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

DPA

By , Hauke Goos and

Part 7: Easy Come, Easy Go


VII. Easy Come, Easy Go

Deutsche Bank's balance sheet and its total results as an investment bank: A sober look at the books.

Several million numbers flow into Deutsche Bank's balance sheet and the most recent annual report for 2015 is 500 pages long. But if you take a closer look at the bank's annual report over the years, you can find numbers that tell the tale of the institution's metamorphosis.

The bank has become much larger since 1994, but it has lost value. It began taking much greater risks, which ultimately proved not to be worth it. The final analysis of Operation "Deutsche Bank Rebirth" is rather sobering.

In 1994, the bank had 73,450 employees, three-quarters of them in Germany. But by 2001, there were 94,782 people working for Deutsche Bank, half of them abroad. In 2007, at the apex of the boom, fully two-thirds of the bank's employees were outside of Germany -- and not even one-third of the company's revenues came from Germany.

The balance sheet climbed from 573 billion deutsche marks in 1994 to 2.2 trillion euros in 2007, an unbelievable expansion. But size alone isn't necessarily indicative of value. The value of a financial institution is determined by its stock price and market capitalization. And here, the results aren't nearly as impressive. There was a time under Breuer and again under Ackermann when the bank's value had temporarily doubled relative to 1994, but today Deutsche Bank is worth less than it was before it completely revamped its approach.

Other numbers provide an indication for why that is. The bank has a completely different internal structure. In 1994, most of the bank's earnings came from traditional commercial banking. But by the 2007 peak of the speculation party, the investment division's share of the bank's earnings, often made with the help of particularly risky deals, had climbed to over 70 percent.

Ackermann's strategy initially seemed successful. At the peak of its success, the bank achieved a 31 percent pre-tax return on equity, which is estimated to be twice as high as it was in 1994. Return on equity measures the profit earned on the investment of the bank's own equity. It was Ackermann's longtime and oft-stated dream to achieve a return of 25 percent. At the time, he was unfairly berated as a greedy, unscrupulous shark. Before 2008, Ackermann's 25 percent wasn't an unusually high return.

What was unusual, and unsavory, were the tricks and the brutality Ackermann used to achieve his target. Return on investment climbs, of course, as profits rise -- but it also rises when the amount of equity invested is lowered. And if both happen at the same time, the bottom line becomes quite attractive indeed.

Ackermann continually demanded that his people buy back Deutsche Bank stock and destroy it. Doing so is not against the law; indeed stock corporations do it quite regularly to reduce their proprietary equity. But seen another way, Ackermann was hurting the company's long-term prospects for the sake of short-term balance sheet figures.

At the beginning of the Ackermann era, the bank's core capital quota stood at 10 percent. By the highpoint of the boom and the onset of the crisis, Ackermann had pushed it down below 9 percent. That means that the bank's capital buffer was shrinking, which increases risk. In the language of the branch, Deutsche Bank was highly leveraged, investing with more of other people's money (debt) and less of its own. At Deutsche, this debt-to-equity ratio would sometimes reach as high as 40:1 in those days.

An additional risk that the bank took on during this time can only be found in more recent annual reports: Penalties or damages accrued as a result of illegitimate or illegal deals. Such bombs only go off after a significant amount of time has passed and their effect can first be seen in an appendix to the 2012 annual report. There, one notices that the line item for "operational risks/litigation" exploded from 822 million to 2.6 billion euros. At the time, investigations into the Libor affair were ongoing and penalties were looming. But such risks continued to rise in subsequent years -- and continue to do so.

Ackermann has defended himself by saying that, until the financial crisis, he intentionally crept as close as possible to the line of what was permissible and prides himself on that approach. With capital, with leveraging, with risk, he took advantage of the full extent of his leeway. Otherwise, he says, the bank wouldn't have been competitive. But was the strategy worth it?

The numbers in the annual reports help provide an answer to that question too. Both the high profits and most of the legal problems were produced by the Global Markets division under the leadership of Anshu Jain. In the 15 years between 2001 and 2015, Global Markets earned 25 billion after taxes. But a majority of the more than 12 billion euros that have been paid out by the bank since 2012 due to the bank's legal troubles must be subtracted from this: fines, damages and penalties. The bank has set aside an additional 5.5 billion euros, but analysts believe that the bank could need up to 10 billion for the payments.

That, though, would mean that almost the entire profit earned by Global Markets would disappear. The huge investment bank experiment would result in a goose egg, or, even worse, a lasting burden. Because in order to keep the traders busy, other divisions were neglected. Investment in the bank's infrastructure, in its computer systems, was insufficient. It was only due to regulatory pressure that the bank recently invested a billion euros in improved control and security systems.

The costs to the bank's reputation caused by the activities of Ackermann and Jain, however, cannot be calculated. How might Ackermann "price in" Deutsche Bank's ruined reputation -- the bank's collapse into a broadly scorned financial institution that has little to do with its German roots?

And then there are the bonuses. From 1994 to 2015, the number of bank employees rose by 30 percent, but total salaries rose by 200 percent, to 13 billion euros. Most of that was paid out to Jain's team. Notably, that salary figure hasn't declined much since the crisis. In 2015, 756 of the bank's 100,000 employees earned more than a million euros. For what exactly?

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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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