Special Briefing: Deutsche Bank’s Loss … the Global Economy’s Gain?
WHY YOU SHOULD CARE
As the German financial giant makes a last-ditch attempt to save itself, the rest of the financial industry may gain from it.
This is an OZY Special Briefing, an extension of the Presidential Daily Brief. The Special Briefing tells you what you need to know about an important issue, individual or story that is making news. Each one serves up an interesting selection of facts, opinions, images and videos in order to catch you up and vault you ahead.
WHAT TO KNOW
What happened? Deutsche Bank announced on Sunday that it’ll cut about a fifth of its workforce, or 18,000 jobs, by 2022. The bank has been flailing, with sinking share prices and a hoped-for merger between it and fellow German institution Commerzbank falling apart in April after both banks decided it was too risky. Shares have plunged since the news broke, as the bank’s restructuring is widely considered an acknowledgment that it’ll quit attempting to run with huge global banks like JPMorgan Chase or Goldman Sachs.
Why does it matter? Though Deutsche Bank has been doing better with some tests of financial health in recent years — after failing Federal Reserve tests a year ago — it’s still viewed in the banking industry as a uniquely reckless operation. CEO Christian Sewing said the company will focus on its European clients and on asset management — and turn away from the “days of spectacular ambition” to be a big-time player in investment banking, an ambition that saw high operating costs eat up 95 percent of investment profits and five years of decline. That’s good news for other giant banks, which will see less competition. But it might also be good news for Deutsche Bank, whose employees — the ones who keep their jobs — will see a much more stable environment, if a less ambitious one.
HOW TO THINK ABOUT IT
Too big not to fail. Two years ago, the International Monetary Fund tapped Deutsche Bank as the riskiest of the banks big enough to cause a major economic crash. But recently, there had been some encouraging signs: Last month, the bank passed a health test set by the Federal Reserve, one it’d failed in the past.
Competitive edge. In terms of investment banking revenue, the top five banks operating in Europe are all American institutions, and both politicians and banks in the EU have been calling for more mergers to create European giants that can compete. The EU’s largest bank, Spain’s Banco Santander, is about one-fourth the size of JPMorgan Chase. But Europe’s central bank has been slow to adapt, owing to concerns that banks that grow too big tend to fail … bringing financial systems down with them.
How did we get here? Many trace Deutsche Bank’s spectacular meltdown back 20 years, to its $10 billion takeover of American firm Bankers Trust, which gave it the largest assets of any bank in the world. That elevated the firm into the big leagues and led to nearly a decade of expansion, but the 2008 financial crisis and subsequent regulatory crackdown proved disastrous for Deutsche Bank, which has seen both profits and investor confidence collapse.
Personnel stories. Job cuts have affected the bank’s offices from Sydney to Mumbai to London, and the newly axed have been seen crying while exiting the company’s glittering offices. London, especially, is seeing huge cuts — it’s the hub of the investment banking arm that is being pared back. That, combined with the banking exodus expected to accompany Brexit, could mean a lot of London bankers struggling to find work.
WHAT TO READ
Deutsche Bank’s Reboot Looks Real This Time, by Elisa Martinuzzi in Bloomberg
“Deutsche Bank has to convey both internally and externally that, this time, change means change. Accepting this hasn’t been easy. It involves the humility of giving up on a two-decade effort to be the Goldman Sachs Group Inc. of Europe.”
Deutsche Bank Shares Fall Sharply on Restructuring, by Jenny Strasburg and Paul J. Davies in The Wall Street Journal
“The efforts to peddle chunks of functioning operations reflect a stark turn for the European lender that for years has had the biggest global investment-banking ambitions.”
WHAT TO WATCH
Deutsche Bank’s Radical Restructuring Rocks Frankfurt
“There’s a lot of sympathy for investors and bankers as human beings, but for sure they’ll find a job.”
Watch on Deutsche Welle on YouTube:
Deutsche Bank’s Restructuring Very Thorough, Senior Credit Analyst Says
“They’ve been listening to the market, and the equity market has been telling them to undergo this very deep restructuring.”
Watch on CNBC on YouTube:
WHAT TO SAY AT THE WATERCOOLER
Sugar daddy. Deutsche Bank is known for its lasting relationship with Donald Trump. The bank lent about $2.5 billion to Trump projects over two decades, despite an incident where the current U.S. president defaulted on millions and then sued the bank itself. U.S. federal authorities are investigating whether the bank complied with anti-money-laundering laws, including in the case of transactions linked to Trump’s son-in-law, Jared Kushner.