Deutsche Bank - The End of an Aberration

31 july 2019

Resume: Deutsche Bank is Germany's largest (private) bank and, at the same time, its most controversial. It has left its mark on the German financial market as well as on the German economy, and it has been a trendsetter in its fundamental restructuring over the last twenty years. For ten years now, it has been mired in a deep crisis which threatens its very existence.

Deutsche Bank is Germany's largest (private) bank and, at the same time, its most controversial. It has left its mark on the German financial market as well as on the German economy, and it has been a trendsetter in its fundamental restructuring over the last twenty years. For ten years now, it has been mired in a deep crisis which threatens its very existence. Apparently, Deutsche Bank had survived the global financial crisis of 2008/2009 relatively unscathed, and its then-CEO Josef Ackermann boasted that it needed no state aid - unlike the country's second-largest private bank, Commerzbank, which had to be rescued by the German government. Insiders, however, already knew at that time that this was, at best, half the truth. The whole truth came to light bit by bit over the following years.

  The most significant events to determine the fate of the lender have been its financial scandals, or, more appropriately, financial crimes. There is not a single financial crime to have happened in which Deutsche Bank was not involved. There is the dubious role that Deutsche Bank together with others played in the US (subprime) mortgage market, which triggered the financial crisis in 2008. There is the manipulation of international interest rates (specifically the reference interest rates Libor and Euribor) as well as the prices of foreign currencies and precious metals. There is Deutsche Bank's participation in international money laundering scandals, from the transfer of up to 6 billion US dollars on behalf of dubious Russian customers to transactions in the British Virgin Islands, where, according to the "Panama Papers", it had 900 customers, essentially tax fugitives. It took part the largest European money laundering affair in recent history, involving the Estonian branch of Danske Bank, in which 150 billion euros flowed through Deutsche Bank's correspondent accounts (more than six times Estonia's annual GDP). It also had a hand in the recently-uncovered 1MDB scandal involving the Malaysian sovereign wealth fund; Deutsche Bank provided 1.2 billion US dollars in financing. It goes without saying that even in the biggest tax fraud case in European history, it was not on the sidelines: refunds were procured through criminal chicanery for unpaid capital gains taxes in the so-called Cum-Ex and Cum-Cum businesses, costing the German tax authorities over 30 billion euros. It isn't surprising that Deutsche Bank lent money to a notorious bankrupt American after US banks had refused: Donald Trump.

These crimes and scandals have cost Deutsche Bank tens of billions of dollars and euros in fines to US and European regulators and prosecutors: $7 billion in 2016 for US mortgages alone and $700 million in 2017 for the Russian affair. All this was paid for by the bank's shareholders, with not a single executive being prosecuted. Five capital increases between 2009 and 2017 and a steadily falling share price reduced the bank's value to its owners by 70% in the last five years alone, from 24 euros to 7 euros per share. The bank's capitalisation is thus only 15 billion euros; it barely ranks among the 100 largest banks. With the exception of 2018, it has only recorded losses over the last four years - but has paid out between one and two billion US dollars per year in bonuses to its investment bankers.

It has been obvious for years that the bank is at a dead end, but the consequences are only now being felt, with a seemingly radical restructuring programme that involves the loss of 18,000 jobs (mostly in the US) and, above all, the divestiture of large parts of its investment banking business, with restructuring costs expected to total 7.4 billion euros by 2022 (the year in which the CEO already expects profits of 6 billion euros, last achieved in 2007). This closes a circle that began thirty years ago, when Deutsche Bank took over the London investment bank Morgan Grenfell in 1989. It was the entry into a completely new business, Anglo-Saxon investment banking, which was rapidly expanded in the following years with the aim of advancing into the global 'Champions League'. The takeover of the New York investment firm Banker's Trust in 1999 was the next seemingly logical step, turning the allegedly boring German bank into a fancy Anglo-Saxon bank with a skyscraper on Wall Street and, for the first time, a majority of its employees abroad, many of them speculative junkies, who after the financial crisis of 2008 populate its cinematic processing. But the takeovers were not enough to secure its place in the sun among the global players in the financial industry. Deutsche Bank had to aggressively move into new areas of business and seize all opportunities – at great risk and, as seen, often beyond the limits set by law. Such behaviour is not atypical for latecomers and is by no means limited to the financial sector.

The change of course announced in July 2019 is now set to beam Deutsche Bank back to square one. Whether this will be successful may be doubted. The entry into Anglo-Saxon investment banking thirty years ago also meant the departure from the German model that the French economist Michel Albert had called "Rhenish capitalism" in 1991, as a counter-model to "Anglo-Saxon capitalism". It shaped Germany's post-WWII economic miracle and consisted of a corporatist network of social partners (trade unions and employers), benign state oversight, and comprehensive financial support from the banking houses. Financing took place via bank loans and not via the capital market. Stakeholders, not shareholder value, provided the guiding principles (although shareholder value, as shown, is more ideology than practice). The spider in this web was Deutsche Bank, which held capital shares in all the major companies in German industry until the beginning of the new millennium. Deutsche Bank is now determined to return to this role as a servant of the (German) economy. However, as with Goethe's sorcerer's apprentice, not only has the bank changed, but so has the economic landscape around it, which was once deliberately triggered by it: Capital investments are gone and trust is equally gone. The former will not return, and restoring the latter requires considerable and credible efforts.

The Valdai Discussion Club

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