Deutsche dumps its investment bankers

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A year ago Deutsche Morgan Grenfell was set to challenge the US global investment banks. Then Frankfurt jammed on the brakes. A bank-wide restructuring has left DMG - now just the global corporate and institutions (GCI) department of Deutsche Bank - a pale shadow of its former self. Did the Deutsche Bank board lose its nerve or does it truly believe it can have an investment-banking culture without the investment bankers who inspired it? Peter Lee reports.

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."

But even as DMG's senior managers congratulated themselves, the knives were out for them in Frankfurt. A reshuffle in the main board, the Vorstand of Deutsche Bank, in May 1997 triggered a tough reappraisal of investment-banking strategy. Two of DMG's prime supporters, speaker Hilmar Kopper and Ulrich Cartellieri, were gone. "Kopper is very international in outlook," says one senior executive at the old DMG. "So is Rolf Breuer [the new speaker, fluent in French and English], but you can also see a more nationalistic side to him. He's much less likely to assume that all things foreign are necessarily better than the German way."

Asia scares the Vorstand

The top American and British managers hired to build DMG as an independent investment-banking unit, soon felt the chill. "Breuer would not keep the old commercial bank guys at bay any longer," recalls one former executive. "Within one or two months we found decisions being made that were inimical to DMG. Or decisions that very much needed to be made were simply not being taken."

Over the summer, senior executives of DMG pressed the managing board of Deutsche Bank to resolve several key issues, without success. They wanted a consistent approach to performance measurement and pay. Should investment bankers be paid a percentage of revenues or of pre-tax profits? No decision. As DMG was growing so fast, it was running into more and more problems with support functions - technology, operations, securities clearing, control and accounting - all of which were centralized within Deutsche Bank in Frankfurt.

"Frankfurt was not offering a very competitive service, but nor would it loosen control of those functions," recalls one executive. "At the Schmitz, Ackermann, Dobson level, decisions were not being made." (Main board members Ronaldo Schmitz, Josef Ackermann and Michael Dobson then shared responsibility for investment banking.)

Then came the crisis in Asia which finally seemed to scare the board away from building up DMG as a stand-alone investment bank. After three good quarters in 1997, DMG gave back most of its profits in the final quarter. The global-markets division was badly hit. In New York it had been trying to build up its investment-grade bond business by establishing itself as a leading trader of yankee bonds. Unfortunately Asian names are among the biggest issuers of yankees. The firm's traders suffered losses and the generalist sales force was also demoralized. Even though losses at DMG probably never amounted to more than a few hundred million dollars - far less than the bank will suffer from bad commercial lending in Asia - it was decided that DMG would not be allowed to continue as an elite unit of Deutsche Bank.

The Asia explanation cuts little ice with the investment bankers. One says: "The problem is that the people overseeing investment banking have little experience or understanding of the business or securities markets. They appear unable to distinguish between losses due to an extraordinary exogenous event - the Asian crisis - and losses created by bad management."

Towards the end of last year, Deutsche Bank considered four options for its future strategy in investment banking: 1) to continue the full build-up of investment banking; 2) to exit, as certain British banks were doing; 3) to take a limited, home-market approach based on Germany, the UK and Europe; 4) to take a global approach, integrating the investment and commercial bank.

"No-one favoured exiting," recalls Ackermann. "One or two might have preferred the home-market approach as being more profitable in the short-term. And some still preferred the fast build-up, though this was no longer realistic in my view. The majority favoured the fourth approach. That decision was fully supported by the Vorstand and the investment-banking board"

Deutsche's situation was different from that of Barclays and NatWest which had chosen option 2. The British banks appeared to their shareholders to be squandering or diluting the gains from very profitable domestic retail banking by pursuing market share in investment banking where returns are poorer. But in Germany domestic retail and wholesale banking is hampered by competition from non-profit-making publicly-owned banks, savings banks and cooperative banks which together have a huge market share.

Unlike Barclays or NatWest, Deutsche will never make a 25% return on equity in mainstream banking. It will do well to hit high single digits. So it can't abandon investment banking so lightly - it desperately needs to make it work.

