The German Finance Ministry is planning to create a bad bank to hold, on its own balance sheet, risky assets to be swapped with government backed bonds, according to information released on its website. The announcement is in some ways surprising, considering the central government’s positioning against such measures. The country is also home to the oldest covered bond platform, the Pfandebrief, where asset-backed bonds must be held on balance sheet. Germans hold a special place in their heart for this product and often view securitization as a sort of wicked step-child. This move will no doubt further ingrain this mentality and may prove to be more damaging in the long-term that envisioned. Therefore it is likely that the bad bank will apply more to securitization structures, such as collateralized-debt obligations, which allow for rapid short-term refinancing, if the liquidity is available. The bad bank is likely to take up to 10% in haircuts for its troubles, as well as fees for servicing. Nonetheless, the offer is still more attractive that what the European Central Bank is laying on the table, where ABS swaps can run up to 18% in haircuts. Analysts long claimed that ECB rescue operations are unsustainable as the central bank piled up its balance sheet with risky assets for much of 2008, so that by this year, it could really take on no more. Under the German plan, the bad bank may hold the asset for up to 20 years if necessary. Another obvious benefit is in asset versus liability management, whereas bank need no longer claim these toxic assets on their own balance sheet. However, a translation of the Finance Ministry’s proclamation in German, indicates a longer term strategy behind the bad bank: one where the government is establishing a vertical slicing solution to securitized assets, where shareholders and bond investors alike may take a hit.