EconoMatters

Time to Write Deutsche Bank’s Obituary?

Deutsche Bank, once the powerhouse of the German economy, is being battered ever harder by the fallout from ferocious crises, with no safe harbor in sight.

Deutsche Bank, Frankfurt. Credit: Brais CE www.flickr.com

Takeaways


  • After years of crises, Deutsche Bank -- which proudly declared in 2008 that it did not need a government bailout -- may be about to have to turn to the German authorities in desperation.
  • As a new century dawned, Deutsche Bank was a rather sleepy giant – solid and boring. But everything changed -- for the worse. Boring was out, go-go finance was in.
  • It is the legacy of all the crises, all the high-risk operations designed to boost short-term profits that has come to haunt Deutsche Bank now.
  • The Coronavirus has investors in a frenzied scramble to dump shares. Deutsche Bank is now on the verge of sinking.

Yes, I realize that today is Friday, the 13th. But that coincidence is not what moved me to write what would seem to be Deutsche Bank’s obituary. Yesterday, on Thursday alone, its stock price plunged 15%.

How the mighty have fallen

After years of endless crises, it looked until quite recently that Deutsche Bank’s chief executive Christian Sewing was succeeding in knocking the financial giant back into shape. Now, the bank that proudly declared during the financial crisis of 2008 that it did not need a government bailout, may be about to have to turn to the German authorities in desperation.

“Dark Towers”

Is this a surprise? No, at least not for those who have read the recently published U.S. top-selling book – Dark Towers: Deutsche Bank, Donald Trump, and An Epic Trail of Destruction, written by New York Times financial editor David Enrich (published by Custom House).

Deutsche Bank has fascinated me ever since I first met Herman Josef Abs when I moved to Frankfurt in 1970 as a reporter for London-based The Times newspaper. Mr. Abs was the giant of German business. He had been a Board Director of Deutsche Bank already in the 1930s.

Despite his many dealings and those of the bank with the Nazis during World War Two, Abs was singled out to play a leading role in the revival of the German economy by the Americans and by post-war German economics minister Ludwig Erhard.

Erhard, who held that crucial post for 14 years from 1949 onward and then served three more years as Germany’s Chancellor (=prime minister), put great faith in Abs.

Co-father of Germany’s economic miracle

The Erhard-Abs partnership was an important component in securing the German “economic miracle” and, of course, the revival and rise of Deutsche Bank. At one time, Abs served as the chairman of a dozen major corporate boards. Deutsche Bank held shares in many of them.

When I met him in 1970 Abs had officially retired, but he still went to his Deutsche Bank office most days and remained a quiet, yet powerful, influence there. Of the many 20th century top executives at Deutsche Bank, only one — Alfred Herrhausen, who led the management board in the mid-1980s — looked as if he would exert the power and influence that Abs had done in reshaping the bank.

However, when he was 59 years old, Herrhausen was assassinated in 1989.

A new culture: Boring was out, go-go finance was in

As a new century dawned, Deutsche Bank was a rather sleepy giant – solid and boring. But everything was about to change and, according to Enrich’s book, for the worse.

In 2002, a Swiss national, Josef Ackermann, took the management helm with a ruthless determination to dramatically expand the bank’s profits, revenues and global operations. Boring was out, go-go finance was in.

The cultural transformation launched by Ackermann was to have profound consequences. According to Enrich’s book, Ackermann started at the helm of the institution by giving full support to a small band of carefree American traders who had already joined the bank to build an investment banking powerhouse. They moved ahead and took gigantic financial risks, especially through operations guided by the bank’s offices in London and New York.

Full disclosure: I worked closely with Ackermann as a public relations advisor from 2003 to 2012 in his role as chairman of the Institute of International Finance (IIF). Enrich paints a picture of an executive who had no moral compass, no true understanding of the risks that his investment bankers were taking or any interest in whatever unethical activities his bankers pursued so long as short-term profits kept rising.

My experience of Ackermann was that he was a far more subtle operator and more thoughtful. Nevertheless, Ackermann — like so many of the other leaders of major banks across Europe and the United States in the first decade of this century — were exceptionally competitive. They were keen to use all manner of new complex financial trading instruments to leverage their balance sheets and produce what initially seemed like big profits.

These bankers were able to take full advantage of bank regulatory authorities who had blind faith in the stabilizing power of market forces. That was a grievous error, as former U.S. Federal Reserve Chairman Alan Greenspan — himself widely seen as the impresario or high priest of deregulation — has admitted.

Big fines

In his book, Enrich singles out Deutsche and barely mentions the competitors. He notes the enormous $7 billion fine that the bank paid to settle U.S. charges of alleged fraud related to subprime mortgage finance, but fails to note that Bank of America and JP Morgan Chase paid far larger fines, $16.5 billion and $13 billion respectively.

In a rather dizzying book that switches from major Deutsche Bank developments to the travails, for example of a drug-taking bewildered son of a former American senior employee of the bank who committed suicide, Enrich catalogs a vast list of money-laundering, interest-rate fixing and other criminal activities that Deutsche Bank has been accused of.

He blames Ackermann for much of the mess and the eventual large losses that the bank took, as well as his successors, notably investment banker Anshu Jain. He does not attach any of the blame to U.S. and German regulators who seemed to have only woken up to Deutsche Bank’s problems after the financial crisis.

And where was the Bank’s Supervisory Board that is meant to oversee the management? Its culpability is not mentioned by Enrich. It seems to have been totally captivated by Ackermann up to about the final year before his eventual retirement in 2012, when some of the hidden losses in the bank’s New York subsidiary started to emerge.

Epitaph

But it is the legacy of all the crises, all the high-risk operations designed to boost short-term profits that has come to haunt Deutsche Bank now. Restoring investor and regulatory confidence in the bank has been Christian Sewing’s toughest challenge.
He was making progress, albeit by firing thousands of employees and shrinking many of the bank’s operations.

Then came the Coronavirus and investors have been in a frenzied scramble to dump shares. Deutsche Bank is now on the verge of sinking.

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About Frank Vogl

Frank Vogl is co-founder of Transparency International and author of Waging War on Corruption: Inside the Movement Fighting the Abuse of Power. [Washington D.C., United States]

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