"Commercial banking has falling returns on capital and lower margins," says board member Schmitz. "That's why many of us feared the dilution of investment-banking quality if there was a complete merger of investment banking into the much larger commercial bank. Rather, we must firmly implant investment-banking culture in the bank, because the greatest profit potential is in investment banking."

Earlier this year Deutsche unveiled a new structure for the whole bank, splitting it into five main divisions: 1) retail and private banking; 2) corporates and real estate, focusing on small and medium-size enterprises mainly in Germany; 3) asset management; 4) transaction services; 5) global corporates and institutions (GCI). GCI is the new and lower-profile incarnation of Deutsche Morgan Grenfell. GCI is further divided into several divisions, including those covering information technology and operations, and emerging-market proprietary trading. The most important divisions are global markets, headed by Mitchell; global equities, headed by Michael Philipp; global banking services and structured finance, the lending arm, headed by ex-Citibanker Jürgen Fitschen; and investment banking and relationship management headed by Josef Ackermann.

This last division, the old investment-banking division of DMG including equity capital markets and mergers and acquisitions is by far the most damaged and troubled area, but it is also the key to making Deutsche's new strategy work. That's why Ackermann is running it personally, as well as taking overall responsibility for GCI. Ackermann, the methodical Swiss once expected to take the helm at Credit Suisse, is favourite to succeed Breuer at Deutsche within five years, provided he makes a success of GCI, according to internal rumour.

But that could be difficult if the performance targets set by Breuer are the measure. In April Breuer outlined targets for each division of the re-organized Deutsche Bank for the next three years, as part of the drive to raise annual pre-tax profit to Dm9 billion and return on equity to 25% by 2001. For 1997 Deutsche Bank made Dm2 billion pre-tax after taking hits of Dm2.5 billion for restructuring costs related to the reorganization and Dm1.4 billion for credit costs mostly arising in Asia, but also after exceptional gains of Dm1.2 billion from the sale of long-held equity stakes in Karstadt and Bayerische Vereinsbank.

Following its tough final quarter, the old DMG reported profit of Dm800 million. Breuer wants the revamped GCI to make Dm2.8 billion by 2001, more than any other division within Deutsche Bank. It will be able to include a net interest margin on loans, which the old DMG did not capture. But it still looks ambitious, as does the target to cut the cost/income ratio to 72% from nearer 80%.

Expenses at DMG were high during its build-up phase and Deutsche Bank is now keen to control that. It is noticeable that the 2001 target for cost/income ratio at Deutsche Bank's corporate-banking and real-estate division - which includes corporate finance, capital markets and IPOs and M&A services for small to medium German companies - is just 50%. "As we blend commercial bankers into GCI, that will dilute the cost/income ratio," points out Schmitz.

Another reason for slowing the build-up of DMG may be Deutsche's growing impatience with the big egos that come with investment banking. It suffered the shocks in Morgan Grenfell Asset Management of fraudulent investments (the Peter Young affair) followed by screaming egos (the Nicola Horlick affair). In 1997, as the Vorstand struggled to define its strategy, not only in investment banking but for every business at Deutsche Bank, the feeling may have grown that DMG was running out of control.

That suggests no more expensive hires, no more guaranteed bonuses, no more talent from the great houses of Wall Street. Ackermann will have to make do with what he's got and turn commercial bankers into investment bankers.

Right strategy: wrong people

But the investment bankers of Deutsche Bank say that this betrays a total misunderstanding of what drives investment banking: "The German commercial bankers are very proud of how they think things through. It is a process-oriented culture. To them, the result doesn't matter, as long as the process was right. Investment banking is totally different. It's not process-driven, it's event driven. And the art is to manage yourself in such a way that amid apparent chaos you are able to clinch a deal."

