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What went wrong at Deutsche Bank?

Deutsche Bank AG is a German multinational investment bank and financial services company headquartered in Frankfurt, Germany. The bank is operational in 58 countries with a large presence in Europe, the Americas and Asia. In April 2018, Deutsche Bank (pronounced Doyychh) was the 15th largest bank in the world by total assets.

Deutsche Bank’s drastic retrenchment marks the latest chapter in a dramatic fall from grace for a bank that was riding high until the banking crisis struck in 2008. Here’s how the 149-year-old bank ran into trouble.

1989-99: The plan to build a global bank

The Frankfurt-based lender embarks on a period of global expansion, beginning with the acquisition of blue-blooded merchant bank Morgan Grenfell in the UK.

Capitalising on the rapid pace of globalisation, it pushes into European markets such as Spain, where it buys Banco de Madrid. Acquisitions are part of its ambition to become a major player in investment banking.

It consolidates its US operations into one, in an effort to take on the big beasts of Wall Street such as Goldman Sachs, and in 1999 it builds on its US foothold by snapping up New York-based Bankers Trust for $10bn (RM41.4bn).

2001: Joins the New York Stock Exchange

Deutsche Bank floats on the New York Stock Exchange, cementing its position as one of the major players, not just on Wall Street but in global banking.

2004-08: Deutsche’s role in the subprime mortgage crisis

In the years leading up to the banking crash, Deutsche Bank is a leader in mortgage-backed securities, bundling up homeowners’ debt into huge packages and selling them on to investors. The bank continues to sell toxic mortgage-based investments even as the market turns south and it begins betting against such products itself.

A key character in The Big Short movie about the sub-prime scandal – played by Ryan Gosling – was based on a Deutsche Bank trader who was enabling investors to bet against the very market in which Deutsche was involved.

In 2008 the bank reports its first annual loss for five decades, losing €3.9bn (RM18.1bn). “We have made mistakes, as everyone did,” said chief executive Josef Ackermann.

2009: Using private detectives

An internal investigation finds that the bank hired private detectives to spy on people it considered a threat to the bank – including a shareholder, a journalist and a member of the public. German prosecutors find no evidence of criminal wrongdoing or that senior executives were involved.

2012: The first of four chief executives resigns

Deutsche’s boss Josef Ackermann, a Swiss banker, stepped down after a decade in the top job in May 2012. He was succeeded by joint chief executives Anshu Jain and Jürgen Fitschen, who resigned in the wake of the Libor scandal.

The LIBOR scandal, which came to light in 2012, involved a scheme by bankers at many major financial institutions to manipulate the London Interbank Offered Rate (LIBOR) for the purposes of profit. The LIBOR, which is calculated daily, is supposed to reflect the interest rate that banks pay to borrow money from each other. It is also the basis for determining the rates charged on many other kinds of loans. Evidence suggested that this collusion had been going on since at least 2005, possibly earlier than 2003.

Among the financial institutions that became caught up in the scandal were Deutsche Bank, Barclays, UBS, Rabobank, HSBC, Bank of America, Citigroup, JPMorgan Chase, the Bank of Tokyo Mitsubishi, Credit Suisse, Lloyds, WestLB, and the Royal Bank of Scotland.

The LIBOR scandal was significant because of the central role the LIBOR plays in global finance. The LIBOR is used to determine everything from the interest rates that giant corporations will pay for loans to the rates individual consumers will pay for home mortgages or student loans.

A British banker, John Cryan, took over, but he left in 2018 having failed to get to grips with the bank’s problems. Deutsche’s shares lost more than half their value under Cryan as it struggled to return to profitability. He was succeeded by Christian Sewing, who said yesterday the bank had “no choice” in axing 18,000 staff.

2015-18: The bank paid huge fines for multiple misdemeanours

Deutsche is fined $2.5bn (RM10.3bn) by US and UK regulators for rigging the key Libor interest rate. The bank was also ordered to fire seven employees and accused of being obstructive towards regulators in their investigations into the global manipulation of the benchmark rate. The fine is a record for Libor transgressions.

The bank is fined a further $258m in the US for doing business with US-sanctioned countries like Iran and Syria.

As regulators continue to sift through the wreckage of the banking crash, Deutsche takes a large slice of the blame. In September 2016, its shares slump on news that the institution faces a $14bn charge over mis-selling mortgage securities in the US. It eventually reaches a $7.2bn settlement with the US Department of Justice.

In 2017 UK and US regulators fine Deutsche more than $630m after finding that the lender failed to prevent $10bn of Russian money laundering via “mirror trades”, which had no economic purpose and served only to transfer money covertly.

Last year New York financial regulators hand down a fresh fine, $205m this time, for “lax oversight” in the bank’s foreign exchange business between 2007 and 2013, when it was the world’s largest dealer in foreign currency.

2019 A merger collapses

After struggling to recover from the financial crisis, Deutsche attempts to organise a merger with another troubled German lender, Commerzbank. The talks fell apart in April, scuppering plans for a bank that would have been the eurozone’s second largest. The German government had been in favour of the deal, but the two banks said the risks and costs were too great.

Deutsche said it would “review all alternatives” – and at the weekend Sewing announces 18,000 jobs cuts, 20% of its workforce, with the axe falling worldwide.

 

– The Guardian | photo/CityAM
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