The Deutsche Bank Downfall How a Pillar of German Banking Lost Its Way

DPA

By , Hauke Goos and

Part 2: Gordon Gekko, or How It All Started


II. Gordon Gekko, or How It All Started

The masters of Germany Inc. wanted to be masters of the universe, but couldn't even speak English. From the 1980s to the 90s: The Deutsche looked old.

The term "globalization" only began to emerge in the 1990s, a time of economic euphoria in the wake of the fall of the Berlin Wall, after the perceived victory of capitalism over the historical dead end of communism.

In the wake of 1980s "Reaganomics" -- named for the US President Ronald Reagan -- and the anti-socialist doctrine of British Prime Minister Margaret Thatcher, neoliberalism flourished. For its adherents, neoliberalism was considered a well-founded theory. But its opponents saw it as an erroneous belief in the self-regulating powers of the markets. Nevertheless, neoliberalism entered the mainstream and in Germany too, politicians were eager to deregulate and weaken state oversight.

The Internet arrived, a game changer, and English was suddenly the language of choice. The "New Economy" was here and the "Old Economy", the industrial economy of things, was considered passé. The virtual economy was the future and "shareholder value" became the driving force of all economic effort.

Things were changing in the banking world as well. Whereas money used to be earned with bonds, stocks and commodities, bets were increasingly placed on fluctuations in the values of bonds, stocks and commodities. A meta-market, one driven by new mathematical formulas, developed alongside the real market -- one which took on increasingly madcap characteristics with ever more insane "financial products." Risk was transformed into securities and those who weren't part of the machinery hadn't a clue what was going on.

Well-known US financial institutions such as J.P. Morgan, Goldman Sachs, Merrill Lynch and Shearson Lehman Brothers helped bring the best university graduates from all around the world to Wall Street, creating new role models and masculine sex symbols. In 1987, Tom Wolfe's Wall Street novel "Bonfire of the Vanities," about the precipitous fall of Sherman McCoy, described investment bankers on the hectic trading floor as "masters of the universe." In Oliver Stone's "Wall Street," released the same year, Michael Douglas' character Gordon Gekko became a kind of mascot of greed, with his wide suspenders, thick cigars and generously gelled hair.

At the time, in the late 1980s, it was inconceivable that such a person might ever rise to the top of Deutsche Bank. Until 1988, Friedrich Wilhelm Christians headed up the bank, a discrete, courtly gentleman from Paderborn, a city in the western German state of North Rhine-Westphalia. Born in 1922, he had worked for Deutsche since 1949, a graying witness to the origins of Germany's social market economy.

In 1988, Deutsche Bank was the largest player in the German economy. It held large stakes in many, if not all, large corporations in the country: a quarter to a third of Daimler shares; co-owner of Karstadt and Südzucker; a stakeholder in Metallgesellschaft; a major shareholder of the construction firm Holzmann, the Hortmann Group and the porcelain producer Hutschenreuther. The list could go on. The bank's senior managers and directors also sat on the boards of 400 companies around the country. Without the bank, nothing worked, and standing in opposition to the financial institution was fruitless. Deutsche Bank was Germany, Germany Inc., a small state within the state. Indeed, it was so powerful that many considered it at the time to be a danger to democracy.

In 1985, Alfred Herrhausen became Christians' deputy and, after Christians left the bank in 1988, was CEO for a year until he was murdered by the left-wing terrorist group Red Army Faction (RAF). Herrhausen had lofty plans for a better world and the development of Africa. He wanted to consolidate the bank to make it more flexible and he understood that international investment was the future. The bank's German clients were increasingly discovering the enterprising nature of international financial institutions and Deutsche had to be careful not to be left behind.

Herrhausen's successor Hilmar Kopper shared those worries and he was a new kind of Deutsche Bank CEO, much more Gordon Gekko than Friedrich Wilhelm Christians.

Back then, German was still spoken at the top of Deutsche Bank -- it was a time when German personalities such as actress Hannelore Elsner were invited to management retreats to recite poetry. Those who valued good manners, timeliness and order -- and who held the correct, center-right political views -- tended to have good careers at the bank. In this atmosphere of demonstrative decorum, there was, it seems safe to say, the virile alpha-males types who personified avarice, spoke English and had no use for tradition seemed both attractive and repellent. And the Germans -- "chaste souls," as Kopper, himself something of a ruffian, liked to call them -- needed a wakeup call.