They argue that Deutsche Bank is now following the right strategy with the wrong people. It has underestimated the scarcity and worth of top-level investment bankers who are capable of talking almost as equals to CEOs of large companies about the big issues facing their businesses and industries globally and - crucially - who are trusted by those CEOs to give a good performance in the highest margin businesses: primary equity and M&A. One investment banker points out that even in a sizeable European economy there may be only 10 to 20 such investment bankers who the CEOs of that country's leading corporations really know and trust. At the very best firms those top investment bankers will be supported by an infrastructure of other like-minded investment bankers constantly swapping leads and ideas of how the behaviour of companies in, say, Asia or America might have implications for companies in the same industry sector in Europe.

Relationship managers being appointed within GCI, the former Deutsche Morgan Grenfell, have the major task of coordinating ad hoc client service teams. Each of the global product groups may put forward someone - a trader, lender, equity analyst, adviser - who might work with a particular client, and the relationship manager for that client will establish a business plan for serving the client and co-ordinate client visits. The ideal entry-level for these top relationship managers to their target customers will be the chief financial officer, not the chief executive.

The sketch of the good relationship banker outlined by GCI chief Josef Ackermann sounds far removed from the high-profile dealmaker: "Some people brought up in a pure advisory environment feel this is no longer pure investment banking," says Ackermann. "It's tough suddenly to become familiar with all these other products. And we have suggested that a few people who are not fit for that challenge should leave."

For the moment, the product heads, like Mitchell, and the big revenue earners at GCI, seem happy to work with these relationship managers, many coming from a commercial-banking background. This alliance between the product groups and the new relationship managers has left the investment bankers out in the cold and it is they who are leaving.

Appointing some competent relationship managers to client service teams won't be enough to ensure success in areas where Deutsche remains weak. The chief concern must be M&A and, to a lesser extent, equity capital markets. The decision to do either type of transaction typically comes from a chief executive, not the chief financial officer who is the highest point of access for Deutsche's new relationship managers. Although at the start of this year equity capital markets had a reasonable flow of deals booked for the first half, and may do transactions including bought deals opportunistically that its own origination effort captures, the fear must be that the business flow will dry up. If that happens, then Deutsche begins to look more and more like Barclays.

Deutsche Bank "wants to make do with a bunch of 50-year-old German commercial bankers, some of whom may be quite smart but many of whom will be quite mediocre," says one disgruntled employee, adding: "Even in Germany they probably have no more than five or so bankers that could have a top-level conversation with the head of a leading German industrial company." The cynics say that the commercial banking bent of the new structure was apparent in the appointment at the start of the year of Friedrich Schmitz, a commercial banker, as co-head with Bill Harrison of the investment-banking division. Schmitz didn't last long in this role, being moved on to asset management in May.

Ackermann is taking personal control of the investment-banking division with a view to re-organizing it along three lines: 1) relationship management and client coverage; 2) industry groups offering strategic advice and 3) two global product groups: a pure execution M&A business and equity capital markets which, like debt capital markets, will retain its own origination people.

Pulling commercial banking and investment banking together fits with Deutsche's universal-banking culture. With the two separated, Deutsche would often find its commercial lending and debt capital markets teams competing against each other in front of the same client. Harnessed properly, the ability to commit large amounts of senior debt to a deal can be a big advantage for an investment bank pitching for higher-margin capital-markets or advisory business. The leading American investment banks have all been hiring syndicated-loan teams in the past two years and worming their way into the loan league tables. Deutsche should have the same mercenary attitude to lending, says Schmitz: "Many Japanese and American multinationals regard Deutsche Bank as a core bank. Very often the anchor to that is a commercial-banking anchor. We are one of the big liquidity providers in the world. But clients must be aware this has a price. And where we do not see the potential to penetrate a client with anything more than commercial lending, we may withdraw. Clients are not insulted by this."

Above all, if DMG remained a stand-alone investment bank, separate from - and even at odds with - the rest of Deutsche Bank, it could never be more than a pale imitation of the leading global bulge-bracket members. The brief weakness of the American investment banks in 1994 may have allowed newcomers at DMG to think they had a chance to catch up. But banner years for the Wall Street firms since then had dispelled this optimism. "There was no way to close the gap on Goldman Sachs. And Breuer must have realized that if he continued to fight on that ground - with DMG as a stand-alone unit - he would lose," says one DMG veteran. "Instead of segmenting Deutsche into commercial versus investment bank, it makes more sense to segment by type of client and go back to being a universal bank both to small and medium-size enterprises in Germany and to the top 1,000 global corporates and institutions."

