Deutsche Bank reflects shattered ambition and Schadenfreude

Bid to forge new identity in investment banking has turned spectacularly sour

Deutsche Bank’s slab-like 1980s twin towers in Frankfurt, once an emblem of German power, have become a symbol of shattered ambition. In a chronicle of melancholia and pain reminiscent of a fable by the Brothers Grimm, this most enduring of institutions has been laid low by internal mismanagement and wrenching European change after Germany’s 1990 reunification.

A bid to forge a new identity in the rollercoaster world of investment banking has turned spectacularly sour. Throwing off its traditional conservatism, Deutsche Bank has moved into a realm of risk-taking where recklessness has ridden roughshod over rectitude. After days of swirling rumours about heavy fines from the US authorities, fund withdrawals by market counterparties and possible German state aid, the bank may be forced towards a government-sponsored merger with Commerzbank, the No 2 institution, also in poor condition.

An agreement with the US Department of Justice on the penalty for subprime mortgage mis-selling looks possible shortly, and at less than the initially mooted $14bn. Yet Deutsche’s fortunes, intertwined with national destiny like no other bank, will take longer to settle.

From its establishment in 1870, a year before Germany’s first unification after the Franco-Prussian war, to the fall of the Berlin Wall, fusion with East Germany and the birth of the euro, Germany’s premier bank has guided industry, built booms, suffered busts, built cartels, engineered trade, driven expansion — in good times and in bad.

Since the beginning of this century, especially since the 2008-09 financial crisis, the journey has spiralled downwards. The bank is at its lowest ebb since it was broken up by the western Allies in the aftermath of the second world war. Once aspiring to fell the world’s giants, it is valued on the stock market at only €16bn, about 7 per cent of that of the global leaders, JPMorgan and Wells Fargo of the US and ICBC of China. In 1990 Deutsche was the highest-valued bank in Europe, worth the combined totals of Santander of Spain, Société Générale of France, and the UK’s Lloyds and Midland Bank (now HSBC). Each of this foursome is valued today on average at thrice the size of now-humbled Deutsche.

The setbacks stem from a string of shortcomings. Deutsche tried to use post-unification manoeuvring room to break out beyond its small domestic market share. The idea, in line with time-honoured German “universal banking”, was to expand retail business across integrated Europe and simultaneously build up Anglo-Saxon investment banking. In November 1989, just after the Wall fell, and 10 days before he was assassinated, Alfred Herrhausen, the bank’s charismatic chief executive, forecast that, propelled by reunified Germany’s “strong economic force”, Deutsche was “destined to play a major role in global banking”.

Its leaders, however, failed to bridge the tribal divide between its swashbuckling investment bankers in London and New York and staid colleagues in Germany. Investment banking has been transformed from a major profit source into a legal, regulatory and financial nightmare. Domestic expansion has been stymied by the entrenched regional positions of Germany’s co-operative and public sector savings banks.

And Deutsche has never advanced predicted cross-border European banking consolidation after monetary union. The euro’s introduction hit capital market activities by ending the German banks’ previous near-monopoly status in D-Mark issuance. Low, now negative, euro area interest rates have further depressed profitability.

Schadenfreude is rampant. In June, the International Monetary Fund brandedDeutsche the riskiest globally significant bank. Successive German leaders have been well aware of the “irritation and envy” (as Helmut Schmidt once put it) elicited by the bank’s overweening approach and closeness to German power.

One reason for a sustained US anti-Deutsche campaign has been American desire to impede an overbearing interloper.

In a sign of internal faultlines, Deutsche’s own investment bankers in London in 2000 blocked a tie-up with the then No 2 bank, Dresdner Bank, (since merged with Commerzbank) aimed at producing a German champion.

If, in the latest in a century-and-a half of vicissitudes, a Commerzbank deal starts to loom, opposition at home and abroad is certain. Deutsche’s tangled tale of woe and Weltschmerz has some way to run.

The writer is managing director of Official Monetary and Financial Institutions Forum and author of ‘Europe’s Deadlock’


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