Deutsche Bank Throws in the Towel, Announces Restructuring into Bad Bank/Good Bank, Firing of 18,000

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Deutsche Bank has been the poster child for how long a sick but ginormous bank can be allowed to limp along.
As we wrote in March:

That does not excuse Deutsche Bank having long been spectacularly mismanaged. It’s been operating under what amounts to regulatory forbearance since the crisis, with capital levels way way below any other big international bank. But Deutsche is the classic “too big to fail” bank. Whether it is too big to bail is debatable, but the EU’s new Banking Recovery and Resolution Directive, which banking experts almost to a person declared to be a horrorshow, was supposed to end bailouts and force bail ins….refusing to recognize that that’s a prescription for bank runs. And even though Deutsche is very much the German government’s problem, as readers no doubt have figured out, German politicians hate fiscal spending and stealth monetization of spending. So until there is a crisis to force their hands, they are allergic to providing official support to Deutsche.

The last desperate effort to shore up the clearly listing Deutsche was the idea of merger with wobbly Commerzbank. The scheme was met with remarkably open skepticism, including from nearly all of Deutsche’s big shareholders.

After those talks failed, Deutsche was back to Plan A, of year another restructuring, but one intended to be big enough to have a hope of getting the bank on the right path. Deutsche had already been through a series of “Yes we are really gonna fix this garbage barge” plans over the years, which did not satisfy Mr. Market. One analyst pegged Deutsche’s market cap at a mere 1/5 of its book value before the restructuring was announced, reflecting considerable skepticism over the value of the bank’s assets.

On Sunday, Deutsche announced its program, The cornerstone is moving significant operations and the related assets, including its global equities sales and trading, into a “bad bank” to be liquidated over time.
Key elements of the plan include:

Sequestering €288 billion of assets (€74 billion risk-weighted assets) in the “bad bank”; the language used by Deutsche hinted that this number could grow

Shutting down global equities sales and trading; the bank says it will still provide underwriting to corporate clients, but it’s hard to see how it will be competitive given the lack of distribution and much (any) research support1

Eliminating 18,000 jobs by 2022 out of a workforce of 91,000 and recognizing €7.4 billion in “restructuring charges” over time, starting with €3 billion in the quarter just ended

Halting dividends for 2019 and 2020

The official story, per the Financial Times:

The axe will fall hardest on the investment bank, where the balance sheet allocated to trading will be slashed by 40 per cent. Job cuts will start first thing on Monday morning in London and New York, and three top executives have been replaced….

The new strategy signals a retreat from Deutsche’s global ambitions and its aim to be Europe’s main rival to Goldman Sachs. One year ahead of Deutsche’s 150th anniversary, [CEO] Mr [Christian] Sewing is refocusing the lender on its historic foundations — financing German and European corporate clients and domestic retail banking….

Deutsche has also struck an agreement with regulators to gain more breathing space on its minimum common equity tier one ratio, the most important measure of balance sheet strength.

Mind you, Deutsche’s capital isn’t its only asset under stress. From the Guardian:

Deutsche Bank has suffered multiple blows to its reputation over the past year, having failed US bank stress tests, suffered downgrades to its investment grade ratings, and had its offices raided by German police in November as part of a money-laundering investigation linked to the Panama Papers revelations.

Following the raid, the bank said that it had “no concrete evidence that would support the allegations against us or any of our employees”.

The bank has also paid billions in fines and settlements relating to behaviour before and after the global financial crisis, including a $7.2bn settlement in 2017 with the US Justice Department over the sale of bonds based on mortgages to people with unreliable credit.

Far too many institutions have failed or been forced into major retreat in trying to become a global capital markets player. The problem is that the minimum scale to be competitive is high and includes having equities and fixed income trading operations (including all of the back office, information and IT support) in major financial centers around the world. That means high fixed costs (yes, they are variabilized to some degree by having a large bonus component to compensation, but the nut is still large). If you are an aspirant, you have say 50% to 60% of the revenues of a Goldman….and have to have at least 80% of the infrastructure. So the wanna-bes often wind up taking on risk to try to boost their profits so they can bulk up faster. But we can see how that movie ended with Bear Stearns and Lehman, who both bet on risky real estate as the way to close the gap with industry leaders, or Eurobanks who placed big CDO and derivatives business bets on top of exposures to frothy residential real estate markets.

Deutsche started far too late down the path of trying to become an investment bank, and on top of that was extremely inept in how it went about it.