It makes so much sense to do this that the DMG investment bankers themselves were pushing for it. And they were pushing to lead any integrated effort themselves. From 1996 key members of the investment banking division, including co-heads Carter McClelland and Maurice Thompson, were arguing that it made no sense to have highly paid investment bankers and not let them sell Deutsche's lending and balance-sheet capacity, as well as M&A advisory and equity capital markets. In America, where McCelland took the lead, plans were well advanced by late 1997 on integrated marketing.

Last November Mitchell, Philipp and Fitschen were called to join a committee looking at the restructuring, joining McClelland who had been pushing for integration, though with his own slant. They were given three weeks to come up with a plan that could be put before the board and be announced on December 17. During January, working with consultants from McKinsey this was further refined. It must have been a turbulent period, as Mitchell's willingness to consider another offer from SBC Warburg suggests. "That came up in the middle of all this when it was still unclear how the re-organization would work out," he says. Now, he seems to be happy enough with the logic of it all: "Having lending separate from capital raising was no longer optimal and having duplicate relationship management functions for big companies was a luxury we could no longer afford. Nor was it something the clients wanted."

Dobson joins the Vorstand club

There was also a leadership vacuum at DMG. Insiders say that the firm's heyday was the first 18 months of build-up from 1995, when Michael Dobson was clearly the chief executive of DMG and not yet on the Vorstand of Deutsche Bank. During that time, Morgan Grenfell chairman John Craven sat on the board and, in the words of one American banker, "ran interference" for Dobson who was briefly "the most powerful executive at Deutsche Bank. In building up DMG he did not constantly need to seek total agreement from the Vorstand. He simply went ahead and took decisions quickly. The Germans were scared of Mike". But when Dobson joined the Vorstand himself in 1996, that changed. He could no longer play the despot. In the ivory tower of the Vorstand, he entered a very different world. Decision-making there is by consensus. Dobson couldn't be rude or pound the table: he became one of the club and the Germans were no longer in awe of him.

No-one replaced Dobson as chief executive. But one of his last acts at DMG, before being moved over to take responsibility for Deutsche bank's asset-management business, was to push for the hiring of Bill Harrison, fresh from a stint as chief executive of the doomed BZW, to head the investment-banking division. It was a hire that met with mixed success. A few weeks after arriving, Harrison was put in charge of client relations mainly in the UK. The official line from Deutsche is that this was always Harrison's preferred role and that he only agreed to run investment banking as a stop-gap measure. Not according to some Deutsche insiders. They say that Harrison was hired to drum up some deals for the investment-banking division which ranked an embarrassing seventh in M&A advisory in Germany last year.

Unfortunately, senior figures in the investment-banking division were not impressed by Harrison's gruff, table-thumping management style. Shortly after his arrival, Thompson left, later to be followed by Simon Ellis, head of regional and industrial client coverage. "The problem when you don't have a chief executive," says one senior executive, "is that in a situation where people are basically refusing to report to Harrison, there's no-one to get people in a room, bang their heads together and say, 'this is the way it's going to be'."

The absence of a chief executive fuelled dissatisfaction among the top executives of DMG already frustrated by their difficulty extracting key decisions from Frankfurt. On one occasion in the autumn of 1997, the firm's three most prominent American executives - Mitchell, head of global markets, Philipp, head of equities and McClelland, co-head of investment banking - went to Frankfurt to suggest creating the post of chief executive at DMG, to be filled by one or even all three of them. They were turned down. McClelland, the American from Morgan Stanley hired in 1996 by Ronaldo Schmitz to head investment banking, quit the firm earlier this year after being talked into relinquishing his position as co-head of investment banking to take regional responsibility for America.

