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Deutsche is planning a ‘bad bank’: my heart goes out to the clean up workers.

The idea of this wheeze is to ring-fence a bunch of assets that are now surplus to requirements and – in isolation – gradually sell them out or run them down. It’s a little bit like the massive concrete containment vessel placed around the doomed Soviet nuclear reactor at Chernobyl (after the catastrophic accident so brilliantly portrayed in a recent, unmissable Netflix series) – though, in fairness, even the toxic crap that the Deutsche credit people put together pre-2008 doesn’t have the half-life of Caesium 137.

A few questions arise from this announcement.

The first is, why now?  Because, as anyone who follows DB closely knows, this is not the only time the bank has tried this approach.

Back in the tail end of 2012, the Non-Core Operating Unit was set up.  This was meant to be the repository of EUR 122 billion of assets that the bank didn’t want to keep and didn’t want the rest of the bank to be polluted by.  Its staff beavered away for years selling off such ephemera as a Nevada casino and a Canadian marine terminal. (Whether or not the bank still owns the rather beautiful golf course near Sapporo in Japan that I played on in 2002 after the previous owners defaulted and chucked the keys to DB is unclear).

By 2017, though, the NCOU had, by virtue of its own diligence, put itself out of business. But, now, by another name, it’s back.

Which leads to the second question: what is going to be buried in the new sarcophagus?

Will it be old assets that the bank thought were perfectly fine a few years ago but now drive the risk dosimeters crazy?  If so, that is a rather worrying development:  has DB’s risk position really deteriorated that fast?   Or – worse – has the bank put on more risk in the last few years that only now seems in need of lead shielding?   In this case, who authorised the new deals?  What were they thinking?

Of course, it’s perfectly possible that the reason for the Bad Bank 2.0 is just that it will contain assets from businesses that DB’s management imagined would carry on into the dazzling light of the future back in 2012 but which it now realises must be sacrificed.

Thus, the question of what is dumped into the bad bank will give a strong clue to Deutsche’s future direction: for example, if it’s mainly equity derivatives you can probably start saying your last lingering goodbyes to the DB equity unit.

Then, who will staff the bad bank?  Whoever they are, I don’t envy them.  I have sold off the detritus of shuttered businesses before and it’s no fun.  Very frequently, all the P+L on the deals has been taken upfront and the people responsible long gone.  Your counterparties see you coming and rub their hands with glee.  You spend a lot of time with lawyers (no offense to lawyers but, damn!)  I imagine if it’s your full time job (which, happily, it never was for me) your colleagues from surviving businesses look at you as if you are the walking dead.

How to motivate these people?  Wads of danger money I assume and possibly – a la USSR – lashings of free vodka.

Anyhoo: all these questions and more are occurring both to the shareholders of Deutsche – who, unimpressed by this new reorganization scheme, have kept DB stock languishing near all time lows – and to the regulators.

For instance, today it’s the chaps at the Fed who are asking questions.  No doubt the BaFin will also be soon rocking up at the Frankfurt twin towers for a chat.

But in reality, all of this is a mere sideshow to the really existential decisions facing the bank: will it axe global equities?  Will it quit the USA?  Will it quit fixed income outside Germany and continental Europe?

These decisions have to made soon in a terrible macro environment for the bank: flat and low yield curves stifling its core franchises of transactions banking and rates, and continuing cutthroat competition in domestic retail.  The bright spots in the world of finance (QE-driven equity markets juicing revenues in private wealth and M&A) are occurring in business and locations where DB has traditionally been rather weak.

That said, there are a few encouraging signs of recovery from some of DB’s strongest and most resilient businesses.

After all, even at Chernobyl, green shoots eventually came back.

Let’s see at DB.