Deutsche bought Morgan Grenfell, a well-regarded but not particularly large UK merchant bank, in 1990, but let it operate autonomously until 1995. By contrast, Citibank and JP Morgan had been trying to turn themselves into investment banks since the early 1980s. Credit Suisse acquired a large stake in bulge bracket investment bank First Boston in 1988 and completed the takeover in 1992. Swiss Bank bought the Chicago options trading firm O’Connor & Associates in 1992, with the intent that the transaction would be the vehicle for turning Swiss Bank into an investment bank.2

In 1999, Deutsche acquired Bankers Trust, which had fallen greatly from its status earlier in the decade as one of the two top derivatives traders. Procter & Gamble had sued Bankers over derivative losses, and recordings the bank handed over in discovery revealed Bankers sales personnel gloating about how they ripped off their chump customers. Deutsche acquired Bankers after a second scandal, when New York State caught it keeping escheated funds.

In other words, it was hard to fathom what Deutsche thought it could possibly be getting from this deal.

To make a bad situation worse, Deutsche was known even back then to have disastrously-behind-the-state-of-the-art IT. And it didn’t get any better with time. A colleague who’d worked for Deutsche in a compliance role for a couple of years in the early 2000s was interviewing with the bank again in 2015. A rough recap of what the Deutsche staffers said: “You remember how things were when you worked here. Nothing has changed.”

Further confirmation from a 2018 article, Inside Deutsche Bank’s “dysfunctional” IT division

So, COO Kim Hammonds is leaving Deutsche Bank. Less than a month after describing Deutsche as, “vastly complex,” the, “most dysfunctional place she’s ever worked,” and in the middle of a, “difficult transformation,” Hammonds has left, “by mutual agreement with the supervisory board.” She was, “a breath of fresh air,” according to the chairman. In some ways, however, Hammonds does not seem to have been fresh enough.

Hammonds’ key task at Deutsche Bank was to streamline the bank’s unwieldy array of operating systems. When now ex-CEO John Cryan presented his “Strategy 2020” plan in October 2015, he expressed his intention of eliminating 6,000 Deutsche Bank contractors and cutting the bank’s operating systems from 45 to four. Two and a half years later, Deutsche still has 32 different operating systems, and the contractors we spoke to complained that the bank has become “toxic” to work for.

Other regulators have been more bloody-minded in dealing with Eurobanks who got themselves in hot water thanks to chasing investment banking dreams and pay packages. After costly bailouts, Swiss regulators forced Credit Suisse and UBS to abandon their sizable investment banking and derivatives operations and retreat to being traditional Swiss banks.

It remains to be seen as to whether the Deutsche Bank makeover can turn the bank around. It’s very difficult to fix systems and a bad culture while also trying to plug financial holes. It at least recognizes it has a problem. Again from the Financial Times:

Deutsche also said it would invest another €4bn in improving its controls, combining its risk, compliance and anti-financial crime functions after a string of high-profile failings, including processing as much as €160bn of potentially suspicious transactions for Danske Bank’s Estonian unit, and helping to launder $10bn in dirty money out of Russia.

Unfortunately, the odds are not on Deutsche’s side, and not just due to its sorry history. In most countries, retail banks can at least benefit from being able to amass deposits cheaply. This isn’t the case for Deutsche (or Commerzbank), which faces competition from players that aren’t as mercenary. Germany’s Landesbanken have government backing and their Sparkasse purportedly are not profit oriented.

The less-badly-managed SocGen went through a similar exercise, ring fencing and selling troubled assets. Even so, costs are allegedly still too high in the shrunken remainder.

It’s hard to see how Deutsche pulls out of its nosedive. Hoisted from the Financial Times comments section:

This is more like the next step of a shutdown of DB than the rebirth of the company.

Fact #1 – the new DB is still way behind the competition on even it’s ‘strong’ businesses.

Fact #2 – it has less firepower to invest that it’s competition so is not ever likely to catch up with them.

Fact #3 – it’s competition are more concerned about the disruptive forces of technology, virtual banks etc to care about this creaking monstrosity that is continually cutting itself to oblivion.

Game over DB (but congrats on stringing it out a few more years).

Having said that, banks of even the newer, smaller Deutsche Bank’s size pretty much never fail because regulators do not like taking them over. They are not just too hard to manage, but they are also too hard to unload. When the comparatively simple Continental Illinois failed in 1984 (it was then the fourth largest bank in the US), it took the government seven years to exit its ownership.

So if Deutsche Bank continues to founder, the next chapter might be to break up the bank into (theoretically) more manageable pieces which then down the road wind up in stronger hands. So shutdown isn’t likely but a slow butchering is. Will German egos be satisfied if the Deutsche name is kept alive, say on a reasonably-sized retail branch network?


1 Commercial and investment banks often can twist the arms of close corporate clients and get themselves included in the well-paid and not-much-work role of being a co-manager of an underwriting.

2 Swiss Bank took the radical step of putting some former O’Connor partners on its board.

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  1. fdr-fan

    This is actually good news. Unlike US monsterbanks, DB wasn’t bailed out. It was forced to separate banking from betting, thus proving that Glass-Steagall was good for the overall economy AND good for banks.

