The Undoing of Deutsche Bank: Part One

12_the_new_deutsche_towers_preview                                                Deutsche Bank’s Frankfurt Office

The following article from the New York Times dramatically illustrates once again how the type of man sought for leadership in high-risk investment firms seeking maximum profits—men not averse to risk or danger, thick skinned, often  with backgrounds in team sports—ultimately bring to ruin the institution they serve.

The article discusses three of these men, employed by Deutsche Bank, Germany’s largest bank, who initially drove the German firm to the forefront of financial success but ultimately to become a major contributor to the Great Recession. Of the three, two are now deceased, the first in a plane crash, the second taking his own life, and the third forced to resign as CEO when his firm was charged one of the largest penalties ever imposed by the United States in the wake of the financial crash of  2007-8.

Oh, how the mighty have fallen! Read on:

By Landon Thomas Jr., writing in The New York Times, Jan. 1, 2017

In 2005, Deutsche Bank, then a powerhouse in the selling of risky derivatives on a global scale, was minting money.

To mark the moment, the bank’s profit engine — its global markets division — commissioned a book about itself. The remembrance would celebrate how Deutsche Bank, once a sleepy lender to German car companies, had transformed itself in just 10 years into a force in financial engineering, selling interest-rate swaps, credit derivatives and opaque tax-slashing investment vehicles to the world’s wealthy elite.

In the view of one senior executive, it all came down to masterly salesmanship by a single man, Anshu Jain, the chief promoter of the bank’s hottest product: risk.

01db-deutsche-blog427                         Anshu Jain was a force behind Deutsche Bank’s appetite for risk.                                                                                               

 “The size just kept mounting and mounting,” this person marveled in a passage in the book, referring to the growing demand for some of Deutsche’s raciest fare. And it was Mr. Jain, the bank’s eventual leader, who “dramatically accelerated that delivery of complex structures to the broader client base.”

Today, these words read more like an epitaph than a commemoration. On Dec. 22, the bank agreed to pay $7.2 billion to settle a claim with the Justice Department that it pushed toxic mortgages on investors in the years leading up to the American housing bust.

The fine was one of the last — and among the stiffest — penalties imposed upon global investment banks by the Obama administration for their role in the financial crisis. And it was also a fitting coda to a turbulent 21-year run by the trading and banking unit at Deutsche that was inspired by three derivative specialists who had been poached from Wall Street years earlier.

In addition to Mr. Jain, they included Edson Mitchell, a charismatic builder of businesses at Merrill Lynch who, in 1995, was given a mandate by Deutsche to create a world-class investment bank in London and spare no expense in doing so.

Mr. Mitchell recruited two colleagues from Merrill to help him in his task. William S. Broeksmit, a derivatives trader with a risk manager’s nose for spotting financial dangers, was one. And Mr. Jain, then just coming into his own as a purveyor of the exotic to hedge funds around the world, joined him.

Today, two of these three men are dead.

Mr. Mitchell died in a plane crash in 2000 at age 47. Mr. Broeksmit committed suicide in 2014 at 58.

As for the 53-year-old Mr. Jain, his carefully crafted plan to finish what his mentor, Mr. Mitchell, started at Deutsche Bank has ended in disappointment.

In the years since the financial crisis, many investment banks have had to pay significant amounts to atone for their various sins. And while the sum of Deutsche’s fines is in the middle of the pack, the bank has been drawn into some of finance’s furthest frontiers when it comes to the pursuit of profit.

Deutsche has been a primary offender in two of the biggest banking scandals of the past decade: promoting toxic mortgages to unwitting investors and manipulating for profit the main lending rate for banks in London. In the process, it has agreed to pay over $9 billion in fines and consumer relief. The bank has sold tax-reduction products to hedge funds, and is alleged to have helped Russian investors illegally move money overseas . . . .

Analysts calculate that of the 20 billion euros in profits that Deutsche’s trading and banking unit accumulated since 1995, as much as 15 billion euros will ultimately be returned to regulators via fines and penalties. Of course, not all of this lands in the lap of Mr. Mitchell — and more recently, Mr. Jain.

The investment bank they created remains a power in bond and foreign currency trading worldwide. And from the beginning, it was overseen by a strong-willed German board that knew well the risks and rewards that came with such a business.

It is also the case that when Mr. Jain became co-chief executive of Deutsche in 2012, one of his first priorities was lowering the bank’s risk, which he did by unloading opaque, hard-to-trade assets. In spring 2015, Mr. Jain put in place his own plan for reforming the bank, which his C.E.O. successor, John M. Cryan, has not entirely abandoned.

23db-deutschebank_web1-master768                                                             John Cryan, chief executive of Deutsche Bank, at a conference in Berlin in June. CreditJohn Macdougall/Agence France-Presse — Getty Images

That said, Mr. Cryan has made it clear that his Deutsche Bank will be markedly different from Mr. Jain’s. Since taking over last year, Mr. Cryan has preached simplicity, less risk, better internal controls and reduced reliance on derivatives. As for the investment bank he inherited from Mr. Jain, he has said that he is committed to it but that it will be a very different institution under him.

Through spokesmen, Mr. Jain and Deutsche Bank declined to comment.

Following Mr. Trump’s election, Deutsche’s stock has been on a tear, up over 30 percent on the hope that the combination of a banking-friendly president and a more cautious leadership under Mr. Cryan will help the bank chart a new path.

When an investment bank trips up in spectacular fashion, human misfortune is often a consequence. That could mean a cashiered chief executive seeing his career and reputation ruined. Or a rogue trader who loses billions of dollars and ends up in prison.

But there have been few instances in which the personal toll surrounding a bank’s rise and fall has been as profound as this one.

This article, because of its length, is presented in three separate blogs, two of which are to follow.

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