Macaskill on markets: Life after bonuses for Deutsche Bank?

Jon Macaskill
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Deutsche Bank’s co-chief executive John Cryan may find the bonus obsession of his investment bankers hard to understand. He will need to keep them motivated if he is to have any chance of pulling off a hugely challenging turnaround plan for the bank, however.


In July 2007 Deutsche Bank hired the Rolling Stones to play at a dinner for its derivatives clients in Barcelona for a reported fee of over €4 million. Mick Jagger was a cricket-watching acquaintance of Deutsche’s then head of global markets and future co-CEO Anshu Jain, who commissioned the performance, but that didn’t stop the Stones from securing an eye-watering rate for an 80-minute show. 

Jagger also couldn’t resist tweaking his hosts with a sarcastic thanks for the invitation: "The best part is, it’s coming out of your bonuses."

Jagger was wrong though – it wasn’t coming out of their bonuses, or not in the near term. Deutsche’s investment bankers were paid around €4.4 billion in bonuses for 2007, with an overwhelming majority of the money going to the sales and trading staff in Jain’s global markets group. This total was close to a record set the year before, despite clear signs that a long credit boom was heading towards a likely bust. Even after the global credit crisis finally struck in 2008, Deutsche still only cut its bonus pool for the year for its investment bankers by around 50%, though Jain and other executive committee members were forced to follow CEO Josef Ackermann into giving up an annual discretionary payment.

Deutsche has been having a credit crisis of its own so far in 2016, as it approaches the 10th anniversary of its record bonus bonanza of 2006.

This DB-specific crisis of confidence is now threatening the bank’s ability to pay meaningful bonuses to its employees and that in turn could affect the firm’s chances of reversing a downturn in revenues.

Deutsche faces multiple overlapping threats to market confidence in its long-term viability. The catalyst for a collapse in its share price in February and a sharp widening in its credit default swap spreads was a report by CreditSights casting doubt on Deutsche’s ability to pay the coupons on its contingent convertible (CoCo) debt.


Euromoney commented 18 months ago on the contradictions inherent in the sale by banks of CoCo bonds at yields far lower than their real cost of capital, despite the fact that the deals are effectively equity-like in nature, albeit with some debt characteristics.

When this contradiction was resolved by an upward spike in the yield of Deutsche’s 6% coupon CoCo bond to over 13% in February, the proximate cause was the analysis by CreditSights of how much "available distributable income" the bank has to pay future coupons.

It turns out that available distributable income under German accounting rules is both vaguely defined and poorly understood in the markets. Deutsche Bank was already trading at a share price far below the nominal book value of its assets, indicating a lack of confidence among investors in its valuation policies. So it was perhaps no surprise when assurances by CFO Marcus Schenck and co-CEO John Cryan that Deutsche was good for any coupon payments served to fuel market alarm about the firm’s creditworthiness, rather than allaying concern.

Deutsche is likely to be able to shift money from different reserve pools to pay the coupons on its CoCo bonds that are due in the coming months and into 2017. It is also likely to be forced to cut deeper into discretionary payments to its employees to keep the coffers stocked, however. That in turn threatens to affect the fragile morale of those employees, just as higher credit counterparty charges for derivatives undermine the ability of the bank to maintain volumes in the trading businesses that remain the engines of its revenue creation.

When Deutsche announced a €6.8 billion loss for 2015 at its full year results in late January there was a widespread view that Cryan was trying to pack as much bad news as possible into one set of annual results so that he could deliver a rebound in performance after taking sole control of the bank in 2016.

There is no reason to assume that Deutsche will make a profit in 2016, though. The real surprise in its fourth quarter results was how sharply revenues had fallen at its investment bank, both on an absolute basis and relative to peer group performance.