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Deutsche Bank: From bombs and bravado to risks of a bailout

Deutsche Bank offices in Frankfurt Image copyright Reuters

Deutsche Bank is under the most pressure a major lender has faced since the 2008 financial crisis. Many, however, trace its woes back beyond the banking crash, as Joe Miller writes:

On a cold November morning in 1989, Alfred Herrhausen left his house in the Hessian town of Bad Homburg, climbed into his chauffeur-driven Mercedes-Benz, and settled in for the routine journey to his Frankfurt office.

A few minutes later, he was dead.

As the head of West Germany's largest lender, Deutsche Bank, Mr Herrhausen had been a target of the anti-capitalist, radical-left Red Army Faction.

They claimed to have planted the remote-control bomb that blew his armoured limousine a few metres into the air.

The group opposed the 59-year-old banker's "imperial" ambitions: his advocacy of closer European integration, his counsel of then-Chancellor Helmut Kohl, and his championing of economic internationalism.

But although the attackers succeeded in taking Mr Herrhausen's life, they could not extinguish his unique vision, one that paved the way for Deutsche Bank's soaring success in the Nineties and through the new millennium, and one that may have sown the seeds of its recent decline.

'Imperial ambitions'

Just three weeks before the attack, Deutsche, which for decades focused on servicing Germany's home-grown industrial heavyweights, had made its first foray into the heady world of investment banking, by buying the British merchant bank Morgan Grenfell.

The acquisition, masterminded by Mr Herrhausen, was designed to catapult Deutsche to the top of the global banking ladder, and to broaden the institution's reach beyond Germany's - and indeed Europe's - borders.

Image copyright Deutsche Bank
Image caption Alfred Herrhausen was the mastermind behind Deutsche's expansion

What Mr Herrhausen had realised was that the German market, "dominated by savings and co-operative banks, and not-for-profit institutions, was no place for a private bank to grow," explains Deutsche Bank's former chief economist, Prof Thomas Mayer.

What's more, as the West German economy boomed in the lead-up to reunification, the likes of Siemens, Daimler and Volkswagen, some of Deutsche's biggest clients, were looking for access to capital markets on which to issue corporate bonds, rather than relying on more traditional banking services.

In the following years, in an attempt to beef-up its international offering, Deutsche spent billions of dollars on poaching the best talent from American titans such as Merrill Lynch - including Anshu Jain, who went on to spearhead the bank's global expansion until his resignation last year amid serious accusations of wrongdoing in the lender's investment unit. Mr Jain himself was subsequently cleared by regulatory investigations.

Such was the culture change, that, as legend has it, Deutsche's name had to be spelt out phonetically on the signs in its London offices, as some of the foreign employees charged with diversifying the bank's operations had trouble with German pronunciation.

The new recruits were, by design, cut from a different cloth than Deutsche's German employees. Mr Herrhausen had talked of bringing an "Anglo-Saxon" financial culture to the bank, with the hope that they would inject some Wall Street bravado to the rather conservative, staid organisation.

'Cut corners'

For at least a decade, the plan worked. Deutsche's profits soared, and its share-price rocketed. At one point, it was the sixth biggest bank in the world, as respected in Manhattan as it was in Munich.

Even in 2008, when the financial crisis led European stalwarts such as UBS and Credit Suisse to seek bailouts, Deutsche weathered the storm on its own.

But unlike those banks, who downsized in the wake of the global crash, Deutsche "missed the point where they needed to rebalance their business model," according to one financial journalist who has been scrutinising the company for years.

Deutsche has been accused of becoming more arrogant after surviving the downturn.

Predictably, the London and New York based financiers who transformed Deutsche into a global player were less risk-averse than their Frankfurt colleagues, and, as Prof Mayer alleges, they cut corners.

"You can attribute many of Deutsche's current problems to the army of investment bankers who joined in the 90s," he says. "They were given a mandate to push the bank into the investment banking league tables, and they took reputational risks.

"They were in the business of making money, and they did not proceed cautiously."

Image copyright Reuters

Deutsche, which now employs roughly 100,000 people across more than 70 countries, is paying a heavy price for those risks - in fact the second biggest since the financial crisis.

A whopping $14bn fine from the US Department of Justice for mis-selling mortgage backed securities, which isn't much less than the size of Deutsche's current market capitalisation, is just the latest penalty for a litany of misdeeds, including manipulating Libor rates and fixing gold prices.

Despite a famously impressive art collection, the bank has precious few assets left to help British chief executive John Cryan raise much needed capital.

Ironically, Deutsche, which paid billions of euros in bonuses to its star bankers even after suspending its dividend payments to shareholders, is struggling to keep key staff.

'World's most dangerous'

It is not just Deutsche's investors who are concerned. After more than 25 years of vigorous diversification, including a string of small acquisitions across the world, the bank's tentacles reach many parts of the global economy.

The IMF has called Deutsche the world's most dangerous bank, and as one insider explains "if Deutsche Bank goes down, everyone else has a problem too".

But although the German giant is in dire straits, its demise is anything but inevitable.

For one, there are now regulatory regimes in place, which mean that various bondholders and large depositors would suffer a haircut to help shore up the bank's balance sheets.

Additionally, the long shadow cast by the collapse of Lehman Brothers has left world leaders with little appetite for allowing another large lender to hit the buffers.

Nonetheless, a government bailout seems unlikely, at least in the very near future.

Image copyright Getty Images
Image caption Chancellor Angela Merkel, seen here with former Deutsche boss Josef Ackermann, is reluctant to bail out the bank

EU legislation makes it difficult for countries to inject cash into a failing financial institution without making sure investors take a hit first - a point Angela Merkel has been keen to make to the her Italian counterpart, Matteo Renzi, who was prevented from using Roman money to prop up the failing Monte dei Paschi di Siena bank.

Plus, as Prof Mayer explains, there is hardly any love left for the once-iconic bank among ordinary Germans, who tend to see the beleaguered lender as more of a national embarrassment.

Whatever Deutsche's fate, the almost 150-year old bank's rise and fall has served, as Prof Mayer puts it, to "refocus people's attention" on the problem that faced Alfred Herrhausen three decades ago - expansion inevitably comes with exposure.

"It was the right decision to go into investment business," the Deutsche veteran, who left the bank in 2012, insists.

"But there were difficulties in execution."

It is hard to know what Alfred Herrhausen would make of the mistakes made in pursuit of the mission he helped set in motion, and of Deutsche's prolonged failure to face up to its frailties.

But a clue to how he would handle the current crisis may lie in the inscription on the two memorial pillars erected on the site of the pioneering chief executive's murder.

A quote by Austrian poet Ingeborg Bachmann, it reads: "Die Wahrheit ist dem Menschen zumutbar."

"People," it translates, "can handle the truth."

Follow Joe Miller on Twitter @JoeMillerJr.

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