In good times, investment banking has been the pride of Germany's Deutsche Bank. The company's traders have earned billions on the financial markets, and cunning advisors have engineered mergers and acquisitions. For now, though, it appears the good times may be over. What had once served as the bank's pride has now proven to be a problem child.
During the second quarter this year, profits in Deutsche Bank's investment banking sector fell by 63 percent, down to 357 million before taxes. They also plummeted by 80 percent compared to the first quarter.
This is not good news for Anshu Jain, the company's recently installed co-CEO, who was promoted to the position from his perch as the head of investment banking at Deutsche Bank and still maintains responsibility for that portfolio.
Jain and co-CEO Jürgen Fitschen on Tuesday blamed the euro crisis for the company's precipitous decline in profits. "The European sovereign debt crisis continues to weigh on investor confidence and client activity across the bank," the CEOs, who have been in office since June, said in a statement.
The executives say they plan to cut 1,900 out of a total of 100,000 jobs -- with the greatest slashing to take place in its investment banking unit centered in New York and London, where 1,500 positions are to be eliminated. The cuts are part of an effort to save 3 billion ($3.69 billion).
Tainted by High-Risk Securities
The bank, which was also an actor in the subprime mortgage crisis in the United States five years ago, also said it would apply more rigid ethical standards to its operations in the future. "The time for vague promises of cultural change in our industry is long gone," Jain said in a conference call on Tuesday. "Our investors, but also our clients, regulators, governments and the public, want to see change." Among the steps the bank plans to take are to cut salaries and bonuses for Deutsche Bank workers. In 2011, investment bankers at the company earned average bonuses of 300,000.
Deutsche Bank never had to accept a government bailout during the economic crisis, but it has nevertheless been tainted by its involvement in high-risk securities. More recently, the company has become embroiled in a rate-rigging scandal in London. Deutsche Bank and a number of other leading international banks are currently under investigation under suspicion of manipulating the London Interbank Offered Rate (Libor), a key lending rate that is used as the basis for more than $350 trillion in securities transactions and loans. Earlier this month, the scandal led to the resignation of the head of Britain's Barclays bank.
On Tuesday, the bank's supervisory board cleared management of any wrongdoing in a letter sent to employees. "Based on current findings, no current or former member of the management board was in any way inappropriately involved in the incidents surrounding interest rates," the banks said in a statement. However, in a move that could prepare the ground for regulatory action, supervisory board head Paul Achleitner did state that "a limited number of employees, acting on their own initiative, engaged in conduct that falls short of the bank's standards, and action has been taken accordingly."
Achleitner also warned that a cultural transformation must take place in the financial industry in order to regain respect within society. He said Deutsche Bank must play a pioneering role in that change.
On the editorial pages of Germany's leading newspapers on Wednesday, much of the focus is on the needed changes at the country's largest bank as well as the ability of Jain and Fitschen to lead the bank after the difficult transition of power from former CEO Josef Ackermann.
Center-left daily Süddeutsche Zeitung writes:
"Nobody can yet say whether Jain and Fitschen will be good CEOs. But one thing seems certain: They seem to be honest enough to admit to problems in the financial sector. In year five after the financial crisis, banks around the world are still looking for the business model of the future. Many bankers realize that they can't speculate to high heaven as they did before the crisis because it is easy to land in hell -- and to bring taxpayers down with them. They also realize that the classic business model of making loans and managing deposits collides with the profit and salary expectations that have developed in the business."
"The decisive questions are now approaching. On the one hand, the duo must show that they can do more than simply save -- for example by presenting ideas for making money in the future without offloading the risks onto taxpayers. On the other hand, it is unclear where exactly most of the 3 billion in savings are to come from. Primarily via job cuts in Deutsche Bank branch offices? Or perhaps via a significant reduction in the 5 billion worth of bonuses the bank pays out?"
"Jain has the opportunity to show that he has really understood how the financial sector must change -- to work towards a future in which bankers are no longer hated. To get there, however, concrete moves to reduce bonuses are necessary. So far, he has only made announcements. That is honorable, but not enough."
The financial daily Handelsblatt writes:
"As the new CEOs of Deutsche Bank, Jain and Fitschen are facing an explosive mix. The profit situation in investment banking, which is still the company's most profitable division, is deteriorating rapidly. In light of the debt crisis, the situation is unlikely to improve soon. The company is too bloated to remain competitive in the long term. That's why the company's new management, which would actually prefer to think about expansion, is now -- and it is indeed acting much later than many of its competitors -- cutting 1,900 jobs. They also want to cut salaries."
"It would be wrong to lay responsibility for all the problems on Jain and Fitschen. The power struggle over the leadership of Deutsche Bank and the transfer of power has led to a delay in important strategic areas like a solution for the company's asset management and a reorganization of investment banking. But now the two bosses, who have had one year to prepare for their job, bear responsibility. So far they have only delivered fragments, but they must come up with answers. When they present their strategy for the company's future in September, they must be persuasive."
Center-right Frankfurter Allgemeine Zeitung writes:
"Deutsche Bank's investment bankers have made many moves in recent years that resulted in the loss of customer trust. ... Jain was involved in all of them. Yet he is still the bank's senior investment banker and is now ... co-CEO together with Jürgen Fitschen. Now, though, Jain is gripped by remorse. He believes that a radical change of culture in investment banking is necessary to win back the trust of both customers and society at large. Proprietary trading, combined as it is with high returns and high bonuses, is the biggest of the sins. Customers were sold products which allowed them to bet against the bank. To win back their trust, banks must completely abandon proprietary trading."
-- Daryl Lindsey
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