In an effort to put the things back on track, Deutsche Bank created its ‘bad bank’ unit to sell loss bearing assets. The Bank's objective is to enhance the much-needed capital it requires to overhaul its portfolio and structure. Goldman Sachs, in an attempt to expand its market and gain an advantage over the competition, is buying €45 billion ($50 billion) worth of DB’s wind-down unit. The Bank has already sold some of its bad bank assets to BNP Paribas and Goldman Sachs.
The latest sale to Goldman Sachs has surprised many as they already bought some of the bad bank units earlier this year. Goldman Sachs is trying to take advantage of its competition’s bad financial situation. This latest sale has cut down the wind-down unit from $177 billion to $119 billion just in six months.
Known for its sloppy policy-making and financial handling, Deutsche Bank has been in deep waters since 2008, when it reported its first loss in nearly five decades. The real situation is even more serious for Deutsche’s management. Whistleblowers and former employees, Matthew Simpson and Eric Ben-Artzi, alleged that the banks would have had the same fate as Lehman Brothers had they kept their accounts properly. The bank cannot ask investors for the capital that it direly needs for treading its water, as they have already done this.
Christian Sewing, newly appointed CEO of Deutsche Bank has a mammoth task at hand. He is planning to flush DB’s balance sheet and sell off unwanted assets, so they put about a quarter of its total balance sheet in the wind-down unit, which was initially supposed to house €74 billion. Mr. Sewing, in his plan to turn around bank’s performance, has cut down 18000 jobs worldwide which is the worst staff cut since the financial crisis. While the move is been criticized by many, it is important to understand that if the bank had not done so, the impact would have been far more serious, Deutsche Bank most likely would have failed to recover from its current position. The sale has also allowed bank management to focus on the bank’s core units. Sewing has both limited time and narrow ground on which to operate. Most investors are looking at him as a last resort, as the bank is on the brink of collapse. The conditions are similar to Lehman Brothers before their infamous bailout in 2007-08.
As Whitney Tilson, CEO Empire Financial Research said in an interview;
“investment banks like Deutsche Bank […] they make me nervous, […] there's just Black Swan risk out there because there's leverage and because they have either big derivative books or loan books where it's very difficult […] to know what's in there so you just have to have a lot of confidence in management.”
Despite things are not looking so great recently, the latest sale of bad assets has surely had some positive effects. Investors are responding well to the move as the bank’s shares saw an increase of 2% in European exchange.
The struggles don’t just end there. Competitors have been able to lure talent and capable employees from Deutsch Bank due to the bank's uncertain future. There is speculation that the bank may shut all of its American operations, which will leave many top employees available to other firms, something which competitors see as a long-waited opportunity.
With the Bank's sesquicentennial celebrations coming up next year, management aims to restore confidence in its investors, its employees and customers via a radical restructuring and winding down of bad assets. The spokesperson, Kerrie McHugh, said earlier this year, “Deutsche Bank is working on measures to accelerate its transformation to improve its sustainable profitability. We will update all stakeholders if and when required.”