"The Wall-Streeters are expansionists by nature," observes one Morgan Grenfell veteran of the Americans who came into the firm during the build-up of the global markets division. Tensions and rivalries began to emerge and have persisted ever since. Mitchell was engaged in a dispute with DMG's head of emerging markets, Rick Haller, throughout 1997 over who should run emerging-market sales, research and trading. Eventually, Haller, who had built a stand-alone emerging-market investment bank of 400 people agreed that 325 of those should be absorbed into other DMG units - global markets, equities and investment banking - as emerging-market adjuncts. Haller kept a 75-person proprietary trading group that made one of the strongest contributions to DMG's profits for 1997.

Deutsche Morgan Grenfell used to report to two Vorstand members: Schmitz and Ackermann. From now on resolving such conflicts will be the task of one man. In the latest reorganization, Ackermann will take on management responsibility for all the businesses within GCI division, while Schmitz will manage client relationships in Germany and Switzerland. Although Ackermann declines to describe himself as CEO of the division, there are no plans to appoint a non-Vorstand member as CEO of GCI below him. "It would be an unnecessary management layer," says Ackermann. To Anglo-Saxon eyes, the sight of Deutsche Vorstand members lining up to take specific responsibility for major divisions of the business, rather than geographic regions of Germany, is refreshing.

In the past, responsibility was vague. Investment bankers in France working for DMG, might find themselves with mixed reporting lines both to Vorstand members responsible for DMG, and to a different Vorstand member, of a commercial banking outlook, with country responsibility for France. The process confused line managers. And it smacked of a mechanism designed to allow Vorstand members ultimately to avoid accountability for divisions if anything went wrong.

Ackermann is now clearly the man in charge, but can he handle aggressive investment bankers? His relationship with Mitchell apparently may have been strained when Mitchell came close to quitting the firm for SBC Warburg earlier this year. The story inside Deutsche is that Mitchell had an appointment with Ackermann on a Tuesday to hand in his resignation, but on the Monday night, after talking the move over with his closest companions at global markets, he decided to stay. There is talk of arguments between Ackermann and John Ross, the new head in Asia. Ross is said to have argued for taking a regional P&L responsibility for the GCI operations in Asia, contrary to the move towards global product reporting that first came in with the build-up of DMG.

Dismay at the disappearance of DMG shouldn't obscure Deutsche's considerable achievements in securities markets. The global-markets division has been climbing the league tables in derivatives, foreign exchange and bonds: in 1995 it was nowhere in these areas. Even in Deutschmark bonds it was losing market share to Commerzbank and Dresdner Bank and had lost its old dominance of German institutional investors. That has been reversed. The bank has hugely increased its coverage of financial institutions across Europe, dealing in bonds, forex and derivatives.

In the US, the bank has a credible presence. It has just completed a $1.4 billion debt exchange for Ford. It has made great strides in mortgage bonds. And recently it securitized some of Deutsche's own residential mortgages and distributed 60% of that deal in America. It has done well in emerging-market sales. In just a few years, the bank has scored more successes in these businesses than any tradition-bound European commercial bank could reasonably have expected to. For good measure, the first five months of the year have been extraordinarily kind and, according to Mitchell, global markets is 50% ahead of budget, while still selectively building: notably in high yield where there is obvious potential synergy with Fitschen's structured lending group.

In equities its progress has been perhaps even more impressive. The business has grown with several shrewd moves under Philipp, who originally ran global fixed-income sales under Mitchell, before moving to equities in 1996. Philipp acquired NatWest's equity derivatives group last year, when most of the rest of its cash equities business went to BT Alex Brown. The NatWest team, since being recruited from Morgan Stanley, had been building state-of-the-art systems for much of the previous 18 months. Now, those systems have allowed Deutsche to treble the amount of daily trades it can handle. It is a top programme-trading firm on the New York Stock Exchange and in Japan.

