later years, according to the statement. If Puerto Rico’s economic growth surpasses budgeted projections by a certain level in a given year, retirees whose benefits were cut will get a portion restored for that year.

The potential deal “is a crucial step to presenting the plan of adjustment for the commonwealth of Puerto Rico and for getting us out of the Title III debt restructuring process, while ensuring the future benefits of our retirees,” Jose Carrion, chairman of the federal oversight board, said in a statement Wednesday.

The defaulted Puerto Rican 8% general obligation bond is now trading at 47.750 with a yield of 17.964%.

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The former Dean of GMU’s School of Business was Jorge Haddock, who is now President of the University of Puerto Rico. Good luck with university funding, Jorge!