Deutsche Bank: A prolonged crisis of identity
John Cryan, Deutsche Bank’s chief executive, has to resolve an identity crisis that has beset the bank for 30 years.
The modern history of the bank is of a split between those Vorstand directors and executives that wanted to keep the bank essentially German and those who embraced international expansion and the conquering of Anglo-Saxon-style financial markets.
In the 1980s it was a powerful German institution, a position cemented after the Second World War through the sheer willpower of its long-serving chairman Hermann Josef Abs.
It gained a unique position at home, unchallenged as the hausbank for many of the country’s leading corporations through cross-shareholdings and reciprocal board seats.
But because the savings banks and the Landesbanks were not answerable to public shareholders and pursued a social mandate rather than a financial one, Deutsche never had the fallback of a profitable domestic retail business to extract profits from. It had to set out to partner its German clients with commercial banking services outside Germany.
But it faced the same problem then that it does today. US investment banks, bolstered by profits from their own high-margin and yet impenetrable home market, began making inroads into M&A and capital markets for German clients not only abroad, but even at home in Germany.
Deutsche Bank knew it had to build investment banking in a defensive way, to protect its home market and see off the invaders. In 1990 it made a false start, buying Morgan Grenfell, hiring high-cost and sometimes temperamental M&A advisers uniquely unsuited to working alongside German commercial bankers wedded to process and consensus management. It spat them out.
Almost at once it realized it had to try again. Instead of M&A prima donnas, it hired in market traders to which powerful German figures like Rolf Breuer and Ulrich Cartellieri, who had each run FX and rates trading in Germany, could at least relate. It hired Edson Mitchell from Merrill Lynch and a stellar cast of traders and derivatives rocket scientists like Anshu Jain, brought in on guaranteed bonuses at vast expense. For over a decade these bankers built a derivatives trading powerhouse and a cash markets flow monster. Former Warburg banker Michael Cohrs built up the equity capital markets and M&A franchises to sit alongside them.
It seemed to be winning, although it perhaps enriched a generation of bankers far more than it did shareholders. But it almost looked easy.
Instead of being beaten out of sight by the Americans, it started to acquire them. In 1998 it bought Bankers Trust, the ultimate derivatives house.
Going into Deutsche Bank in those days was an adventure for financial journalists, a chance to be bewildered by the derivatives jargon of the rocket scientists, who insisted that the bank was helping clients to take on their desired market exposures and to manage their risks by letting them avail themselves of Deutsche’s own balance sheet and bespoke products.
These were clever men, though touchingly naïve with it. It was hard to work out the details of the trades and products they were talking about because they withheld the secret recipe. But it was obvious to anyone that these people were punting prop trades for their own benefit and using their clients to dump the risks they did not want. Deutsche Bank had more counterparts than it did clients.
Some on the Vorstand sensed it was all going too far. Cartellieri, an early exponent of the investment banking build-up, had a change of heart and turned against the Anglo-Saxon model. He even urged Swiss chief executive Josef Ackermann, when he briefly considered a merger with Citigroup, instead to buy Postbank and to double down at home in Germany.
For a long time the power behind the throne at Deutsche, following the murder of Alfred Herrhausen in 1989 and the appointment of Hilmar Kopper as speaker of the board, Cartellieri finally quit in 2004 having fallen out with Ackermann. Years later, after the financial crisis, Deutsche insiders say that from his seat on the board, Ackermann himself urged Jain, when he rose to head the bank, to trim the investment bank’s share of group capital. But Jain had built it and hoped, if he hung tough, to be the last man standing.
While Deutsche Bank rose towards the top of investment banking it became renowned, in a tough industry, as being one of the most poisonous places at which to work, with a culture of back stabbing and blame, as well as that approach common across investment banking of doing what was legally defensible with counterparts, rather than what was always in the best long-term interests of clients.
If Cryan wants to build a relationship-focused commercial bank with more clients than counterparts, he is not quite starting from scratch, but he is turning back the clock by almost three decades. He might do well to remember the words of Kopper, one of his predecessors, in an interview with Euromoney in 1994: “This is an organization you cannot change in a fortnight. You can stay on the bridge and yell ‘Change!’ It will be eight months before the stern of the ship moves three degrees.”