    Banking and betting don’t belong in the same building. It ruins the economy AND it ruins the banks.

    1. Clive

      This is narrowly true, but all Too Big to Fail banks are wards of the state or, perhaps more accurately stated for the topic under discussion here, wards of the EU’s Bank Resolution and Recovery Directive.

      The side-bet for creditors of Deutsche Bank is how diligently — or otherwise — Deutsche Bank (and the hapless creditors) might or might not be held to the conditions specified in the resolution Directive. As written, it is pretty much a hard cram down of creditors with equity or equity-like claims. And it also has elements of a depositor bail-in. It is a no good, terrible, really bad scheme. It almost certainly ensures a bank run if a bank is seen, rightly or wrongly, to be in serious trouble.

      But this isn’t, say, Cyprus. And it isn’t a tuppenny-ha’penny regional bank in discussion here. It’s Germany and it’s a (cough, try to keep a serious face) national champion. With huge systemic inter-connectivity. One can’t help but have an inkling that it might well be a case of one rule for thee, another rule for me.

      That all said, merging Deutsche Bank with another intuition would have been the usual response and it is always a bad idea. The healthy, or healthier, institution invariably gets a degraded capital base because it has to absorb losses from the rubbishey bank. So forcing Deutsche Bank to sort its own mess out is a plus.

      But bad banks can hang around for a generation. The U.K. government is still sitting on 70+% of the worlds worst bad bank, RBS. Crystallising the eventual losses, let alone any hope of breaking even (“profit” being a daydream) is a long, long way off. Deutsche Bank and their shareholders or creditors must surely be in for a similar long haul. So where is the inevitable capital needed to support the restructuring going to come from?

      1. dearieme

        competition from players that aren’t as mercenary. Germany’s Landesbanken have government backing and their Sparkasse purportedly are not profit oriented: isn’t this sort of subsidy from the taxpayer purportedly outlawed in the EU?

        One can’t help but have an inkling that it might well be a case of one rule for thee, another rule for me. Alles ist klar.

      2. readerOfTeaLeaves

        I read this post thinking, “Oh, my God whatamess… oh, my God whatamess…!”
        With that said, it would sure be interesting if either Yves or Clive found time/energy to do a post on how Deutsch and RBS failures seem to be feeding into the right wing politics in Europe.

        The RBS/the City (of London) surely must have played a role in Brexit. It’s not clear to me how Deutsche’s languishing under debt is playing out in German politics.

        For the Russians, it appears to be ‘win-win’: either you launder our money, or your banks collapse. So much winning…

        Banks evidently don’t do so well when they launder billions. Who knew?!

      3. boz

        Thank you, Clive.

        The investment capital is a good point. A couple of other things I would add:

        Does a brilliant and shiny core bank exist at DB, or is what has been set aside merely the cream? Work on winding down the bad bank will take a lot of time (and be good for contractors!), but there will also be the need for cultural, managerial, and economic restructuring at the core bank as well. These are formidable headwinds to contend with, so you can be sure that DB will be preoccupied internally and susceptible to competition from better capitalised and more attractive competitors (for staff and clients).

        The success of a restructuring like this will be contingent on cultural change, and some people may not like the direction in which the wind ends up blowing. So, what emerges from the ruins (presuming it does) will be a bank that is remarkably different from its predecessor, 10, or even 5 years prior.

        The challenge of technological consolidation can not be understated. It is a mammoth task that is fraught with execution risk, and due to the impact of those risks (eg TSB scenario), banking licenses could be at stake if things go south.

        Like I said, not happy times for long serving staff (especially those with share price linked pension or saving schemes), but could be interesting for contractors who want guaranteed work for a few years.

        1. Clive

          However drekky the bank, there are always some well, or even adequately, performing assets. And lending to market segments which don’t have high capital requirements.

          On the flip-side, there’ll be the inevitable garbage barges (over-leveraged retail Commercial Real Estate, fracking, tech unicorns, amongst many, many others). But even there, there’ll be some underlying collateral which might not be absolutely worthless, it’ll just be worth less than the anticipated cash-flow assumptions on which the loan was made. Vulture funds and restructuring can be quite profitable, if done right, so there’s a market for distressed debt. Deutsche Bank will need, however, to accurately assess likely loan losses to determine fair market value. But it can’t really avoid this task (the only other option is to simply write everything off, but that misses out on getting value-for-money on potentially worth-more-than-nothing assets).

          But your point about cultural change is, ah-hem, right on the money. A management clear out is essential. You need new people, who can realistically assess what to keep, what to sell and what to close. With no emotion or ego ties to the old decisioning which led to the mess which has been created in the first place. And you need that old Loch Ness Monster (oft-rumoured but seldom observed in wild) “cultural change”.

