Deutsche in dock as Germany’s most German bank struggles to reinvent itself

The German dramatist Bertolt Brecht once remarked drily that breaking into a bank is nothing compared to founding a bank. His observation hangs in the air of a Munich regional court where three generations of Deutsche Bank chief executives have gone on trial.

The sight of Rolf Breuer, Josef Ackermann and Jürgen Fitschen on the bench, past and present heads of Germany's largest bank, was the financial equivalent of a court case against Helmut Kohl, Gerhard Schröder and Angela Merkel.

The case against them for aggravated attempted fraud is the lowest point so far in a long decade of legal battles, commercial crises and financial floundering at the bank.

As its past catches up with it in court, however, analysts worry more that the lender has no clear path for its future. So how did Germany’s blue-chip bank get here? A mixture of accident, design and hubris.

The Munich case is the last in a lengthy litigation between Deutsche Bank and the defunct German media group, Kirch.

Founded in 1955, Kirch once operated leading private and pay television stations and held a key stake in the Axel Springer newspaper group.

By 2002 it was struggling with debts of €6.5 billion and was forced to file for bankruptcy. Founder Leo Kirch later sued Deutsche Bank for damages, saying its then chief executive Rolf Breuer had provided the final nail in his corporate coffin by claiming, in a Bloomberg television interview, that no one was interested in lending to the media group.

Kirch’s compensation case against Deutsche Bank succeeded in 2006, but the case dragged on as the bank appealed. Although Kirch won the later rounds, too, he went to his grave in 2011 before it was finally settled, insisting that Deutsche Bank destroyed his life’s work. His theory: the bank destabilised the company in the hope of earning commission in the subsequent asset sell-off.

The bank has denied it had any such intentions but, after over a decade in court, it agreed a settlement with Kirch’s heirs of €925 million in February 2014.

The current case sees Fitschen, along with Breuer and his successor, Josef Ackermann, charged with aggravated attempted fraud for allegedly conspiring to submit false testimony during the Kirch case. Also facing charges are ex-chairman Clemens Börsig and former board member Tessen von Heydebreck.

In an indictment running to more than 100 pages, Munich prosecutors say the bank leaders and their lawyers conspired to thwart Kirch’s case by co-ordinating testimony and, in some cases, making false statements to investigators.

All men deny the charges but, if found guilty, face sentences ranging from six months to 10 years in prison and a fine of up to €1 million for the bank.

The case is likely to drag on for years, denting even further the already tarnished reputation of a German lender that is older than Germany itself. Deutsche Bank was founded in 1870, a year before the German Reich, with headquarters on Berlin's Französische Strasse.

That building is long gone, replaced by a modern block housing offices and a H&M clothing store, but the institution lives on. Whether Deutsche Bank has stayed true to its original mission is a matter of heated debate.

The banks founders, including the Siemens family, wanted an institution to offer more attractive terms in crucial import and export financing than those on offer by French and English lenders.

The founding committee’s hope was to “conquer finally for Germany on the field of financial procurement commensurate to those our Fatherland already occupies in the fields of . . . science and art”.

With a capitalisation equivalent to €1 billion today, the new arrival soon established itself as a key institutional player at home – helping the birth of industry giants like Krupp and Bayer – and co-financing projects abroad like railways in the US midwest and the Ottoman empire.

The bank survived the interwar financial crises, despite a halving of its capital at its peak of 1929-32, thanks to timely mergers and takeovers that broadened its base at home and shifted its focus abroad away from pure trade and industry financing.

Its darkest chapter came in the Nazi era when it first purged itself of Jewish staff, then earned profits on the forced sale of Jewish property, companies and gold.

The bank even financed the construction of Auschwitz and a nearby plant for IG Farben, the company responsible for the poison gas pellets used in the gas chambers.

Despite their Nazi complicity, none of the bank’s board members was ever charged with war crimes.

