Deutsche dumps its investment bankers

Earlier this year, when Deutsche Bank first outlined its plans to integrate its investment banking unit, DMG, more closely into the bank, Frank Quattrone, high-profile head of DMG technology asked the Deutsche Bank Vorstand members responsible for DMG to sign a letter reaffirming the bank's commitment to the investment-banking business, for Quattrone to show to his clients. They were surprised by the request but complied when Quattrone assured them that it was not so unusual in the investment-banking world.

But it proved to be an empty gesture. This July, Quattrone and his key lieutenants quit, taking their business to CSFB. "Quattrone was the US business," wails one Deutsche investment banker. In fact, his is only the latest high-profile departure from the old DMG. The co-heads of DMG's investment-banking division, Carter McClelland and Maurice Thompson resigned earlier this year to be followed by a string of the firm's better known bankers.

Quattrone's leaving was the natural response of a seasoned investment banker to the bank's reorganization, particularly the departure of McClelland who had originally hired him in 1996 with the idea of making the technology group a first step in building top-quality investment-banking teams in key industry sectors.

That reorganization left no room for Quattrone or people like him, as Josef Ackermann, Vorstand member responsible for the bank's global corporates and institutions group (GCI), the new incarnation of DMG, made clear in an interview in late June.

Ackermann described Quattrone and his group as a throwback to an earlier and abandoned strategy. "[The group] was a special case because of their special expertise. I don't think we would add similar franchises. It's not an ideal way to build up an integrated bank to have expensive groups of investment bankers in different areas."

This about-face was all the more surprising given Quattrone's performance. Although resented by many at Deutsche Bank for the fabulous deal he struck for himself and his team - rumoured to be worth at least $20 million - the team justified itself financially.

In its first two years it worked on 100 transactions worth $23 billion and last year produced revenues of $205 million, against compensation costs of $65 million and other infrastructure costs. The group shouldered its way in between the two top firms in technology investment banking, Morgan Stanley and Goldman Sachs. It showed what it was possible to achieve at DMG.

Ackermann stands by his earlier statement. The day Quattrone quit, he added: "Deutsche Bank Technology could not be integrated into the GCI structure. It was a US business with its own management structure and compensation systems. Our Europe-first strategy requires a focused approach to integrated wholesale banking."

It seems extraordinary for the head of an investment-banking division to be so cavalier about the departure of a top-rated name in one of the hottest sectors of the market. But it is consistent with Deutsche Bank's new strategy which seems to be to try and do investment banking without investment bankers.

While the top-rated and highly paid investment bankers from the old DMG are seething with discontent and heading for the door, Ackermann is unperturbed and now hopes to replace them with a new group of relationship managers to coordinate company visits from representatives of its reasonably strong product groups covering bonds, structured lending, forex, derivatives and cash equities. Many of these will be old commercial bankers, playing on Deutsche's position as a key lender to many companies. It's a strategy straight from the commercial-banking playbook, more reminiscent of Citibank than of Goldman Sachs.

It must be doubtful whether these relationship managers will enjoy much success winning high-margin investment-banking business such as M&A and equity capital markets. While Deutsche Bank pays lip-service to a continued commitment to investment banking, the truth is that it has slammed on the brakes.

For the demoralized surviviors of the old DMG, what makes this change all the more difficult to bear is that DMG had seemed to be making great progress. For almost three years, from the end of 1995 onwards, the most talked about investment bank in the business was Deutsche Morgan Grenfell. Its head-on charge to build businesses in bonds, foreign exchange, derivatives, equity and corporate finance under a group of expensive American and British managers hired in from the best firms, transfixed the market.

With many Wall Street firms still shaken and uncertain following their hefty bond market losses in 1994, DMG's hiring frenzy quickly became the stuff of legend. There was the story of the trader, hired for nearly $1 million a year, guaranteed for two years, who confessed, after leaving his previous employer, that he'd promised to take part in a charity round-the-world yacht race for much of the year. No worries, the charitable DMG is said to have replied, take the full two-year deal anyway, even if it's for just one year's work.

In the US, the graveyard of many an ambitious foreign bank, DMG gained instant notoriety - and some credibility - when it hired Quattrone and his technology investment-banking team from Morgan Stanley. Suddenly, DMG became a firm people wanted to work for. It hired the best people from the top firms - most notably Edson Mitchell from Merrill Lynch to run its global markets business, covering fixed-income trading, foreign exchange and derivatives.

DMG did more than add on costs. It also started to gain revenues - big revenues. In the first half of 1997, its revenues were $2.2 billion, marginally more than those at Salomon Brothers. Although costs ate into this heavily, that still left a profit of some Dm800 million ($444 million) for Deutsche Bank, a respectable margin of around 18%.

DMG's senior managers were delighted. Many had risked the scorn of their peers by joining a start-up firm in 1995 or 1996. Now, two years on, it all seemed to be working. "We may have been unbalanced, and certainly still weak in many areas in the US," says one recently departed executive, "but we had a real shot, within a couple more years, of being a top-10 global investment bank and maybe even better than that."