          I am always deeply, deeply, skeptical about the latter. My TBTF has spent a decade beseeched by regulators, customers and on occasions the public threatening torches and pitchforks to mend its wicked ways. It goes through fits and starts where it does, earnestly, try to begin the process. But then someone reaches for their P&L figures and says, in effect, “this is hitting the bottom line too hard!”. So it all gets rowed back a little. And at the top, you merely swap out one load of overt, in-yer-face, unrepentant psychopaths for a new lot of suaver, more polished and better-at-hiding-it psychopaths. Difficult, then, to achieve much real change there.

          1. Colonel Smithers

            Thank you, Clive.

            “New lot of suaver, more polished and better-at-hiding-it psychopaths?” Tony two names..? He’s certainly suave and polished, matinee idol even :-).

    2. notabanktoadie

      Banking and betting don’t belong in the same building. fdr-fan

      Banks borrow at short* maturities to lend at longer maturities. That IS betting.

      Now it’s true that government privilege** reduces the risk and uncertainty of that betting but that introduces other problems, not the least of which is the ethical issue of extending what is then, in essence, the PUBLIC’S CREDIT but for the private gain of the banks themselves and of the rich, the most so-called “credit worthy”.

      * In the case of demand deposits, banks borrow at ZERO(!) maturity to lend at longer maturity.

      ** Such as government-provided deposit insurance for private banks, etc. instead of allowing all citizens inherently risk-free debit/checking accounts at the Central Bank itself.

  2. vlade

    Clive’s capital question is the main one, TBH. One could say that there’s enough Gulf or Asian chumps (Softbank, here’s looking at you…) with enough money to spare, but at the same time the German government would not, IMO, be very happy with the bank with “Deutsche” in the name being majority held by any of those…

    DB’s problem is that it’s too large to serve only German corporates,but too small to do so if it shrinks too much (because those corporates are very much export looking, so you need a good global footprint. EUR was a big hit to bank’s revenues in a way.. ). It also lacks the retail base of the French competitors, and is unlikely to be able to get it (it tried with PostBank, which was another debacle.. ).

    Product-wise shrinkage, especially equities, is for me no-brainer, and I’m just surprised it took so long (it was talked about for years now).

    TBH, I’m not even sure whether selling off bits and pieces would work. What exactly would be the reason to buy those bits? Clients? Just poach the salesforce. Systems? See the post. Know-how? Again, poach. Licenses? Can be had cheaper likely. Brand? Ugh.

    1. Colonel Smithers

      Thank you, Vlade.

      Softbank has two former DB banksters on board, Rajiv Misra (also ex UBS) and Colin Fan. The pair may want to steer clear of the hazardous waste they left on DB’s balance sheet.

      1. Thuto

        Colonel Smithers what do you think the future holds for outposts like Deutsche Johannesburg given these latest developments and the fact that the services in the crosshairs of this restructuring effort, equities and fixed income products etc, are a big part of the business for the local office? A barclays style retreat/total shutdown or a significant scaling back? Plus they’ve been here for decades already.

        1. Colonel Smithers

          Thank you, Thuto.

          I reckon these capital markets activities will be scaled back, if not abandoned, but there will be more emphasis on trade finance and foreign exchange.

          1. Thuto

            Thank you Colonel Smithers, pretty much the same sentiment I got from a local banking insider.

          2. Ignacio

            We have some money invested in funds managed by DB. Will they sell this branch of their business to others? Should we relocate in other funds?

            1. Colonel Smithers

              Thank you, Ignacio.

              The funds side makes money, unlike the bank, and is separate, but you should review the portfolio in any case from time to time. I doubt that the group will sell.

              1. Ignacio

                Thanks a lot Colonel. Yes we review the portfolio which is doing as poorly as most other funds. When I argue with my wife about this, she worked as fund manager for many years, I tell her that now, some spending (home improvement for instance) is better investment than those funds. Your advice will be followed of course!

  3. fajensen

    The problem is that the minimum scale to be competitive is high and includes having equities and fixed income trading operations (including all of the back office, information and IT support) in major financial centers around the world.

    Someone smart and well funded could really do a number on the current banking business model, probably getting very rich while doing it:

    Ericsson, during the naughties, designed and rolled out an entirely new network management system for mobile networks. The revolutionary part of this was that using this system one could partition the network and slice it into very thin slices like pastrami. Each “slice” containing the whole “mobile operator package” – network, network management, billing services …. Everything one needs, but on-demand scaled to the expected number of subscribers, so that suddenly “anyone” could afford to launch a mobile service without first dropping billions into building out Everything, Everywhere, at full scale. This tool forced into existence a large number of new “virtual” mobile operators, people who sell subscriptions and mobile phones but rent the network access and all the “accounting tools”!

