The New Face of Deutsche Bank Anshu Jain Mixes Success and Controversy
Part 2: Multiple Lawsuits in the United States
This doesn't mean that Deutsche Bank's activities in the financial markets are seen as particularly sound. Its share price has plunged by more than 40 percent since early July, partly because the bank faces the threat of being sued for billions in multiple lawsuits in the United States.
Deutsche Bank was one of the major players on the US real estate market before it collapsed in 2007. Jain, who was responsible for the bank's interest-rate products, did his utmost to encourage the development. Between 2005 and 2008, Deutsche Bank issued structured mortgage-backed securities worth a total of $84 billion.
When the housing bubble burst, these securities were no longer worth much, leading many customers to feel deceived by the bank. A few major investors have already filed lawsuits, and others are likely to follow. At the beginning of the month, the US Federal Housing Finance Agency (FHFA) filed a suit against the bank, in which it alleges that it and 16 other banks provided false information about the quality of mortgage-backed securities. Deutsche Bank had sold securities worth $14.2 billion to two semi-governmental mortgage lenders, Fannie Mae and Freddie Mac.
Even the US government is suing Deutsche Bank. In 2007, it acquired mortgage lender MortgageIT, which had gained access to a government program by providing false information on bad loans. The government allegedly incurred a loss of $370 million as a result.
A Serious Mistake
Deutsche Bank stresses that most of the potential wrongdoing occurred before it bought MortgageIT. After long hesitation, Jain had supported the purchase during the late phase of the real estate boom in order to capture even larger market shares in the US market, which still appeared to be booming. Today he sees it as a serious mistake.
The risks stemming from these legal disputes are enormous. Sources in the investment bank say that damages and fines could wipe out a year or two of Deutsche Bank's earnings in the United States. But they also add that this is something the bank could endure.
Nevertheless, enormous damage has been done to Deutsche Bank's image. A US Senate report lists Deutsche Bank, along with Goldman Sachs, as one of the main culprits behind the American real estate crisis.
And now, of all times, Deutsche Bank is being placed in the hands of the top investment banker responsible for all of these deals.
Since Jain started working for Deutsche Bank in 1995, his office has been in a small, transparent glass box next to the large trading room at Deutsche Bank in London. With his office door usually open, Jain can easily hear the shouting of the traders. The coffee room, where machines dispense thin streams of coffee with a small amount of foam on top, is next to Jain's office. This is where Angela Merkel paid him a visit in 2003, before she became chancellor. She wanted to know how the financial markets work and, like most visitors, received a brief, sharp analysis.
Contacts with George Soros and Warren Buffett
Jain never worked as a trader. At Deutsche Bank, he has always handled the large customers, the ones that move billions back and forth around the globe. He was also the one who established contact with hedge fund managers like George Soros. "We weren't even involved in this league until 1995," says one man who has closely followed Jain's rapid ascent.
Today the bank does its best business with speculators like John Paulson, an American who earned $5 billion in profits last year. The major US fund companies, like Capital Group and Blackrock, also prefer to discuss their investment ideas with someone like Jain, who is seen as a brilliant analyst. This benefits Deutsche Bank, because these large customers ultimately issue big orders.
The story that Ajit Jain tells is typical. He too is a cousin of Anshu, as well as the potential successor to Warren Buffett, one of the richest men in the world, at his investment firm Berkshire Hathaway.
"Ten years ago, I arranged a meeting between Anshu and my boss in Omaha," says Ajit. The two men had lunch and spent half a day talking to each other. Later on, Buffett called Ajit and raved about the young banker. "That boy will be running an investment bank one of these days," predicted the old man, an icon in the financial world nicknamed the "Oracle of Omaha."
Anshu Jain had impressed Buffett, who struck it rich with Coca-Cola stock and recently rescued Bank of America from a difficult situation by investing $5 billion in the company, with his detailed knowledge about covered bonds. "When the telephone rings, I hope it's Anshu," Buffett apparently said jokingly.
Contacts like this are priceless for Deutsche Bank, an upstart in the world of investment bank only ten years ago. Jain is probably the main reason the institution has become the world's largest foreign exchange and bond dealer. The investment banking division earned close to 4 billion in profits in first six months of this year alone.
As head of the unit, Jain's compensation, sometimes ranging into the double-digit millions, makes him one of the world's best-paid bankers. He has usually made more money than his boss Ackermann, who is often at the top of the list of Germany's best-paid executives. According to an ironclad rule of investment banking, those who lay golden eggs are showered with money.
Jain, for his part, has spoiled the 16,000 investment bankers working under him, drawing on a bonus pot that has always been stocked with several billion euros. Once, in 2007, he even flew in the Rolling Stones for a private concert in Barcelona.
But Jain would no longer do this sort of thing today. Times have changed. These days he invites his biggest customers and the most important bankers to an annual event at a London hotel. Famous musicians still perform at the event, but their names are protected like a state secret.
The managers who engaged in the notorious real estate deals in the United States were also among the best-paid bankers for years. Jain fired them without hesitation when their deals became a liability for the bank and its customers. But now the bank must pay for the consequences.