Germany's Largest Bank Announces Enormous Restructuring

Jul 8, 2019
Originally published on July 8, 2019 9:12 am
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RACHEL MARTIN, HOST:

Germany's largest bank is restructuring. Deutsche Bank is known for huge deals and also some big risks. Now, as it cuts its workforce, Deutsche Bank wants to isolate the risky investments that didn't pay off by putting them in something called a bad bank. NPR's Jim Zarroli explains.

JIM ZARROLI, BYLINE: Deutsche Bank has been in the news in recent years for all the wrong reasons - it paid billions in fines for crimes such as money laundering; it's under investigation by Congress for loans to President Trump. But Deutsche Bank has problems completely separate from that. It's made a lot of bad investments, and its share price hit a record low last month. Yesterday, the bank said it was setting up what it calls a capital release unit, also known as a bad bank.

KAREN SHAW PETROU: It's a polite euphemism for this is where the garbage goes.

ZARROLI: Karen Shaw Petrou of Federal Financial Analytics says Deutsche Bank is taking all the poor investments it's made - $81 billion worth of bad loans and sketchy derivatives - and creating a separate unit for them. Then once it's roped them off from everything else the bank owns, it will try to sell them. It won't be easy because, Petrou says, once you've put an asset into something called a bad bank, it's pretty much stigmatized.

PETROU: You can't pretend anymore. You've really said, OK, here are my doggies. And investors will then try to get what, in the market, you call fire-sale prices.

ZARROLI: Petrou says buyers try to cherry-pick the best assets cheaply, and Deutsche Bank won't exactly be in a position to bargain. It's bound to lose a lot of money. But here's the good part - once it's unloaded those bad assets, it can send a message to shareholders and regulators that it's cleaned up its act and it's ready to move on.

PETROU: It's finally, in a sense, baring its soul, isolating its troubled assets instead of sticking with the game face - well, maybe they'll soon be good.

ZARROLI: Petrou says this isn't a step banks take lightly; it's a last resort. But the strategy has worked in the past. After the financial crisis a decade ago, Citigroup, Credit Suisse and the Royal Bank of Scotland all set up bad banks, and they all recovered. Now Deutsche Bank is trying the same thing.

Jim Zarroli, NPR News, New York. Transcript provided by NPR, Copyright NPR.