    Banking is just begging for someone to do the same number on them. Banking systems requirement are driven by legislation and rules, which thanks to emerging forces like the EU are becoming more and more similar across larger and larger regions. In my opinion, the time is just about right for someone to roll out a “Virtual Banking Network” and recreate boutique banking.

    1. vlade

      Unfortunately, the IB part is nowhere as easy as this. A non trivial part of it is model library, and how it can be used by the risk, sales and trading people (and those bits working together). Even if say modelling of some derivatives can be standardised, the more complex ones have often tweaked models because small differences can lead to large PnL differences (which is funny, since real cashflows for any party will be the same, don’t ask). Nertheless, getting all this in is non-trivial. In other words, you can do a third, maybe even lower second-tier IB to buy a full package (there are existing ones for at least parts of the business, usually having some strong bits, and some weak bits, depending on its history) and be happy with it.

      All first-tier ones basically run a full on IT shop. GS is actually pretty good at this, but, apart from JPM, I believe that other American banks can be still classed as “good” (compared to their peers, who can’t often even implement a rollout of a new version of Excel). To an extent, the more predatory the bank was (i.e. more mergers, takeovers and purchasers) the worse it is.

    2. Thuto

      I don’t know about other parts of the world but in my neck of the woods the emergence of this Network-as-a-service business model spawned some Virtual Mobile Network Operators that eventually all failed. I’m not privy to the SLAs involved in such arrangements but it seems the owners of the core and backhaul networks they were renting would always prioritize their own primary subscribers during peak network traffic, resulting in often crappy signal reception for the VMNO subscribers. Perhaps someone could make it work for banking as you point out.

    3. Clive

      This is a scam-or-be-scam’ed business area.

      Either the vendor sells to the gullible and overly-trusting client a load of empty aspirations and vapourware (or consultancy hours) which promise far more than they can deliver or the client tries to get a vendor to solve problems, the solutions for which are about as likely to arrive as Godot, but upon which the vendor (if they’re silly enough to quote a fixed price for) will eventually founder and lose money on the contract.

      Neither of these options results in what either party want — working, timely solutions which might meet some (let alone all) the original requirements. Usually, they just (if they get as far as implementation; many falter well, well before then) make things more complex — a mish-mash of the old and the new, the new never, somehow, quite managing to fully displace the old.

      There are really only two options which might have any chance of working in this (I’m going to ask reader forgiveness, but I can’t think of anything better by way of vocabulary right now, okay, steel yourselves, here it comes) space.

      One is to roll out a “bank in a box” solution. This is a fully working end-to-end solution that has all the features needed in one shrink-wrapped (it’s not actually shrink-wrapped, but you get the gist…) package. Even if this works exactly as intended — and you’ve given yourself a whole migration and cut-over headache to solve, think TSB, for example — there is only the slimmest possibility it really will contain all the features required. And there’s a reason for the proliferation of systems in your typical TBTF bank and their sprawling tentacle-like complexity — to gain competitive advantage, a bank, like any business, must offer product differentiation unless it wants to merely satisfy commodity propositions. So the chances are the “bank in a box” won’t support the product line(s) without customisation. Once you start down the line of customisation, the “here’s one we made earlier” software development model falls over on its arse.

      The other, and this is what Deutsche Bank is / had been attempting, is simplification and rationalisation of systems. Remove, so the theory goes duplication, “pick a winner” amongst internally-competing systems (different systems doing basically the same job), reuse common components (you shouldn’t, for example, need multiple firewall solutions, multiple network authentication, different storage vendors), consolidate hardware on a single platform or move to a cloud-based service — that sort of thing. Again, the problem is, if it had been simple to do that, it would have probably been done in the first place. Windows rules the corporate desktop, to give an example, but tell traders they can’t have their Bloomberg terminals (understandably proprietary, with its own licence and user authentication, Michael Bloomberg isn’t about the give Microsoft a leg-up). Software-as-a-service might be fine for, say, office applications, but you can’t have your core payment infrastructure exposed to the risks which this would bring in terms of security and resiliency. And so on. You inevitably end up with a pick-‘n-mix approach… which brings you right back to where you started, you’ve just moved the deckchairs around on the Titanic a bit.

      There’s a load of money to be made discussing possible solutions. Actually designing them and delivering them, not so much

      1. ChrisPacific

        Your second solution amounts to getting a handle on the enterprise architecture. This is typically the only feasible solution in practice. It is difficult for a number of reasons. Systems are defined by the business models they implement, down to the smallest details, and in the case of banking those business models are incredibly complex. On a large scale (as in Deutsche’s case) they are often too complex for any single person to wrap their head around them in their entirety. That immediately turns it into a team dynamic problem in the ‘blind men describing an elephant’ sense, in which your success will be determined by your ability to assemble everybody’s individual piece of the puzzle into a coherent whole, and also measure whether or not (and how well) you have succeeded by the same process. The systems architecture adds a whole extra layer of complexity, and you’re also dealing with sins of the past where suboptimal decisions were taken either deliberately (due to constraints on budget, time etc.) or accidentally (due to getting the analysis wrong or just not knowing what you were doing in the first place). You also need to try and prevent the same thing from happening in future. Systems don’t just spring into being out of thin air – they are a product of an organizational culture and dynamic, and organizations that have produced flawed systems will tend to produce systems with exactly the same kind of flaws in future, unless something changes.

