“Mephistopheles: I’d pack myself off to the Devil, in disgrace,
If I weren’t a Devil myself already!”
Johann Wolfgang von Goethe, Faust
Deutsche Bank (DB), one of Germany’s largest banks, has been fighting many problems in recent decades. This has forced the bank’s management to launch a radical restructuring plan, which will run through 2022, that includes exiting its Equities Sales & Trading business, cutting 18,000 jobs, and moving non-core assets to a “bad bank,” a separate unit that will manage and eventually terminate those unwanted holdings.
The Deutsche Bank’s ambition to compete with Wall Street banks in all banking services, failure to properly asses crisis risk and the battle for profit after the financial boom was over cost the bank dearly and ruined its clients’ and shareholders’ trust.
Record low interest rates affected the bank’s revenue. The post-crisis toughening of banking sector regulations and prudential supervision by the central banks resulted in multibillion dollar fines, slashing the profitability of complicated derivatives transactions and forcing DB to abandon its brokerage business, which had been a real cash machine for decades but which went under when the second Markets in Financial Instruments Directive (Mifid II) set new rules for equities trading.
The massive lay-offs in the Deutsche Bank’s 60 Wall Street office in New York have raised the ghost of the Lehman Brothers bankruptcy. Black PC screens, fired employees leaving quietly with their personal items in cardboard boxes, and silent phones. Similar to Lehman Brothers, DB removed three huge abstract paintings by German artist Gerhard Richter from its New York office lobby. The paintings, which the bank bought in the early 1980s, are estimated at between $12 million and $30 million. The Lehman Brothers’ modern art collection, whose bankruptcy triggered a global crisis in 2008, also went under the hammer.
Deutsche Bank, whose assets plummeted from 2.2 trillion euros in 2007 to barely 1.3 trillion euros, lost the competition against the US global financial corporations in the new conditions. Also, the magic money tree, a modern monetary theory that attacks austerity policies as damaging, has yielded heavenly fruits for US banks and financial institutions, whereas their rivals on the other side of the Atlantic have had to make do with carry trade and a trickle of capital flows.
Does this downturn mean that DB will collapse, pulling the European financial system along into a crisis? Not at all.
Germany has the political will and financial resources to save DB, a system-forming bank that is “too big to fail.” It is a huge financial organization with numerous economic ties whose bankruptcy would spell economic catastrophe.
The war of the global financial giants and risky games with high interest rates and sky-high ambitions are over for Deutsche Bank. DB CEO Christian Sewing said that the planned transformation would help the bank return to its roots of 150 years ago, when it opened as a bank serving large German corporations. Returning to its roots entails parting ways with non-European institutional clients, including hedge funds, but it will also bring the bank back to firm ground. Discipline will be key to overcoming a “poor culture of capital allocation,” Sewing noted. The old saying “Ordnung muss sein” (There must be order), an approach that has saved the German economy before, can certainly be regarded as a national pillar.
Conceptually, the bank will focus on the goal it has had since its establishment in 1870: financing German industry. But it will also continue working on the world’s debt-financing market, as well as in commercial real estate, including in the United States, because DB will remain a global player.
Management expects the bank to cut losses and even become modestly profitable by 2022.
There will still be risks because a global corporation can run into problems anywhere. Deutsche Bank is being investigated for possible violation of foreign corruption or anti-money-laundering laws in its work for state fund 1Malaysia Development Berhad (1MDB). Billions of dollars were drained from the bank between 2009 and 2014, leading to multiple government investigations and the downfall of former Malaysian Prime Minister Najib Razak.
Since the stolen money totals some $4.5 billion and the case also involves Goldman Sachs, the US Justice Department is conducting its own investigation into Deutsche Bank’s role in transactions with 1MDB. The charges against DB are very serious, but this is not the bank’s only or last problem with US law. In June 2019, high-ranking Senate Democrats urged the Federal Reserve to investigate Deutsche Bank’s relationship with President Trump and his son-in-law Jared Kushner.
In light of the above, the bank’s decision to jettison global ambitions and return to its roots looks like a wise strategy that could help DB save its banking business as well as the German industry’s trade ties with the rest of the world.