Anshu Jain's hour of confession is scheduled for a Saturday, because he doesn't have any time during the week. For Deutsche Bank's top investment banker, it'll be one of the most challenging meetings of his life. The American real estate market has just collapsed. Jain and his dealers had invested billions in the market when it was still booming.
It's a weekend in November 2008, and Deutsche Bank CEO Josef Ackermann and his top risk manager, Hugo Bänziger, are at Jain's office on Great Winchester Street in London. They have come to find out what horrible news they can expect from Jain's realm in the coming weeks. The mood is apocalyptic at the round conference table. Rarely have these investment bankers, ordinarily celebrated as "rainmakers," been this subdued. Some, fearing a total crash, have reportedly already withdrawn tens of thousands of British pounds from their accounts and taken the money home.
Speaking in funereal voices, they describe the losses they expect for Deutsche Bank to Bänziger and Ackermann. It's an enormous number. Then Bänziger and Ackermann read out their list of immediate measures that will have to be taken.
One of the key points is that Jain will have to drastically reduce the practice of proprietary trading, which saw his most skillful financial acrobats gambling with the bank's money. These are among the darkest hours of Jain's career.
Today, almost three-and-a-half years later, Jain, 49, is back on top. On June 1, he and Jürgen Fitschen, 63, will become co-CEOs of Deutsche Bank. His former overseers, Ackermann and Bänziger, will then leave the bank. At that point, even the investment banking guru's toughest times will be recast as successes. Jain's associates say that the early decision to reduce proprietary trading, long before laws to curb the practice were even considered, is evidence of the Indian-born British citizen's sense of responsibility and ability to adapt.
Shareholders tout the upcoming transition of power at Germany's largest bank as an "act of liberation." Regulators and politicians, however, are alarmed. "Now we have someone at the head of Deutsche Bank who sees it as a global corporation that happens to be headquartered in Germany," says a politician with Germany's center-right Christian Democratic Union (CDU), who, like many at the moment, doesn't want to be quoted by name on the subject of Deutsche Bank. And in the bank itself, open conflict has erupted since Jain's appointment.
"The investment bankers are assuming power," say some. They fear that Deutsche Bank will lose sight of its roots, and they point to the questionable deals Jain's troops were making in the wild days before the financial crisis.
"The old guard can't let go," say others. They see the most recent turf battles as a desperate attempt by Ackermann and his supporters to put obstacles in the way of their successors.
Three men are fighting for their reputations at Germany's largest lender. Jain is determined to avoid being branded as a cold-hearted gambler. Future co-CEO Fitschen is fighting against being labeled a figurehead. Finally, Ackermann is desperate to defend his reputation as a major banker who steadily guided Deutsche Bank through the financial crisis and, as a savior of the financial system, negotiated with the world's most important players.
To some extent, the conflict has about as much entertainment value as a Bollywood comedy. Nevertheless, there is a question that remains unanswered, one that is more important to regulators, politicians and taxpayers than the battle of the financial titans: Where exactly is the bank, which regulators believe is more critical to the stability of the global financial system than almost any other lender, headed?
Jain's First Setback
The search for an answer begins on a winter morning in the Hermann Josef Abs conference room in Frankfurt, where Ackermann is taking stock of a Deutsche Bank fiscal year for the last time. Jain is sitting a few meters to his right, smiling in agony as Ackermann explains to the international press that Jain's department hasn't delivered, which is why the bank has fallen short of its target of €10 billion ($13 billion) in profits.
Jain doesn't like losing. In its best years, his army of 15,000 earned four-fifth's of the banking group's total profit. But he's taking Ackermann's abuse in stride -- one last time.
After it was inadvertently leaked on March 7 that the new co-CEOs, Jain and Fitschen, wanted to get rid of two long-serving members of the board, restraint was abandoned. Bank sources had long said that the new co- CEOs were not planning a revolution. But the leaked information felt like a coup. The strict Chief Risk Officer Bänziger was being shown the door, as were three other top executives, including Chief Operating Officer Hermann-Josef Lamberti.
