The Deutsche Bank Downfall How a Pillar of German Banking Lost Its Way
Part 4: Life is a Construction Site
IV. Life Is a Construction Site
Deutsche Bank loses its German-ness. It wants too much too quickly. It becomes more American than the Americans. Controlling is spotty and Ackermann has arrived.
Deutsche Bank had lost its home, its center. Germans working at the bank -- employees who had proudly worked there for decades -- were left behind. The bank was now making clear to them that they were only really suited for the unfortunately unavoidable bread-and-butter business of managing loan portfolios and accounts. And that they were completely exchangeable. The big money-makers, by contrast, in London and New York, were considered irreplaceable by senior management at Frankfurt headquarters.
That, at least, is how it must have seemed to Deutsche Bank employees in Germany. They began to feel estranged from the bank, a feeling that also held sway at headquarters itself. In the early 2000s, one employee in Frankfurt said that the building's mirrored facade was but an illusion. In reality, he said, it was rotting from the inside because the bank's workers had lost faith.
And that wasn't the only line of conflict in the bank. The satellite offices in London and New York had contempt for headquarters in Frankfurt, which they referred to as "the Kremlin." On the other hand, some traders who worked for Deutsche Bank in New York said they felt like they were on an island and that headquarters actually exerted too little control instead of too much.
It was a clash of two different cultures that couldn't be reconciled: that of the modestly growing German corporate and commercial bank, which saw itself as an institution operating with an eye to the long-term, and of the world of the investment bankers, whose primary aim was to earn money in the here and now, future be damned.
In such a confrontation, the hunters almost always win out against the gatherers: the Americans and Brits won the clash of cultures within Deutsche Bank, crushing the company's identity. Senior management and the bank's supervisory boards at the time were ignorant of the development and apparently completely misinterpreted the situation. The leadership in Frankfurt, first under Kopper, then Breuer and then Ackermann, were unable to integrate the new divisions into the bank's normal business.
"Compliance" is the name given by bankers to the division charged with ensuring that business is conducted in accordance with the law and that internal rules are observed. But at Deutsche Bank, this division didn't grow quickly enough. The teams in New York and London were allowed far too much latitude and received inadequate legal consultation. The same was true when it came to risk management.
American Deutsche Bank employees were surprised at how easy it was to get even their riskiest deals rubber-stamped by the mother ship. In the US, they had become used to difficult negotiations with despised risk management personnel, during which they were forced to explain even the smallest of details. Each deal required exhaustive documentation, the analysis of various scenarios and legal expertise.
But at Deutsche Bank, they were working with managers who had a completely different interpretation of their role, managers who either didn't understand the deals they were being asked to evaluate or who wanted to act cool in the presence of the Anglo-Americans. The Americans, in any case, were often told by the German risk management division: "What a great deal! Good luck!" They often couldn't believe what they were hearing and, at their parties, laughed about their colleagues back in Frankfurt.
A situation developed which, in the course of our reporting, was described almost exactly the same way by several different interview partners: Under Kopper and Breuer, Deutsche Bank wanted way too much, way too fast. It tried to launch several highly complex operations at the same time and tried, as though it would be no problem at all, to shift from a German culture to an Anglo-American one. At the top, English was now the language of choice, but not even that proved unproblematic because there were still a few older managers hanging on who had a tenuous grasp on the language. The bank's leadership also thought that it would be able to take the step from a classic business model to that of an aggressive investment bank with no ill effects.
As a result, Deutsche Bank became like a site undergoing constant construction -- that still hasn't been completed to this day. Every quarter, the bank's organizational charts looked different. New divisions were created while others were closed down; personnel was cut in one area and doubled in another.
By the end of the 1990s, the bank had begun to lose control. At the time, this could, perhaps, still have been prevented, but the management in Frankfurt and the supervisory board, didn't react. It's possible that some board members -- who were actually upright businessmen -- were intimidated by the new generation, by people like Mitchell and Jain. Perhaps they didn't believe they were competent enough to contradict them. It is also possible that some board members didn't care as long as the bottom line, and their own salaries, looked good. And finally, it is also possible that many of them were simply too scared to say anything.
Starting in 2002, Josef Ackermann stood at the helm of the Deutsche Bank ship, having been named Breuer's successor fully two years earlier. He didn't seem like someone who enjoyed being contradicted. And he also had no patience for critique of his money-printing operations in London and New York, which continued to expand the bank's balance sheet and increase profits. Ackermann's harshest critic at the time was Thomas Fischer, a member of the board in charge of risk management but also in charge of day-to-day operations. He questioned the many risky positions the bank was establishing in all manner of fields, and the confrontation quickly became a power struggle from which Ackermann emerged victorious. Fischer's departure from the bank marked the end of internal resistance in Frankfurt -- and the end of internal checks and balances.
Ackermann had a free hand, and he took advantage of it. In 2002, a banking crisis took place that has now been almost completely forgotten, but despite widespread concern about global stability, Deutsche Bank's team in the US was not made to suffer. The generosity shown by the risk management division was matched by the bank's approach to remuneration. Whereas Goldman Sachs and Merrill Lynch cut personnel costs by 10 percent in the third quarter of 2002, salary and bonus payments at Deutsche increased by 6 percent, according to estimates at the time made by those working in the investment banking division -- despite the fact that the division's earnings had fallen by 15 percent.