Trench Warfare in Frankfurt: Conflict Erupts as Deutsche Bank Charts Its Future

By Martin Hesse and

Part 3: 100 Percent Shareholder Value

Photo Gallery: Infighting at Deutsche Bank Photos
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Ironically, the high point of Ackermann's career was the financial crisis, which began in 2007 and hasn't fully ended yet. When he talks about his career at Deutsche Bank today, Ackermann likes to point out that he made the right decisions time and again, even when those decisions were controversial, such as his decision to refuse government assistance. Ackermann says that he was ahead of the game in recognizing how long the financial crisis would last, and that he realized sooner than others that Greece would not be able to repay its debts. Ackermann, though, also has a tendency to reinterpret past events for his own benefit.

But there is one defeat that the articulate CEO cannot brush aside: In the search for a successor, he lost his way just as Supervisory Board Chairman Börsig did. Ackermann mistrusted all internal candidates and became fixated on former Bundesbank President Axel Weber, who chose to take a position with the Swiss bank UBS instead. The "crown jewels of the German economy" have to be guarded by an executive from this culture, Ackermann reportedly once said. The new co-CEOs haven't forgotten his approach to the issue of finding a successor. When Jain and Fitschen were summoned by the supervisory board, their predecessor reportedly had nothing to say. "After so many years of working together, one might have expected him to congratulate the new co-CEOs," say sources close to the bank's new leadership. Instead, they add, he was too busy worrying about preserving his own reputation.

Even Ackermann's critics recognize that he led the bank safely through the crisis. But in some respects, Deutsche Bank isn't nearly in as stellar a position as Ackermann would have people believe. The largest financial group in Europe, based on its total assets of €2.16 trillion, has been disappointing shareholders for years. Since Ackermann took the helm, the bank's market value has declined by 29 percent.

Calling for Change

When investors are asked about the Ackermann era, they are quick to mention the deficits. They say that Deutsche Bank is too highly leveraged and has too little capital. Among Europe's 10 largest lenders, only France's Crédit Agricole operates with less equity capital and more leverage than Deutsche Bank. Under the new, stricter capital rules, US competitors like Goldman Sachs and Morgan Stanley, achieve a quota of equity to risk-weighted assets, such as loans and all the types of securities transactions in which banks engage, of about 10 percent. According to estimates by J.P. Morgan, Deutsche Bank will reach a ratio of only 7.4 percent by the end of the year.

In good times, banks that operate with higher leverage can maximize their profits on every euro of invested capital. But this strategy becomes risky when the markets go crazy, because the banks then lack a buffer against risk. Only those banks that, like Deutsche Bank, are too big to be allowed to fail, can afford to pursue this course.

Now investors are also calling for change. "Ackermann ignored too many things internally, and in the end loyalty was a more important benchmark than performance," says an insider at one of the bank's biggest shareholders. Managers like American Kevin Parker and Swiss national Pierre de Weck should have been let go long ago, the insider adds. Parker was the head of asset management and de Weck was in charge of private wealth management. The two areas are now being merged. The insider also believes that Ackermann held onto Lamberti for too long. Critics accuse COO Lamberti, who was in charge of IT and personnel, of missing the boat in the modernization of infrastructure, one of the biggest cost factors in any bank.

The shareholders had long appreciated Ackermann for paying homage to shareholder value and issuing flashy goals like the 25 percent rate of return that has angered so many Germans. But they also feel that he hasn't done enough to pursue these goals recently, and that he only devotes 80 percent of his efforts to the shareholders.

Drastic Job Cuts?

"Anshu Jain is 100 percent shareholder value," says one investor. The investors expect Jain to significantly increase return on equity, which was only 8.2 percent after taxes recently. Jain and Fitschen are mainly interested in expanding business in Asia and the United States. They have also leaked expressions like "breaking open the silos" and "dovetailing business divisions," to indicate what they plan to do. This sounds good to shareholders, but their main objective is to reduce costs, especially in the IT area.

Labor representatives anticipate drastic job cuts in the coming years, given the pressure major shareholders are applying to the bank. Shareholders believe that 15 percent of the 35,000 jobs in the areas of infrastructure and regional management, most of which are subordinate to Lamberti, could be eliminated. In other words, more than 5,000 jobs may be at risk.

There is also something else behind Jain's desire to strengthen the ties between the investment bank and other areas: His division is one of the largest construction sites in the group. Since the financial crisis, hard times have descended on the former rainmakers. Analysts expect investment banks to earn significantly smaller profits in the coming years.

In the United States, the industry was simply barred from engaging in certain types of transactions. Regulators worldwide agreed to apply stricter rules to the capital banks must put up as risk collateral. This affects investment banks more than all others, because their trading operations are particularly risky.

Leftover Toxic Assets

Moreover, the trade in derivatives, which accounts for almost €800 billion on Deutsche Bank's balance sheet, is to be taken out of back rooms and onto public exchanges, making it more transparent. This also makes the business less profitable.

The bank also still has toxic assets left over from the time of the financial crisis. Analysts expect that the new co-CEOs, unlike Ackermann, will be prepared to sell, at a loss if necessary, convoluted financial products that have become worthless. This, they argue, could strengthen the bank's capital position.

Because of the problems in investment banking, both Jain's troops and the entire industry will have to reinvent themselves. To drum up business, they will be expected to sell more products to the internal asset management division and to private clients in the future. "How can it be that Sal. Oppenheim does more business with Goldman Sachs than with Deutsche Bank?" asks one investor. Deutsche Postbank CEO Stefan Jütte also announced recently that the parent company's funds would be given top billing. Other investment products from Jain's financial wizards could also be marketed through Postbank soon.

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