        In practice there is often no alternative if things aren’t to stop working completely, and sometimes doing it poorly can be enough if your competitors are doing an equally poor job – which they may well be, since they usually face all the same challenges you do. In theory this should make the first option (bank in a box) more viable, since if offering all the complex and differentiated services is an intractable problem ultimately doomed to crapification and failure then there should be a niche available for someone that sticks to just the basics and does them well. It would be interesting to examine why that hasn’t happened. My guess is that it probably has to do with advantages of scale, and that even poorly run big banks with messy systems have so much market clout and political pull that they are able to squash smaller competitors.

    4. Yves Smith Post author

      I don’t mean to sound harsh, but this is delusional. The high margin end of banking (as in investment banking and the more lucrative parts of trading) are based on high degrees of customization, relationship building (or more accurately customer manipulation) and exploiting fleeting opportunities. The customization often includes complex structuring, which means not just access to clever lawyers but knowing how to manage them.

      None of this is amenable to routinization.

  4. Hayek's Heelbiter

    As a former back-office Bankers Trust employee who was merged into DB in 1999, I could see that all was not well in the Land of High Finance with the convoluted flow charts of deal structures passing across my desk.

    After I fed my own vultures, I was let go in one of the early bloodbaths.

    Although most of the notes on the above graph occur in the later years and are devoted to salvage efforts, the actual seeds of destruction of this once stalwart bank were planted during the pump-and-dump reign of Josef Ackermann, whose legacy was to resign when the stock price was touching $20 (I assume the graph is not adjusted for inflation). And then, to paraphrase Fitzgerald, “he retreated into his vast money and let others clean up the mess he had made.”

    1. Colonel Smithers

      Thank you, HH, and well said about Ackermann, now enjoying his retirement in Zug.

      At least you survived. A couple of people, at DB and Zurich, paid with their lives.

      It’s interesting that two people who ruined banks outside their homeland, but at no cost to themselves, were from Credit Suisse, the Swiss Ackermann at DB and his peer Bob Diamond at Barclays.

      1. Hayek's Heelbiter

        Dear Colonel Smithers,

        Many, many thanks for your seconding.

        For decades I’ve felt like a voice crying in the wilderness even as all the train wreck happened in a fashion that should have been obvious to the most casual observer.

        As you pointed out, it is so tragic so many good people suffered, event making the ultimate sacrifice..

        Now that the debacle has actually come to pass, and I’ve found at least one person who agrees with me, I will forever shut up as I await the day Herr Josef gets to wear his complimentary orange jumpsuit.

        Ps. Never realized that Bob Diamant was Swiss. Very interesting synchronicity.

  5. Rodger Malcolm Mitchell

    Now Trump will be forced to borrow from the Arabs. No one else will lend to him.

    1. Yves Smith Post author

      False. Agnotology is not on. See this MarketWatch story by Francine McKenna, Donald Trump has had no trouble getting big loans at competitive rates:

      Contrary to countless reports portraying President Donald Trump’s relationship with banks as toxic, a new MarketWatch analysis shows Trump has virtually no trouble getting loans on good terms these days. Big banks like Barclays BCS, -0.38% also welcome Trump’s money in brokerage accounts and one of the biggest, J.P. Morgan Chase JPM, -0.15% , oversees his family trusts, according to a recent presidential disclosure.

      Trump signed his first financial-disclosure form as president on Flag Day, June 14 — also Trump’s birthday. The 98-page document shows assets of at least $1.4 billion and income of almost $600 million for the 2016 calendar year and into the early stages of 2017. Trump reported that he owes at least $310 million to banks and financial-services firms, including at least $130 million to Deutsche Bank….

      The MarketWatch analysis shows a variety of lenders, all big banks or listed specialized finance companies like Ladder Capital, that have provided lots of money to Trump over the years in the forms of short-, medium- and long-term loans and at competitive rates, whether fixed or variable.

