Deutsche Bank confirmed plans on Monday to massively scale down its investment banking division and axe 18,000 jobs as part of a radical restructuring.
The move marks the end of a troubled three decades that has seen the German bank try and fail to go toe-to-toe with the behemoths on Wall Street, which now have near-total dominance of the global investment banking sector after a retreat by Europe’s major financiers.
READ: Barclays becomes Europe's only major investment bank as Deutsche retreats
However, the chequered history of Deutsche’s investment banking division meant many could have probably seen this coming.
From its initial foray into investment banking in 1989, when it bought British merchant bank Morgan Grenfell for £950mln, Deutsche embarked on a breakneck expansion that saw it briefly become the world’s largest bank after acquiring Banker’s Trust, at the time America’s eighth-largest bank, for £6.1bn in 1999.
However, while the massive push to take on the Wall Street giants on their own turf yielded fat profits (and fat bonuses for its executives), it had also left the bank heavily exposed to risky assets by the time the financial crisis began in 2007.
A key hazard were collateralized debt obligations (CDOs), which were created during the housing credit bubble of the mid-2000s and pushed heavily by Deutsche to their customers.
One of the bank’s traders, Greg Lippmann (played by Ryan Gosling in The Big Short), warned his clients not to buy the CDOs and instead ‘short’ (bet against) them ahead of the coming collapse despite his employer selling products he deemed to be untenable. It ultimately netted him millions in profits.
When the crisis finally erupted, around two-thirds of all Deutsche’s profits were being made from investment banking or related activities, most of which then melted away during the collapse.
Libor and laundering
Despite the bursting of the housing bubble and the near-implosion of the global financial sector, Deutsche avoided a government bail-out and continued to push ahead with its focus on investment banking.
The 2011 appointment of Anshu Jain, the group’s head of corporate and investment banking, as joint-chief executive exemplified the move, although it had the added effect of intensifying the rivalry between Deutsche’s investment operations, which were based mostly in New York and London, and its retail and other non-investment activities in Frankfurt.
The years following the financial crash also saw the bank dogged by a number of scandals including Russian money laundering, its involvement in the rigging of the London Interbank Offered Rate (Libor), violating US sanctions against a number of countries including Iran and Syria, selling toxic assets in the run-up to the crisis and spying on its critics.
All of these led to a litany of hefty fines that often ran into the billions, with the Libor scandal alone costing Deutsche a record £2bn (US$2.5bn) in penalties from US and UK regulators.
The tide finally began to turn in 2015, when Jain resigned and was replaced by John Cryan, who became sole CEO shortly after and spent most of his tenure dealing with multiple allegations of past misconduct by the bank and its employees.
Cryan was also no stranger to criticism of the lavish bonus culture that had infested global investment banking, telling an industry conference in 2015 that he thought bankers were paid too much and that he had “never been able to understand” why bonuses made people work harder.
He was also quick to put his money where his mouth was, scrapping bonuses for Deutsche’s entire executive board in 2015 following a €7bn loss.
re-Germanisation
After pouring some cold water on the numerous fires left in its wake, Deutsche’s next move was to try and reduce its dependence on investment banking, leading to the appointment of Cryan’s successor, Christian Sewing, in 2018.
Sewing, while a veteran of working at Deutsche, has been more heavily involved in its non-investment branches having previously overseen its private and commercial banking arms as well as holding a number of risk management positions.
Despite having poured billions of euros, and three decades of time and energy, into building up its investment banking arm, Sewing is aiming to refocus the bank back towards its more traditional areas of business and personal lending, specifically to its German customers.
The ‘re-Germanisation’ of Deutsche’s business, alongside €6bn of planned cost savings, may finally pull the bank out of a black hole that has seen it report a profit for only one of the last four years.
The announcement of the restructuring also seemed poetic given it fell just one day before Deutsche’s 150th anniversary.
With the German bank exiting stage-right, the playing field is now firmly in the hands of Wall Street, with Barclays PLC (LON:BARC) the only European bank to still have a spot in the top five.
However, with Barclays' investment arm also under pressure from what it said were “challenging markets” in its latest first quarter, one wonders whether the plucky Brit can succeed where the Germans have failed.