How Deutsche Bank’s high-stakes gamble went wrong

the item was the Friday before Christmas along with Edson Mitchell, boss of Deutsche Bank’s London-based investment bank, was rushing home to see his family in Maine. By 5pm he was on the home stretch: his private plane had left Portland. By 5.15pm the item was within sight of his destination, Rangeley airport. A minute later, in a swirl of cloud along with snow, the aircraft slammed into nearby Beaver Mountain, killing Mitchell along with the plane’s pilot.

in which was 17 years ago. What was a personal tragedy for Mitchell’s family, friends along with colleagues would likely also mark a moment of upheaval for the bank he had transformed. To some fatalistic observers, the crash — along with its accompanying heartache — presaged the troubles in which Deutsche Bank itself has suffered in recent times.

Mitchell had been a brilliant trader along with an inspirational manager who, in a few years, helped remodel a sleepy German lender into a Wall Street dynamo. As a fast-living chain-smoker who would likely bet on anything via golf to gold, he also embodied Deutsche’s big-stakes gamble on global markets. inside planet of roulette-wheel investment banking, Deutsche was the highest roller of all. along with for a long while the punts paid off.

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nevertheless for the past few years, despite emerging as an apparent winner via the 2008 financial crisis, Germany’s biggest bank has appeared locked in a downward spiral. Last autumn, the stock market’s alarm about the bank’s finances was so severe in which investors along with even government officials discussed the possibility of a bailout.

A recent note on the bank via analysts at Autonomous Research was titled “Beyond Repair”. “the item’s obvious something has to be changed,” says one of the bank’s biggest shareholders. “They [Deutsche’s management] don’t understand the sense of urgency.”

Chief executive John Cryan — a bluff Brit who can be the antithesis of Edson Mitchell — can be resolute. “I will carry on at least until my contract ends [in 2020],” he told the Financial Times. “At the moment the job can be getting more fun every day. The heavy lifting can be almost over.”

Yet existential questions remain. What should Deutsche’s future role be? Will the leading financier of Europe’s biggest economy retreat to its more modest roots? can be Cryan part of the solution or part of the problem?

Deutsche Bank’s journey — via a low-profit group focused on German clients along with owned by German shareholders, to the epitome of global capitalism inside heady days before the financial crisis — can be an extreme variation of a path followed by many banks around the planet. Its fate will hold lessons for lenders, governments along with regulators as the banking industry continues its post-crisis evolution.

Back in 1995, Deutsche was a staid domestic lender led by Hilmar Kopper, a Prussian farmer’s son. Wall Street names such as JPMorgan, Goldman Sachs along with Merrill Lynch were expanding aggressively, thanks to booming markets, the rapid growth of financial derivatives along with the advent of electronic trading. A wave of deregulation led them to Europe en masse.

Deutsche was being left behind along with Kopper was losing patience with the bank’s conservative ways. He felt humiliated in late 1994 when the German government picked Goldman Sachs, not Deutsche, to lead the global process of selling Deutsche Telekom — Europe’s biggest-ever privatisation. By the following summer he had hired Mitchell — a brash nevertheless brilliant banker via Merrill Lynch — to begin the process of turning Deutsche via prosaic corporate lender into one of Wall Street’s own.

For years, the strategy worked like a dream. Deutsche steadily sold off a DM24bn portfolio of corporate shareholdings, relics of its postwar role as a pillar of West Germany’s reconstruction effort. The proceeds were used to supercharge its investment bank: first, by integrating Morgan Grenfell, a tired London merchant bank acquired in 1989; then by hiring via rivals such as Merrill Lynch; along with finally, by purchasing the troubled US group Bankers Trust in 1999.

Josef Ackermann, an ex-Credit Suisse banker, oversaw Deutsche’s investment bank before becoming head of the whole group in 2002 along with leading the item for the next decade. He remains proud of his achievements: “We seized the growth opportunities along with within a few years built a top-three global investment bank.”

At its peak inside middle of 2007, Deutsche claimed the title of the planet’s biggest bank, amassing total assets of close to €2tn. Many of the planet’s finance houses had been growing at unprecedented rates, nevertheless Deutsche’s expansion was faster along with more furious. By June in which year the item was increasing staff numbers at an annualised rate of 20 per cent along with assets by nearly 50 per cent. Net profit was up by an annualised 60 per cent. Deutsche’s investment bank had all its chips on the table.

The financial crisis in which took hold inside second half of 2007 along with accelerated through 2008 left no global bank untouched. the item was an undeniably painful period for Deutsche, using a €5.7bn pre-tax loss in 2008. nevertheless compared with some rivals, the German lender was able to shrug off the crisis.

