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

DPA

By , Hauke Goos and

Part 3: Edson Mitchell and the 50 Bandits


III. Edson Mitchell and the 50 Bandits

At the end of the 1990s, Deutsche Bank went shopping and grew. Now, the bank employed "conquistadors" who partied with the Rolling Stones. Small-town Germans had a few questions.

It was time for Edson Mitchell. Born in 1953, he was the archetype of the new era -- perhaps a bit too short, but wiry and always dressed in the most expensive suits. Mitchell's grandfather emigrated from Sweden to the United States and his lower-middle class family valued hard work and toughness. At college, Mitchell was always among the best students, including at Dartmouth Business School. At age 27, he began working at Merrill Lynch.

His coworkers admired Mitchell's competitive nature, his directness and his chutzpah. He was, people said, "aggressive in a positive way," always wanting to make bets and compete with others. Despite his short height, he played basketball ruthlessly, leaving it all on the court, even during practice. Later, when he began playing golf, he couldn't get through a round without making constant bets with his playing partners.

Merrill Lynch declined to promote him to senior management because of his abrasive leadership style, whereupon an offended Mitchell left for Deutsche Bank in 1995. Even then, he was already well-known in the scene and considered something of a star.

Kopper hired him and Mitchell brought along 50 of his best coworkers. It was a spectacular move, unheard of for Deutsche Bank, but one that would soon become standard in international banking. Investment bankers know no loyalty. They move in packs to the best hunting grounds -- to where the most money can be made.

A red-headed chain-smoker with narrow, clever eyes, Mitchell would go on to lure many more hunters to Deutsche Bank. He was given carte blanche to build up the Global Markets division within the company and charged with assembling a large, international business in London that traded in securities and derivatives, currencies and commodities. He was, in short, charged with transforming Deutsche Bank into an investment bank.

Because he personified the cultural break senior bank managers wanted, Mitchell was polarizing from day one. His direct employees swore eternal loyalty, but those who were not in close contact with him both hated and envied him from a distance. Mitchell was a man of numbers who was considered severe and intolerant of mistakes. On one occasion, when he wasn't recognized by a Deutsche coworker in Frankfurt and asked who he was, he replied: "I'm God." Another striking quote attributed to him: "If you don't have $100 million by the time you're 40, you're a failure."

Initially, though, Mitchell seemed like a failure. His division lost money and was unable to figure out how to integrate the business of British investment bank Morgan Grenfell, even though that is exactly why he had been brought on board. Deutsche Bank had purchased Morgan Grenfell in 1989, but failed to learn from the mistakes of that sale: When buying an investment bank, you are essentially buying the people who work there -- but they generally don't want to work for you and tend to quickly find new jobs. That was the case at Morgan Grenfell too, as employees left the firm in droves, taking their knowledge and connections with them. It took considerable time for Edson Mitchell to stop the bleeding.

His response to both success and failure was always the same: He would demand more money both for himself and his people -- exorbitant sums for a bank like Deutsche, where, unlike Mitchell or his people, many still saw modesty as a virtue.

Mitchell and his people felt differently, and saw themselves as "Indians," as "mercenaries," as "conquistadors." They called their boss a "shark" or the "terminator." Personnel interviews with Mitchell rarely lasted more than two minutes, after which he would decide who would be allowed to stay and who would be pushed out the door.

Those who stayed led lives in accordance with the contemporary definition of happiness: They commuted between London and New York, celebrated deals with huge parties on the shores of Lago Maggiore or on the Thai island of Phuket, they leased private jets and drank prodigious quantities of champagne. And, unnoticeably at first, they also gradually brought disrepute to the entire finance industry and Deutsche Bank, in particular.

That is when it started: Disdain began sneaking into the vocabulary of the traders. They treated clients like idiots who could be sold garbage as gold. It was around this time, around the year 2000 -- a time when Hilmar Kopper had been succeeded by Rolf Breuer, and Josef Ackermann was still waiting in the wings -- that the process that would lead to the global financial crisis just seven or eight years later began. And Deutsche Bank, which still looked like its old self back home, had become unrecognizable in London and New York.

On Dec. 22, 2000, Edson Mitchell died in a plane crash on his way to celebrate Christmas with his family in Maine. He was just 47 years old. When news of his death became public, Deutsche Bank's stock price briefly plunged then quickly recovered. The cynicism at Deutsche Bank was such at the time that people said that, although it was a terrible thing that he had died, it would have been worse if he had gone over to the competition.

Mitchell, though, left behind an extremely competent and ambitious team that continued working in his spirit. People like Grant Kvalheim, an American born in 1957 who specialized in bond issues. Seth Waugh, another American one year younger than Kvalheim, had been brought over from a hedge fund by Mitchell shortly before his death and was an expert on fixed-interest securities. Still another American, Thomas "Tommy" Gahan, born in 1961, had spent 11 years at Merrill Lynch where he had become a junk bond expert. And there was Anshuman "Anshu" Jain, a Brit who had been born in 1963 in Jaipur, India. A protégé of Mitchell's, Jain hung a portrait of his mentor in his office after his death. He once said that he would have "gone to the ends of the Earth" for Mitchell.

In 2001, Jain became Mitchell's successor as head of the Global Markets division and soon achieved superstar status. In February 2006, the Financial Times ran an admiring profile of Jain, who the paper called a "pioneer." Jain was 43 at the time and developed the trade in so-called derivatives. Today, derivatives are notorious for the role they played in the global financial crisis, but at the time they were only known to experts. Jain was completely at home in the alphabet soup of derivative abbreviations -- CDO, CDS, ABS, RMBS -- and his numbers made him to one of the best traders of the era. Deutsche Bank had him to thank for a growing balance sheet and huge profits -- and a rise in renown and glamor. The London trading division that Jain led was responsible for a considerable portion of the company's entire profit.

Under Jain's leadership, Deutsche Bank climbed into fourth place in the global derivatives market, at a time when some had begun issuing dark warnings and others had left the field. The Basel-based Bank for International Settlements, often referred to as the central bank of central banks, warned against the new tools being used to spread risk. But Jain was unconcerned, as were Financial Times reporters. The London-based paper quoted analysts who said that Jain was "top-notch" and had "proved he can walk on water."

Other Mitchell protégés also did well at Deutsche Bank: Michael Philipp, William Broeksmit and Henry Ritchotte, all from the United States. They were joined by Colin Fan, a Canadian with Chinese parents who was born in 1973 and went to Harvard. He was considered a "child prodigy," though he was later brought down as a result of questionable business practices. These traders represented the new face of Deutsche Bank.

Nobody mattered much anymore except for the Americans and the Brits. The old structures, which had stood in good stead for almost a century, had been trampled. The Müllers, Meiers and Schulzes, the branch managers in Düsseldorf and Stuttgart, the former stars of the Deutsche Bank empire, they were no longer valued. Their loan portfolios, still as full as ever, were mocked as antiquated.

And the peeved inquiries from provincial Germany regarding the huge sums being earned by the new guard were ignored. Was it true that Edson Mitchell earned $30 million a year? Could it really be true that in the 2000s, half of all profits, hundreds of millions of euros, ended up as bonuses in the pockets of the super-traders? Did they really earn more than any of the board members in Frankfurt?

And why did management insist on flying Kylie Minogue to the annual investor conference in Barcelona? And the Rolling Stones? Why did Ackermann spend hundreds of thousands of dollars to rent out the entire Kennedy Center in New York and treat invited guests to a show involving the best opera stars of the day? Was that really necessary for the bank's core business?

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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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