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Prescient restructuring aided Deutsche Bank’s Houdini-like escape from Archegos fallout

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Two years ago [hotlink]Deutsche Bank[/hotlink] chief executive Christian Sewing took a fateful decision that might explain how his firm escaped the financial shock waves of an imploding hedge fund this year.

When Archegos Capital Management collapsed in spectacular fashion in March, founder Bill Hwang reportedly had a $4 billion bet running via the bank. Deutsche was able to extricate itself entirely, Sewing said on Wednesday, and a clue to the bank's success lies in its ambitious restructuring plan. 

In July 2019, Germany’s largest lender chose to exit the equities sales and trading business and consequently struck a deal to move its prime brokerage operations to French peer BNP Paribas.

“We are essentially operating the business on BNP Paribas’ behalf,” Deutsche Bank finance chief James von Moltke told analysts on Wednesday during a quarterly earnings call. 

Prime brokerage desks, which lend on margin to high-risk speculative investors, were the source of a staggering $10 billion in losses across the industry after bets placed by Hwang soured. Credit Suisse said it knew of nothing comparable since the failure of Long-Term Capital Management (LTCM) in the 1990s that forced the Federal Reserve to intervene in markets.

As part of the restructuring, Deutsche packed the business into a unit known as CRU (short for “capital release unit”) for steady, piecemeal disposal along with all the other activities no longer considered core.

Mere custodian

That meant Deutsche merely had to act as a custodian of its prime finance unit until client operations shift to BNP Paribas at the end of this year.

Unlike other high-profile Archegos casualties such as Switzerland’s UBS, services for such high rollers as Hwang were no longer strategically important to its franchise. Longer-term revenue repercussions for Deutsche were limited and greater caution could be exercised.

“While the client positions are on our balance sheet, we bear the risk of those client positions, hence the importance of risk management through the completion of the transition [to BNP],” von Moltke said. “We’re a few months away from completing that.” 

As rivals like Credit Suisse booked charges running into the hundreds of millions or even billions because of the fallout from Archegos, Deutsche reported its best quarter since the start of 2014

Its slimmed-down investment bank accounted for more than nine-tenths of its consolidated 1.6 billion euros ($1.9 billion) in income before tax, bolstered by a strong underwriting business for blank-check companies and improved fixed-income trading.

“The partnership with BNP Paribas was, if anything, strengthened by managing through this situation collaboratively,” said von Moltke. 

Deutsche Bank stock closed up 10.7% at 11.28 euros.

This story was originally featured on Fortune.com