Ackermann’s statesmanlike leadership helped, as did the foresight of trader Greg Lippmann, who bet so successfully against subprime mortgages in which he became the protagonist of the Michael Lewis book The Big Short, inspiring the Ryan Gosling character, Jared Venett, inside hit movie of the same name. various other executives sold subprime exposures to rivals along with bought insurance against default. along with the US government’s rescue of AIG, one of those insurance providers, was worth an estimated $4bn to Deutsche.

nevertheless chutzpah, judgment along with luck can only take you so far. What has puzzled many who admired the bank’s handling of 2008 was just how badly the past few years have panned out. As peers have prospered, Deutsche’s fortunes have cratered. Its shares have halved over the past a few years, just as those of some US rivals have doubled in value.

Eric Ben-Artzi, an ambitious young mathematician who moved to the bank via Goldman Sachs in 2010, has an inkling why. “When I joined Deutsche,” he recalls, “I thought I was joining a winner, backed by a German notion of disciplined organisation.” in which impression didn’t last. “Within months I was disillusioned,” he says. He ended up as a whistleblower, informing regulators about the way Deutsche valued along with risk-assessed a vast portfolio of arcane derivative securities — $130bn of so-called leveraged super-senior swaps.

“They were doing some interesting academic stuff in terms of risk modelling,” Ben-Artzi recalls. “nevertheless the item was like a façade. The methodology in which was actually implemented turned out of thin air.” In 2015 the affair landed Deutsche using a $55m fine for false accounting.

“I blew the whistle because I gradually came to realise in which This kind of bank was only semi-legal,” says Ben-Artzi, who right now works for a fintech start-up in Israel. “the item was partly fear along with partly a moral conscience. This kind of was [one of] the biggest banks inside planet along with I didn’t want to be part of the item.”

What the Financial Times has discovered through dozens of interviews with current along with former Deutsche Bank employees, investors along with rivals, can be in which Ben-Artzi’s revelations reflect a broader truth about deep-rooted problems within the bank’s systems along with corporate culture: issues in which can be traced back to the aggressive beginnings of Deutsche’s investment banking expansion, first under Edson Mitchell along with then through the era of Ackermann along with his successor Anshu Jain.

At college in 1970s Maine, Mitchell made a name for himself as a short nevertheless effective basketball player. When he opted for a career in banking, he took his competitive approach to sports into the trading room, along with rose steadily through the ranks at Merrill Lynch. By 1995 Deutsche Bank had poached him to lead the buildout of the group’s still lacklustre trading operations in London. At the time, Deutsche’s investment bank was an amalgamation of a half-decent bonds business, plus a hotchpotch of operations inherited via Morgan Grenfell, the seed for Deutsche’s investment banking push sown by Kopper’s predecessor, Alfred Herrhausen.

In 1998, under pressure via Mitchell, Deutsche launched another bold move. “We had an off-site outside Rome in which year,” remembers one senior manager. “along with the message via Edson along with his allies was clear: ‘If you don’t get stronger inside US, we will leave [the firm].'”

Within months, Deutsche had snapped up Bankers Trust, fresh via a corporate fraud scandal in which senior executives at the US group had shifted dormant customer money into the bank’s own coffers. Older hands on the board were concerned about the drift via Germany along with the influence of unhealthy Anglo-American ways — nevertheless Deutsche’s globalising investment bankers prevailed.

Many who worked with Mitchell praised his technical abilities along with ambition. “Mitchell was talented along with aggressive,” says one former board member. Most of all, he enthused people. When he left Merrill for Deutsche, 50 colleagues followed. Rajeev Misra, who used to run Deutsche’s credit, commodities along with emerging markets units along with right now heads SoftBank’s $100bn Vision Fund, was one of his disciples. “a few minutes with Edson along with you’d walk out passionate about building a global bank. He had such optimism — the glass was always half full.”

nevertheless Mitchell’s appetite for risk was prodigious. “He had Wild West attitudes,” remembers one senior executive via in which era. “[We] truly had to manage him closely. If Edson had lived along with become CEO maybe Deutsche would likely have blown up in more dramatic fashion inside crisis.”

Mitchell was only at Deutsche Bank for a few short years nevertheless he left a long-term legacy. Deutsche’s investment bank became aggressive, Anglo-American, bonus-hungry along with so bent on growth in which regulatory relations were pushed to the limit along with integrity was sacrificed. As at various other banks at the time, some executives’ personal behaviour became increasingly excessive, if not out of control.

There was Mitchell’s own unconventional lifestyle — a live-in mistress at his lavish London villa, the family back home in Maine. various other managers engaged in petty corruption for personal gain, two bankers familiar with the period told the FT, including owning companies such as a limousine operator, to which they outsourced Deutsche service contracts. Sexism was rife — a busload of escort girls were once invited to a Christmas party along with serviced male staff in a VIP suite. Cocaine habits were commonplace.

