Commerzbank AG/New Boss/What's up, Doc?

Jetzt, wo die Wueffel gefallen sind, muss Butter bei den Fischen sein.

All of our best wishes for the new CEO of Commerzbank AG! Your bank has been to hell and back (perhaps better, back from the dead) a few times since the end of the Second World War.

I don't know if you know your bank's ancient history, but the senior management almost sank the ship with a duration mismatch in the real estate lending business right before Paul Volker unleashed ungodly high interest rates to stamp out inflation. There were 30 Year Treasury bonds on offer with a coupon of 22 percent. You even had to sale and lease back you bank building to save your bank. Those were the days.

Their successors then brought back Genussscheine from the dead in the mid-80's to raise bank regulatory capital. This was a smart capital market marketing move, but the blue boys did go alone with the show, so the market segment never really got off the ground. Too bad, while the blended debt/equity content is a hard concept to explain to institutional investors, it is a much superior capital markets instrument compared to CoCos, which are death warmed up for breakfast. Think about using Genussscheine to help refinance, bail-out and save the smaller to medium-sized German life insurance companies in their coming existential fight for life due to another (duration like ) mismatch.

The next big adventure was in institutional asset management. You didn't quite have the bulk for an investment banking power house, but asset management was an easier row. You had Comm Invest, ADIG (mutual funds) and real estate investment companies (these still exist at Coba today), but you lacked a UK/US style asset manager with broader (non-European investment products) to effectively compete with the then four dominant UK pension fund managers, Morgan Grenfell Asset Management (MGAM), Schroeders, Mercury (ML, then BAML) and MG (if I am not mistaken).

Now it is a good thing that you let the blue boys grab Morgan Grenfell Group plc in a dark London alley because the Peter Young Affair within the MGAM unit exploded and sank the entire STG 2.6 billion investment in 1996. When the fires were finally put out, Deutsche Bank AG lost USD 1 billion in a "riskless" business, asset management.

Now you wish you had not gotten into bed with Jupiter Asset Management, but you negotiated a bad deal with the Brits, and they can be very, very tricky if you don't have them on a US style Lead-Lease deal, and even then, they don't pay you your money back.

But I guess the US had to recapitalize the UK somehow, someway, why not with US tax payer's money. They need a place to play in unregulated investment banking from time to time anyway.

The most disgusting event, however, was you selling back your stake in Jupiter to your partner, and he IPO-ed the shop on the LSE and made an ungodly amount of money. This shows you to never trust the due diligence team (even the internal guys) unless you have an old Schwaebische Hausfrau on the team asking stupid questions.

Question:

How could you swap your asset management businesses (ex- Real Estate) to Allianz Global Investors (AGI) for  Dresdner Bank AG, a burned out silo housing junky investment banking, research and asset management businesses that were later sold of piece-by-piece?

The AGI team never were able to clean up this mess before they bought PIMCO, which also blew up in their faces. Stupid German money, they say....?

Now the biggest natural disaster to befall Commerzbank AG was the Eurohypo takeover (was a poison pill that actually worked) running up to the 2007 financial and currency crisis. This is the single most brutal event in your bank's history.

This storm combined with the Dresdner Bank take over effectively destroyed the equity capital base of your bank.

How many times has the capital stock of Commerzbank AG been completely wiped out of the years?

Dear Warren Buffet, you got of fcheap in your US Airways adventure....!

Your current Chairman has done a fantastic job playing the cards he has been dealt.

In the recent past, he would have gotten a Held der Deutschen Arbeit medal, but thank goodness those days have been swept into the dustbin of history. He should get one Bundesverdienstkreuz for each and every year at the helm of Commerbank AG!

Can you imagine how tough it is having an attractive, intelligent wife at Goldman Sachs and JPMorgan making more money than you and then still telling you to take out the garbage...? It is time to make a move into Private Equity in London as is the mode for ex-German CEOs.

Now what is the right strategy for Commerzbank AG at this venture?

It is simple:

1. Throw every thing into the kitchen sink before the current chairman goes, write-down all of the structured products and other Level 3 assets and take a hit on commercial loans (coming massive recession),

2. Put on a massive protective hedge against the coming crash in the German commercial and resident real estate market, you will need those investment banking guys, so don't fire them,

3. Raise equity capital to do:

a. get Deutsche Bank's best retail and HNWI clients to migrate to Commerzbank AG, "buy" them out if you have to, the future revenue stream is worth the investment,

b. rebuild your institutional asset management and mutual fund capabilities, this is perfect timing as the coming crash in the equity market will make acquisition targets super cheap, buy Aberdeen Asset Management and recover a few useful German parts (from Dresdner Bank),

c. buy a solid US asset management player with NO European or Asian business.

For the rest of the story, you need to hire REP Consulting.

Rondal Eric Powell, Managing Partner, REP Consulting with offices in Frankfurt, Germany and Vero Beach, Florida.