      We have repeatedly pointed out that Trump has hundreds of legal entities and had bankruptcies in only a handful of them. More important, Trump was one of only two major NYC developers (the other being Steve Ross of the Related Companies) who did not have to give up much of his NYC portfolio in the early 1990s when the NYC office rental market imploded. We have also stated, as the detail above confirms, that Trump is underleveraged for a major real estate owner (the annual Forbes 400 listings show the same pattern). He could easily pull out a lot more cash and it would be a no-brainer for a lender to provide the funds

  6. The Rev Kev

    I was thinking how this might play out in the coming years but it does not look good. I say this because as far as I know the same management team are still in place overseeing the downsizing that will be taking place. The same management that led Deutsche where they are today. Can you take a toxic workplace and turn it into a smart and efficient workplace that will once more become profitable? I doubt it. Would it be so bad if they went down in flames? Maybe for the encourager les autres.

    1. Colonel Smithers

      Thank you.

      Unfortunately, much of the leadership, especially in so-called control functions, in place before 2008 are still there and looking out for each other, making the place even more toxic.

  7. Chauncey Gardiner

    So Deutsche Bank is back on the radar screen. Seems the failure of Congress and the prior president to reinstate the Glass-Steagall Act and regulate the mega banks’ massive derivatives and debt speculations is bearing predictable toxic fruit. No white knights on the horizon and no reports of government assistance from Germany and German taxpayers. U.S. bank regulators and financial media gone dark. $49 trillion notional (face amount) in derivatives and the IMF saying that among the large global banks, Deutsche Bank appears to be the most important net contributor to systemic risks. All this after they received tens of billions in bailout money and low-cost loans from the Fed and US government in the financial crisis not so long ago. Golly, I wonder who the sucker at the table is?…

    1. Andy Raushner

      Glass Steagall is the biggest nothing, yet we have posters who still make posts like these, still think it would. Considering the credit bubble blew.up in 1973 and 1989 was the first debt bust with GS well alive, maybe you should think differently. I will give you a hint: 1940-70 the U.S. DoD spending was at a high and to this day elevated % of the U.S. economy. WWII did not end the war……

      1. Harry

        So you are right to a degree. But there is a radical difference between finance in 1986 and finance in 2008. It was all just so much bigger. I remember Warburgs in 1992. It was a small bank, but still one of the largest in Europe. Even GS was tiny compared to its size today.

  8. Ruby Furigana

    This is worth re-reading today:

    Some highlights:

    It got worse, because as a direct result, Deutsche Bank could not quantify its own exposure. As Vik’s positions went more and more underwater, Deutsche Bank was simply incapable of making timely and accurate margin calls:

    And later:

    It appears that Deutsche Bank couldn’t bring themselves to admit, to their high rolling billionaire client, Mr Vik, that they couldn’t actually book and process the exotic options trades that he wanted to do. So they kind of ploughed on anyway with their fingers crossed and some IT bodges, and a teeny tiny Ops guy trying to make it all happen while the higher ups studiously ignored his occasional bleats.

    Still later:

    In discussions with colleagues, [Cryan] has expressed alarm about the “Horlicks”, or total mess, the bank has made of its technology by allowing individual teams and traders to operate on their own incompatible platforms.

  9. Summer

    Didn’t financial whales start washing up on the beach just before the last crisis around ’08?

    1. Clive

      True, but this is more accurately categorised as a 2008-era whale which managed to tread water for a little while. It was a zombie, it remains a zombie, but — like any zombie movie plot will tell you — actually getting the bloody thing to die (or be dismembered) is a very long-winded affair.

      And my TBTF is also one of the living dead, it’s business model is suffering from a combination of ZIRP-related anemia and management investment anorexia. But put it, as it is doing, in a nice frock, apply makeup with a butter-knife and send it, periodically, to a Hollywood cosmetic surgeon and it seems, with enough accounting photoshop’ing, to be fit and healthy. There are a lot of similar 2008-vintage cans which were kicked, still there lying on the sidewalks, like Deutsche Bank.

  10. Susan the other`

    Two things happening simultaneously. Deutsche is sailing off into the high-end investment sunset. And Facebook is trying to concoct a new financial vehicle for the opposite end of commerce – all the unbanked.

    1. Yves Smith Post author

      FB’s concept is vaporware. Most of the unbanked per an FDIC study, are unbanked because they don’t have money to put into banks. And South Africa had the answer back in 1997 for those in remote areas and/or with too little $ to warrant a bank account. Employers would pay them on a stored value card. This is very old technology, needless to say. SA was using chip cards back then for this purpose, and the US has been a global laggard in switching to them (not that you needed to use a chip card but they are more secure).

      1. Harry

        Yes. In my experience, the American unbanked used to be banked until the banks learned why they shouldnt be. May Mr Zuckerberg serve them well. He is probably already providing them with free telephony services.

    2. notabanktoadie

      If fiat is for the use of ALL citizens, then ALL citizens should be allowed to use it in account form at the Central Bank, just as depository institutions do, and FOR FREE up to reasonable limits on account size* and transactions per month.