After Mitchell’s death, his protégé Anshu Jain, a fiercely bright pioneer of derivatives trading, was elevated to run the markets business, then the investment bank along with, eventually, the whole of Deutsche. Born into the ancient Jain religion, the banker — a vegetarian along using a refined family man — looked like a sharp contrast to his former boss. What united them was a fascination with the complexities of finance along using a reverence for the sums of money the item allowed banks along with bankers to earn.

At his peak, Jain was among the best-paid financiers inside planet, earning up to $30m a year, according to colleagues. As Deutsche sought to lure staff via rivals, the item became known for its generous pay deals, with top traders routinely earning $10m-$20m.

Many who joined Deutsche Bank inside 1980s, 1990s along with early 2000s speak of the item as an “inspirational” place to work. Creativity was encouraged, results were rewarded along with ambition — along with risk appetite — seemed limitless. nevertheless there was a downside. “Deutsche always hired mercenaries into the investment bank,” recalls one former senior executive. “They didn’t care about ethics.” Internal competition for the same client business was encouraged on a “may the best man win” basis in which could lead to toxic dynamics. “the item was a mishmash of cultures,” recalls one former executive.

Behind in which lay the bank’s rapid growth, the acquisition of two brokerage firms besmirched by ethical scandal along with the mass import of teams of bankers via various rivals. Bosses in Frankfurt were so blinded by the success of the unit in which they invested in little else. nevertheless they also failed to control the item with an effective compliance function or responsive information systems. The result was great success inside boom years along with deep problems ever since. the item has given the current chief executive a mammoth turnround task.

John Cryan can be the third non-German investment banker in a row to take Deutsche’s helm. nevertheless the dry-witted northerner who took over in July 2015 can be as different via his predecessors as you can imagine. He can be plain-speaking, cultured (using a passion for classical music) along with geeky (he talks knowledgeably about Deutsche’s computer code along with, says a friend, once helped builders rewire his London home).

Where the old Deutsche Bank stood for big bets on the markets along with big bonuses to match, Cryan has stripped back high-risk business along with slashed bonuses. Soon after his appointment, he said: “I have no idea why I was offered a contract using a bonus inside item because I promise you I will not work any harder or any less hard in any year, in any day because someone can be going to pay me more or less.”

Last year, Deutsche took the unprecedented decision to axe virtually all bonuses due to poor results. (There were “retention payments” for 5,522 “mission-critical people”.) “the item was probably one of the most difficult decisions we took,” says one board member.

The lender’s previous bonus culture was hardly unique among peers. nevertheless its mismatch with performance was acute. Over the 1995-2016 period, shareholders earned a net €17bn via owning Deutsche, once dividends, share buybacks along with increased stock market value are offset by capital increases. in which can be dwarfed by the €71bn paid in bonuses over the same time period. One top investment banker via Deutsche’s mid-1990s build-up phase, confronted with in which statistic, appears uncharacteristically humbled. “would likely the bank have been better off without hiring any of us?” he asks using a look to the middle distance.

For some staff, Cryan’s abstemious rhetoric rings hollow — his wife can be a member of the billionaire Dupont dynasty. His core integrity, though, can be hard to doubt. Former colleagues remember in which during his work as an adviser to ABN Amro in 2007, the then UBS deals banker informally told Royal Bank of Scotland, ABN’s ultimate acquirer, in which the item should think twice about pursuing the €72bn acquisition. the item was a deal in which ended up destroying the right now largely state-owned RBS. “He’s very honourable,” says a friend along with former colleague. “He’s certainly not afraid to tell someone to abandon a plan even if the item loses him business.”

Cryan’s attempts at reform sometimes verge on the sanctimonious. His refusal to meet Deutsche’s completely new leading shareholder — controversial Chinese conglomerate HNA — caused some friction with Paul Achleitner, the bank’s supervisory board chairman. nevertheless Achleitner, who ousted Jain to make way for Cryan, can be unfazed. “John has the intellect, the dry sense of humour along with the ability to call a spade a spade,” says the chairman. “in which’s extremely healthy. He’s brought people down to earth via too much hype. Are bankers demotivated by in which? They need to wake up along with smell the coffee. He’s genuine along with in which’s a huge attribute in today’s world.”

Cryan has begun to change Deutsche’s substance as well as its style. Cutting costs has become one of the biggest priorities, echoing his work at UBS when as finance director up to 2011 he oversaw a near-40 per cent reduction in overheads. Deutsche’s bloated cost base — accumulated with little thought inside boom years — can be still stubbornly high today. At the last count, the item absorbed more than 80 per cent of revenues, double the tally of some banks. Breakneck growth inside boom years left the group with what several insiders have called “spaghetti infrastructure”. At its peak, the bank used 6,300 risk designs along with 108 trading systems.

Cryan can be convinced the scope for savings can be bigger than at UBS. “Here the cost-cutting can be more straightforward because the item’s an avoidance of duplication,” he says. “We employ 97,000 people. Most big peers have more like half in which number.”

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