World War II had receded sufficiently into the distance and the German economy had experienced its miracle -- now it was time to look overseas. Companies with global potential had their headquarters in Munich, Stuttgart, Berlin and several smaller towns, and they needed a bank to stand at their side during expansion. That, at least, was Kopper's view and he was easily able to convince the bank's board.

It was also a time when senior German managers began hearing of the fabulous sums being earned by their counterparts in the US. Though they may -- in good, Protestant tradition -- still have considered such salaries and bonuses to be indecent, the prospect of such earnings was nevertheless attractive. In general, the ruthless, success-oriented methods of Anglo-American investment bankers were the polar opposite of the relatively staid demeanor of Deutsche Bank, which likely only increased the Germans' fascination.

In June 1994, Klopper and a small group of senior managers met in Madrid and made the decision to recast Deutsche Bank as a global investment bank. Fundamentally, it seems like a sound decision given that the bank's old business model -- Germany Inc. -- wouldn't earn enough on the long term without the addition of more lucrative business segments. Corporate loans alone weren't enough to ensure growth. The bank began expanding a bit into Italy and Spain, but the real adventure waited in Wall Street and the City of London. And that's exactly where they wanted to go.

The problem was, though, that Deutsche Bank at the time, in the mid-1990s, didn't have the right employees to make the change, and the German labor market and universities weren't yet producing them. The bank needed mathematicians, programmers, code experts with business instincts -- and it needed salespeople who could sell the bank as a product; people who didn't just sit in their offices managing accounts but who went out knocking on doors, creating a market and bringing a whole new field into being. It needed people to come up with brand new services that could be sold at a premium; people to come up with contracts that clients had never dreamed of. It needed products that found new, convoluted ways to avoid interest rate risk, limited exposure to volatile currency markets and helped absorb loan defaults. The New Economy needed all of that and more. And the bank needed new people, no matter what the cost.

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fish2064 10/28/2016
1.
Eight pages the all you needed was one word: GREED.
herrD 10/29/2016
2. Precisions on the assassination of Alfred Herrhausen
Strategically far-sighted, Alfred Herrhausen had proposed for quite some time a remission of debt for developing countries, especially in the year of the crash of 1987. In the eyes of his enemies (ultra neo-liberals) his proposals were absolutely unbearable. Some speculate that in view of the complex nature of the assassination, Secret Service / CIA may have been involved. All of Mr. Herrhausen’s proposals for structural changes to the Deutsche Bank as well as the idea of debt relief to third-world countries were abandoned by his successor Mr. Hilmar Kopper and belittled as “not-to-be-taken-serious” expressions of Herrhausen’s ideas.
ptl88 10/29/2016
3. Deutsche Bank
I hope Deutsche Bank survives this very dark chapter of its history and eventually prosper again as any major country needs a strong domestic bank. The whole world has changed drastically since the collapse of Soviet Union when communism stops challenging democracy. I wonder the financial engineering genius that gave us the derivative markets deserves Noble prize in Economics? Are the profits (savings) in derivatives real or perceived?
acpacker 10/30/2016
4.
A wonderfully xenophobic piece about how the upright upstanding Germans were forced into wrong-doing by the Anglo-Saxon axis of evil. Never mind that this was a German bank run by Germans. You the Germans went and hired a hired a bunch of narcissistic industrial psychopaths out of pure greed. No one made you do it. The German Board must accept full responsibility. Stop blaming other people for your mistakes, its not the first time we have observed this culture of blame. Lets have the next article on how the the Volkswagen scandal was engineered by foreigners, we realise Germans would never do anything like that.
m_nadrakas 10/30/2016
5. Globalism
Deutsche Bank is the victim of Globalism, as many companies, industries and nations have also been victims of the insidious Siren call that has for decades been heard around the world. It is time for the Nations of the world to reevaluate their own fortunes, industries, and sovereignty with an eye toward combating the dangers of Globalism. When a company, industry, or nation looses who they are -- looses their identity and their own sovereignty to outside influences then the question needs to be asked: "Is this who we are? Who we want to be?" Globalism is not the answer. Pride in ones self, and ones own nation is the answer. It does not mean hatred of others either; indeed, we can admire and respect each other...and we should do so. However, Globalism is leading to a loss of who we are, who all of us are. - Let us be proud of our past. - Let us be proud of our nations. - We have nothing to fear in doing so. Peace. ~ Nadrakas
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