In addition, membership in the Group Executive Committee -- a kind of expanded board of directors -- is being increased from 12 to 18, and is to be studded with international managers from Jain's camp. Many have quickly begun speaking of a "house cleaning" and an "investment banker takeover."
Indeed, Jain and Fitschen are quickly destroying the hierarchies Ackermann developed and cemented over many years. The official management boards are being presented with a fait accompli. The members of the supervisory board and executive committee were long kept in the dark, with only Jain, Fitschen, Ackermann and, most recently, the presiding committee of the supervisory board, knowing the names of the new leadership.
To those unfamiliar with the internal workings of Deutsche Bank, the new names could sound like the members of a British cricket team: Grassie, Ritchotte, Leithner, Chadha, Faissola. The traditionalists at the bank feel blindsided. They are wondering: "Where is Fitschen?"
Where Was Fitschen?
Of course Fitschen was there when the master plan for the new bank was devised. The co-CEOs jointly selected each of the new men. During that period, Jain was said to have been speaking with Fitschen more than with his own wife. And some of the new managers can certainly be tied to Fitschen, who is head of Regional Management worldwide but is often thought to be merely responsible for the bank's German operations.
Nevertheless, even people with a high opinion of Fitschen believe that he was forced into the changes by Jain. "It isn't enough for Fitschen to have simply granted his approval to the names Jain proposed," says a CDU politician with close ties to the economy.
Others, however, believe Fitschen could indeed act as a counterweight to Jain. The two co-CEOs, after all, will receive the same compensation in the future. For Fitschen, this represents a jump in salary, while Jain will have to take a small pay cut -- both men will be earning a little less than their predecessor, whose most recent salary amounted to €9.4 million a year. In addition, Fitschen will continue to run the bank's German operations and could very well be chosen to head the Association of German Banks. He also has better connections in German industry and politics than Jain could achieve in years. Fitschen likes to talk, is direct and he knows how to inspire people. But, according to an associate of his, he often goes into important meetings "with not much in his briefcase" and tends to act intuitively.
Jain, on the other hand, is a control freak. He chairs a regular videoconference with employees from around the world to assess the situation in global markets. But the conference is everything but an open discussion. Questions, if there are any, must be submitted to Jain's office in advance. Jain responds to emails within minutes, even at night.
A Certain Logic
"Jain is the strategic head," says an analyst who has long observed the bank. And Jain has battalions of loyal employees to back him up. They are referred to as "Anshu's Army," and they will occupy key positions in the future. Henry Ritchotte, an American information technology specialist, will streamline the bank to make it more efficient, and he will also be in charge of the strategy division in the future. Michele Faissola, an Italian, is expected to fashion the wealth management business of the future out of Deutsche Bank's business with the superrich, its classic fund business and the booming exchange-traded funds. These operations were distributed among three different divisions until now.
There is a certain logic to appointments like these, but others raise questions. Why does the Group Executive Committee have to include two people for Asia? Why was Christian Ricken, a German manager of private clients, not appointed to the Executive Committee until a few days after the other appointments had been made? Were Jain and Fitschen trying to invalidate potential criticism that the investment bankers could be seeking to marginalize the German business?
The dispute over the new leadership culminated just prior to the key supervisory board meeting, when it was revealed that the German Federal Financial Supervisory Authority (BaFin) had rejected a key figure in Jain's cabinet, the proposed chief risk officer, William Broeksmit. The spin doctors in the new leadership had labeled him as "Dr. No," in an effort to characterize him as a tough risk manager and worthy replacement for Bänziger. But the officials at BaFin felt that he had too little leadership experience.
Broeksmit had closely accompanied Jain at many levels of the corporate ladder. In the last three years, he had been in charge of risk management for the trading operations for which Jain had been responsible. Was Jain trying to install a chief risk officer who would give him a long leash?