The firm had also coveted many of NatWest's analysts. Though outflanked by BT Alex Brown's bid for the NatWest equity business, it was still able to pick up 30 top analysts from UBS, who were victims of the merger with SBC. The equities business, according to Schmitz, "is mostly there. I have little doubt about Europe, though I still ask myself about America. But we don't need to make major investments in equities this year, or next. If anything we need a period of consolidation, especially internally on the IT and resources side".

But there are areas of weakness. Schmitz says that, in devising the GCI strategy to serve the world's leading multinationals - "companies which might be doing project financing in China today and public take-overs in America tomorrow" - the bank surveyed its own strengths and those customers' view of Deutsche Bank. "We were not perceived by those clients to be truly competitive compared with our American peers," he reports.

Harrison argues optimistically that the playing field for investment banks in Europe is reasonably level and that "among large corporates there is a considerable degree of open-mindedness as to which firms can add value". But there is no shortcut to success. Harrison recalls winning an M&A mandate for Lehman Brothers from one client eight years after a first pitch to the company for a commercial paper programme. "Corporate finance relationships aren't instant," he says. "They have to be built of a base-load of trust from an initial relationship in whatever product."

Has Deutsche Bank demonstrated that kind of patience in investment banking? It dumped what it told recruits was a five-year strategy, to build up DMG, after just three years. Making a big push in global M&A was always something more talked about at DMG than acted on. Revenues did improve from a paltry Dm300 million in 1995 to Dm800 million in 1997, but the firm was far from being a leading force. Even in Germany it was losing out on the big deals, until it claimed a co-adviser spot on the Daimler-Benz/Chrysler merger along with Goldman Sachs. That deal alone - for a company of which it owns 21.8% - will ensure a high place in the M&A league tables this year and has reduced the sense of embarrassment and urgency for a quick fix which led to the hiring of Harrison. But Ackermann admits: "M&A is an area we have to put more resources into because we're competing with firms that have a much longer tradition and track record." He adds: "It takes time to build up. And it's definitely a global business."

He also knows that kind of track record tends to come from a few expensive people winning and executing the most prestigious deals. In Quattrone's technology group, Deutsche had a plum. That sector is now the single largest in terms of market capitalization in the American equity markets. Deutsche Bank doesn't have the stomach to buy more such teams, but that leaves a gap in its client coverage. Ackermann says: "As well as having relationship managers, it's also important to have industry groups offering strategic advice to companies. This should help the M&A and equity capital markets businesses."

But Ackermann has to ask himself what are the industry groups of the future. "Because these people are often expensive and hard to find. We will add industry groups. But you have to concentrate on a few areas where you see real opportunities." It all sounds a little uncertain.

One area of concentration is of course the euro zone. Executives at GCI all repeat the same mantra "Europe first". The first priority is to be a dominant force in the bank's home market, now redefined not just as Germany but as the whole euro zone. That's a fair and reasonable ambition. If the bank is not good there, why would any client use it anywhere else? "Major corporations want a strong local player to help them work through the changes in Europe," says Philipp. "We have to be dominant in Europe, have a credible presence elsewhere and not spread ourselves too thinly."

But Deutsche's critics won't rest until the bank has filled in the US piece of the puzzle. Buying an investment bank there was a topic for discussion last year, when Deutsche executives considered possible deals with JP Morgan, PaineWebber, Fidelity and French insurance company Axa which owns DLJ. But bankers attending a recent meeting in Germany of the top 300 executives of the whole of Deutsche Bank report that the mood seemed less favourable to doing a big merger.

That leaves open the question of how to strike the right balance outside Europe and maintain a strong enough presence to tap into investment and deal flows between Europe and America, and Europe and Asia. America is particularly important. On European new equity issues, some 60% of sales can go to America. The age-old question for foreign firms is can you capture that cross-border business without going to the enormous expense of trying to build a domestic US equities business to compete with the American bulge bracket.

Morale in the US has suffered from talk of reducing the headcount, especially in investment banking, from the rumour of deals with American banks and of likely future job-losses, and perhaps most oddly of all, from the very strength of the markets in America. "It's the most competitive market of all," says Mitchell, "and our rate of progress has slowed because our competitors have had such fantastic years."