Postwar years

In the postwar years, East Berlin nationalised the bank’s assets in its territory while Allied forces broke up the western bank into decentralised entities. That step was reversed a decade later when the modern, centralised Deutsche Bank was born and established in Frankfurt, its home today.

The postwar bank became the lender of choice for, and key stakeholder in Deutschland AG or Germany plc, the interlinked network of West German conglomerates from Siemens to BASF.

At the end of the 1950s, Deutsche expanded its retail banking division, offering small personal loans to Germans, although retail was never its focus as it expanded around Europe through acquisitions.

After starting a sell-off of its Germany Inc shareholdings in the 1970s, Deutsche pushed into investment banking in 1989 by acquiring Britain’s Morgan Grenfell and, a decade later, Banker’s Trust.

Deutsche’s arrival on the New York Stock Exchange in 2001 reflected its wish to move from being a primarily European lender to an international player. This new corporate chapter, critics say, opened the door to many of the bank’s problems today.

Deutsche’s US arm was one of the world’s biggest dealers in collateralised debt obligations (CDOs), structured asset-backed loans that soared during the US housing bubble. After that bubble burst, a 2011 US Senate report described Deutsche Bank as a “case study” of investment bank boom-bust blame.

Investigators found that Deutsche traders had left a comprehensive paper trail of how they painted gold products they knew to be “crap” – their words – and sold them at a premium to investors.

In an email from 2005, cited in the Senate report, a trader rewrote the lyrics of a pop song to explain Deutsche’s modus operandi to colleagues: “Print even if the housing bubble looms/there’s no end to the real estate booms.”

For many Germans, including the old guard at Deutsche Bank, this public humiliation demonstrated the folly of Frankfurt’s move into investment banking.

Former Deutsche Bank board member Michael Endres told The Irish Times last year that shifting from its traditional business of serving its German customers towards speculative international deals was a betrayal of its tradition in the reckless pursuit of profit.

“Whether you betted on a pair of brown shoes or Daimler shares, it was all the same,” Endres said of the modern investment banking business.

The bill for this gambling came last month when US authorities ordered Deutsche Bank to pay a €2.5 billion fine for its involvement in manipulating the London interbank offered interest rate (Libor) manipulation.

The penalty, eclipsing the 2012 fine imposed on Switzerland’s UBS, followed a seven-year investigation into conspiracy ring involving Deutsche Bank employees in London, Frankfurt, New York and Tokyo.

In addition to the fine, Deutsche agreed to accept a guilty plea for the British subsidiary at the centre of the case, making it the most significant banking unit to date to accept criminal responsibility in the Libor manipulation investigation.

Although the deal obliges Deutsche Bank to dismiss certain employees, no one has faced criminal charges. In a statement, joint chief executives Anshu Jain and Fitschen said they "deeply regret the matter but are pleased to have resolved it".

A week later, shrugging off the slings, arrows and fines, the Deutsche Bank duo announced a corporate reshuffle to reduce costs by €3.5 billion and reorganise the investment division worth €1.2 trillion, while shrinking its retail division.

The bank’s first quarter profits for 2015 of €559 million were down from €1.1 billion a year earlier. Although revenue was up a quarter, the fall in profits came as the bank set aside €1.5 billion to cover legal fines. The mixed balance sheet blessings were even more clear in the bank’s investment division, where revenue rose 15 per cent, to €4.7 billion, but penalties caused profit to plunge by more than half, to €643 million.

At a press conference, the two chief executives said their proposed reshuffle was essential to boost profitability and the group’s capital position. Despite two capital injections since 2012, its 3.5 per cent balance sheet cushion is still considered too low – with regulators likely to want up to 6 per cent. Deutsche’s choice: ask shareholders for even more capital or reduce its balance sheet by up to €300 billion.

Deciding on the latter, the group will cut by a fifth the number of its Deutsche Bank branches and offload completely the Postbank subsidiary it purchased in 2008. The loss of Postbank, offering banking services at Germany's post offices, will see Deutsche Bank shed 14 million customers and a balance sheet of €155 billion.