Filled with Resentment
To the displeasure of some of Jain's disciples, Bänziger had stipulated that customer deposits with Deutsche Postbank, a retail bank in which Deutsche Bank had gained a majority stake, could not be used as play money for the investment banking arm's high-risk trades.
It irritates Jain and Fitschen that people believe that Bänziger had to go because he was proving inconvenient to them. Bank sources say that the most foolish thing they could do is to feed into this prejudice by promoting a more lax risk policy. But the Broeksmit debacle has only increased regulators' mistrust of the new leadership. "It certainly is unusual to see financial regulators exposing Deutsche Bank in this way," says a senior Frankfurt banker.
The supervisory board was also filled with resentment when it convened on March 16 at the Deutsche Bank Twin Towers in Frankfurt. The board members had learned about the new management team from the media, and now they were suddenly expected to vote on the proposed new Group Executive Committee members at this meeting, a meeting at which they would witness how broken the relationship was among the executives who had shaped the face of the bank for the last 10 years. Ackermann, Jain and Fitschen were also present. Ackermann was the first to speak. He was unusually upset over the handling of the management restructuring effort, and he was sharply critical of the treatment of deserving top executives like Bänziger and Lamberti.
When the two ousted executives joined the meeting, there was almost an altercation. When Supervisory Board Chairman Clemens Börsig made derogatory remarks about their upcoming departure, "Bänziger almost grabbed him by the throat," says one of the attendees. Bänziger went bright red, slammed his hand on the table and said: "And not a word of thanks!"
Bänziger had also been considered as a successor to Ackermann, apparently as part of a tandem with Jain. "But Jain didn't want that," says an insider. From then on, Bänziger made no secret of his disappointment over being passed over, the new co-CEOs explained to the supervisory board on that Friday, which was why they couldn't work with him anymore. Nevertheless, two supervisory board members voted against the staffing plans, which is also unusual for Deutsche Bank.
But more is disintegrating here than a committee of executives. It's also the end of an era, the Ackermann era.
100 Percent Shareholder Value
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.
What the Germans Fear
But does this mean that Germany's largest bank will soon be turned into a gambling operation again? "There will be no return to the wild days of investment banking," say sources close to the new leadership. The private client business is to be expanded further, and even the investment bankers in London recognize that the purchase of Postbank is worth its weight in gold, because the deposits provide security.
But first there will be job cuts at the retail bank. Several hundred jobs are expected to be eliminated in the course of integration. The payment transactions division is expected to lose 350 jobs by 2016, while another 200 jobs will be cut in credit processing and account management units. There are fears that more jobs will be outsourced abroad in the coming years.
The political world also remains skeptical. Some in Berlin are worried that Deutsche Bank, under an Indian-born CEO, could lose its roots in the home market. "To what extent is the last German global player among banks still willing to be a partner to policymakers?" asks one CDU politician.
A Rare Moment of Uncertainty
Such concerns help explain why an Austrian will assume the role of middleman between the bank and the political world in the future: Paul Achleitner, 55. Starting at the end of May, Achleitner will keep watch over Deutsche Bank as its new supervisory board chairman. He was once the head of German operations for Goldman Sachs, and he has served as Head of Group Finance at insurance giant Allianz since 2000. Sources close to Achleitner stress that, for legal reasons, he is not getting involved in the events in Frankfurt yet.
But insiders guarantee that he was of course filled in on Jain's war games, although he was disconcerted over the spectacle of the last few weeks.
Many in Berlin hope that Achleitner will become heavily involved in the future, especially in three years, when Fitschen retires and Jain's absolute rule could very well begin. In corporate Germany, with its inscrutable networks among politicians, the economy and labor unions, Jain will remain an outsider for a long time to come.
There has been talk recently that the Indian-born Jain, who still lives in London, is learning German. Of course, no one has actually heard any evidence yet of his supposed new language skills. When Jain was asked whether the rumors about his German lessons are true, he merely smiled sheepishly and nodded -- but said nothing. It was one of the rare moments in which Jain seemed uncertain.