      Of course that’s a slippery slope and pretty soon, as they should be, all other privileges for the banks would be questioned such as government provided deposit insurance since accounts at the CB are inherently risk-free.

      *Say, $250,000 in the US, the current insured deposit limit.

  11. PlutoniumKun

    Thanks to all who commented here, as someone who is not involved in banking its great to see such a good article with such highly informed commentary below.

    Its the sort of thing that makes NC special.

    1. Briny

      It is special, and why I do read the comments. I actually learn new things on this site. Priceless!

  12. Ignacio

    Will we see a different bail out scheme this time? Will Germany be different? I don’t know how flexible is EU’s resolution scheme

    1. Wukchumni

      We’ve gotten used to Unabankers blowing things up and being bailed out, but what if somebody had the temerity to say, not this time?

  13. Andy Raushner

    Keep a eye on U.S. Retail sales for june/july. June typically is a weak month, but the beginnings were June 1st. One of these months will be down yry by 1% as credit lines are withdrawn. All banking has credit in most rich nations.

    The countdown to recession begins now. 4 trillion to 8 trillion in bbb rated interest bikes this fall during the corporate 1st quarter of 2020

  14. Olivier

    I wonder how it is possible to have 45 OSes: there aren’t that many by a wide margin, especially enterprise-grade. Do they count every version of the same OS?

    1. Clive

      You’d be amazed. Have a poke around the entrails of your typical TBTF, it’s astounding what’s still running. VAX VMS. MUMPS. Xenix. All it takes is one “essential” application that is “fated” and “isn’t worth” rewriting or porting to a supported platform, and there you are. I even talked to an ATM tech the other day who’d only just recently taken an old, old ATM out of service. Running a flavour of OS/2. It should have been decommissioned a decade ago, but it had slipped off the asset register (or there was a glitch where it should have been swapped out but wasn’t and everyone had forgotten about it). It worked, it was at a remote site and the revenue covered the costs of servicing. So it never appeared on anyone’s radar to take a peek under the covers. Investment banks must be a lot worse.

      1. Colonel Smithers

        Thank you, Gentlemen.

        Methinks the zombie has a lot more than that, often due to star banksters being recruited and given a budget to buy software without checking if existing software could be used or if the new software could work with other software. Said star was happy to maintain an empire within an empire.

        Unfortunately, the dysfunction is everywhere. For example, some software was bought without discussion, so missing the fact that existing software could do the job. In other cases, due to licensing, some good software was discontinued and the not so good kept on.

        1. fajensen

          Well. The more stakeholders you have, the bigger the headache! That’s the first problem.

          And, If existing software can do the job, then that will usually be owned by the internal competition. Maybe they don’t really want your project to succeed. Maybe for them it is in fact better that your project fails and you get sacked or placed in an advisory position because then there is a new slot opening up for one of their cronies.

          So, do you trust those people to deliver on time to your requirements or is it maybe safer to keep everything “in-house”, the rats outside and your work under control?!

          I.O.W: The software system architecture will emerge as a mapping of the various factions within an organisation and not as an expression of “global” business needs. Only where management has a god-like authority and deep, real-time, insight in the core business will one find a sensible setup.

  15. Olivier

    Application software (and the supporting frameworks) does proliferate like kudzu and there is an infinite variety of it but that’s not operating systems. I remain skeptical that you can find 45 OSes unless you count versions.

    And, yes, star recruits given carte blanche to build their own IT island are a big problem in investment banks. These people act more like tenants in a mall or, to use a more IT-flavored metaphor, they treat the bank as a platform for their “application” (i.e., themselves). They don’t act and feel like employees.

    1. fajensen

      Linux flavours matters. In former times, I worked on some high availability features for Linux. Very simple in principle, relying mostly on brute force redundancy. We had a shared message bus and a database in RAM with all the system and application state, and many sets of 8 cpu cores. One set was always a hot spare.

      When the management system detected that something was lagging too much, we simply rebooted the entire system on the spare group of CPU-cores, keeping the database and message bus intact. This took about 6 seconds, which was invisible to the users because we had a cluster of several computers running the same applications on shared data and the messages would go to all of them, the results were filtered for duplicates.

      The trick is to not clear the system memory on boot. How to do this trick depends very much on the BIOS and the exact operating system boot process which needs to be modified in nasty assembly and trixy C code segments used only by the Kernel.

      Once it works nobody wants to spend another 3-600 hours developer time to upgrade the kernel or adopting to another environment. So your high-availability application will pretty much get locked to a specific hardware version and Linux kernel by market forces.

      After a while the next team comes along and does something similar, but on Free-BSD.

      The most anyone will really ever do in the way of standardisation is to put all those different systems into a common virtual environment and then install a common management system on them.

      I occasionally get some job offers for rolling out “Puppet” or “Confd” from banks :).

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