Direction

While the move goes some way to resolving the bank’s capital issues, critics say its on-again, off-again relationship with retail banking and customers shows that Deutsche Bank doesn’t know what it is doing or where it is going.

Several media outlets accused the bank of hacking off its healthy limbs when it should be pruning back the rot – the investment bank. Der Spiegel went so far as to demand the dismissal of the chief executive duo who took over from Ackermann in 2012. Unnamed bank managers told Der Spiegel that the refusal to separate out its investment banking division was motivated by "bonuses, power and vanity".

“Anshu Jain would like to be the head of a European Goldman Sachs,” said one.

Indian-born Jain, it argued, lacked moral authority because he was head of the bank’s investment division that, before Lehman Brothers, “cheated, manipulated and filled their own pockets”.

Meanwhile Fitschen, the magazine stated, was too weak in his supposed function as a link between the “Anglo-Saxon” investment bank business and Deutsche’s traditional German business.

“To this day, Deutsche Bank is suffering from the moral decline through the takeover of the investment bankers,” the magazine concluded in a heated leader. “Deutsche Bank has earned a different leadership. And Germany a better bank.”

Germany’s ARD public broadcaster pointed out last week a growing discrepancy between the booming German economy and its “embarrassing” leading lender. The financial crisis proved, according to the broadcaster, that “Germany can do almost everything, except [investment] banking”.

ARD's Plusminus programme showed viewers a league table of European bank market capitalisation which put Deutsche Bank, with €39 billion, in 12th position, one place behind Ireland's AIB with €45 billion. In a world market capitalisation league table, Deutsche was in 40th position.

However other league tables not shown to viewers show a more differentiated situation. In worldwide investment bank revenue, for instance, Deutsche Bank ranks sixth with the top five spots all occupied by US-based institutions.

Prof Henning Vöpel of the HWWI economic institute in Hamburg sees an inherent tension between Deutsche Bank’s international and domestic business, in particular for the bank’s 12,000 German small and medium-sized business customers which want export and investment loans – not financial sorcery.

“German savers avoid risk . . . while international-operating banks are different, abstract and anonymous and there can be a discrepancy between what savers want and what an investment bank does,” he said. “It’s nice to have a global player that can have a say in international decisions but, functionally, it is not necessary that Germany has a large bank.”

Government officials in Berlin disagree. Through gritted teeth, they would still prefer a Deutsche Bank with an investment competence and know-how to complete dependency on non-German banks for access to financial markets and products.

Deutsche Bank watchers abroad suggest the institution has become too unwieldy.

“It’s long past time for Deutsche Bank’s long-suffering shareholders to challenge the holy writ of universal banking,” wrote Prof Roy Smith of New York University’s Stern School of Business in an analysis of the bank.

Back in Hamburg, Vöpel says Deutsche Bank’s individual problems have been exacerbated by wider insecurity in a changing industry. “All in all, we see a lot of to-ing and fro-ing by banks,” he said. “Deutsche Bank’s search for a business model has a lot to do with the level of movement on international capital markets.”

Head two streets up from where Deutsche Bank set up shop in 1870 and you can see how far things have shifted. With little fanfare, a new bank has gone into business here, named “Number26” after its address on the leafy Unter den Linden boulevard.

Despite its prestigious address, Germany's newest lender – a smartphone-only bank – says it has no interest in bricks, mortar or Deutsche Bank. "At first, we thought we would need a traditional banking partner," said Valentin Stalf, chief executive of Europe's first smartphone-only bank. "Then we realised they are so far behind, we could do it better alone."

Damning words for Deutsche Bank, arguably Germany’s most German bank. It has reinvented itself a dozen times in its 145 years but, amid crises and court cases, markets, shareholders and customers are waiting for a sign that it can do so again.