How Deutsche’s Wall St bet turned toxic

Kuwait Times - - BUSINESS -


Deutsche Bank’s pur­suit of suc­cess on Wall Street has come at a high price, a $7 bil­lion plus penalty il­lus­trat­ing the ex­tent of its de­cline since 2008 when its then chief ex­ec­u­tive claimed it was one of the “strong­est banks in the world”. Ex­pand­ing from its roots in Ger­many dat­ing back to 1870, Deutsche trans­formed it­self into a ma­jor player on Wall Street over the past two decades, of­ten tak­ing ex­trav­a­gant bets to do so.

But it is now set to cut back its ac­tiv­i­ties in the world’s big­gest econ­omy af­ter a penalty for the sale of toxic mort­gage se­cu­ri­ties that con­trib­uted to the big­gest eco­nomic crash in a gen­er­a­tion. “The strate­gic op­tions open to Deutsche Bank in the USA are clearly re­stricted be­cause the prof­itabil­ity of the busi­ness will be weak­ened,” said Ingo Spe­ich, a fund man­ager at Union In­vest­ment, a share­holder in Deutsche.

Ger­man reg­u­la­tors also want Deutsche, the coun­try’s largest bank which em­ploys around 100,000 peo­ple around the world, to rein it­self in. “Size in it­self is no sign of suc­cess,” said one se­nior of­fi­cial in Ger­many, where the mood among reg­u­la­tors has hard­ened to­wards the bank. “They now want to cur­tail their am­bi­tions.” Last year, the bank’s US arm, where roughly one in ten of its staff are based, racked up a loss of €2.8 bil­lion ($2.9 bil­lion) - al­most half the to­tal loss made by the group. That was a swing from a profit of more than 1 bil­lion euros in the previous year. Much of the dam­age was done by a write­down on the value of Bankers Trust, while tighter reg­u­la­tion has made it more ex­pen­sive to trade.

Ex­pan­sion Phase

The $7.2 bil­lion penalty for the sale of toxic mort­gage se­cu­ri­ties closes a sober­ing chap­ter in the bank’s in­ter­na­tional drive, launched in 1989 by the then chief ex­ec­u­tive, Hil­mar Kop­per, when he bought lender Mor­gan Gren­fell in Lon­don. Kop­per is re­mem­bered for his pub­lic de­scrip­tion of a multi-mil­lion Deutsche mark sum as “peanuts” - open­ing a di­vide be­tween an in­creas­ingly An­glo-Saxon bank and the pre­vail­ing fru­gal cul­ture among or­di­nary Ger­mans.

A decade later, Deutsche bought Bankers Trust, pay­ing $10 bil­lion for the Amer­i­can bank and an es­ti­mated sev­er­ance of $100 mil­lion to its chief ex­ec­u­tive. Man­age­ment even dis­cussed a takeover of Lehman Broth­ers, which later col­lapsed at the low­est point in the global fi­nan­cial cri­sis in 2008. This strat­egy of buy­ing to ex­pand in shares and bonds was ex­panded to add out­sized bets on toxic de­riv­a­tives - and the lender’s to­tal as­sets swelled to more than 2 tril­lion euros in 2007.

One for­mer se­nior Deutsche ex­ec­u­tive, who asked not to be named and who was in­stru­men­tal in build­ing the bank’s US busi­ness, said he had pre­ferred us­ing lever­age to sell more struc­tured debt and de­riv­a­tives to buy­ing a Wall Street ri­val. “Buy­ing a US firm is like climb­ing Ever­est with­out oxy­gen. It is risky, and the achieve­ment is sub­stan­tial, but is it re­ally worth it?” the for­mer ex­ec­u­tive said, ask­ing not to be named. “You may find that the view from the sum­mit is quite cloudy.” Yet this al­ter­na­tive route proved per­ilous.

World’s Strong­est

As the bank placed large trades at the end of 2011, its lever­age ra­tio, which di­vides the value of as­sets by eq­uity, reached around 21 - mea­sured by US ac­count­ing stan­dards. As a rule of thumb, the higher this lever­age, the steeper the risks. JPMor­gan, a much larger bank, had a lower ra­tio of around 17. There was an­other im­por­tant dif­fer­ence be­tween Deutsche and its US ri­vals. They had been able to im­prove their cap­i­tal with a com­pul­sory $700 bil­lion “Trou­bled As­sets Re­lief Pro­gram” (Tarp). Ri­vals JP Mor­gan Chase, Mor­gan Stan­ley , Gold­man Sachs and Bank of Amer­ica all took the money.

At that time, in Oct 2008, Deutsche Bank’s then Chief Ex­ec­u­tive Josef Ack­er­mann de­scribed the bank as one of the “strong­est and best cap­i­tal­ized banks in the world,” pri­vately say­ing he would have been “ashamed” if it needed state help. How­ever, an­a­lysts and reg­u­la­tors have since be­moaned Deutsche’s thin cap­i­tal cush­ion.

FRANK­FURT: This file photo shows the head­quar­ters of Ger­many’s big­gest lender Deutsche Bank. — AFP

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