Deutsche really lost their way. I used to be their customer for 5 years but then I gave up. Over the past 20 years (roughly what the article covers) they:
- starting from a more "elite", business customer focus
- went pioneering into online banking to get younger customers
- merged the online customers when broadening out online
- tried to get rid of lower revenue customers
- bought the Postal Bank (which was focused on low income customers and had a huge number of them)
- tried to sell Postbank
The back and forth on the local German banking retail market made no sense whatsoever. Twice they were eyeing pools of lower income customers (younger, Postbank), did not fully integrate them and then backed out again.
I hope there will be a lesson that a steady business or being conservative is often a good thing. It seems there is a lot of pressure to grow until the only way for growing more is to take on a lot of risk or doing unethical things.
That is true, but try telling that story to the shareholders. Most shareholders don't care about long term stability, they just want a profit this year and then cash out and move somewhere else.
The stock price is set by the expectation of long term increased value, not short term. For the simple reason that if everyone is set to cash out at the peak, there won't be a peak, the stock will tank.
The stock market oracle values a dim chance for massive growth much higher than a very large likelihood of continued existence at current levels.
Overoptimistic money drives out realistic money and then suddenly the corporation has to fulfill expectations it might never have actively encouraged. Or else you lose at capitalism, whatever that means.
The only chance to not play that game is to have patient majority owners who are fully willing to ignore temporary devaluation when disillusioned optimists jump ship.
Riskier investments tend to have lower current values, which prices in the risk.
But for a more meta point, if you believe you are smarter at valuing stocks than the market is, then you can make a fortune at it if you are correct. Or even just mostly correct. You don't need to convince me or anyone else.
From a technical perspective they were completely incompetent, refusing to consider that a plan put in place years before might now be invalid.
Investing in hardware and the associated data center, years before a system is due to be deployed 'because my bonus depends on it'.
Outsourcing gone mad.
Obvious quid pro quo arrangements between management and vendors.
There were good people there but they were ignored or marginalized by the Frankfurt crowd.
Most of the technical staff would not get though an intern technical interview at Apple / Google / ...
I tried to build an internal team in Cary to try and prove that outsourcing is not the answer, but it was pointless, the staff available were totally and obliviously incompetent, one of them refused to participate unless we used Erlang, I know Erlang, I really like it, so I quizzed him on why he wanted to use Erlang, you know the outcome, he had no knowledge of OTP, and only a cursory familiarity with the language, and yet I was asked to let this guy lead my development team.
Try hiring technical talent into that environment. They did pay well though.
This is the bank's situation, 146 years after its founding. Once a symbol of Germany
-- Germany Inc. -- and the country's financial pillar. Its managers were respected, admired
as people who lived up to the country's values and expected the same of their employees.
Those times are gone. Deutsche Bank as we once knew it is dead. As one of the bank's former
senior managers said, the bank stumbled into a "Darwinist niche," a place where there were
no more competitors and no more enemies. And the gentlemen at the top of the company became
complacent and inattentive.
I'm not too familiar with the German culture. Can someone explain to me what is this "German provincialism" that they talk about? Do Germans see themselves as provincial? Does anyone else see them as provincial?
Have you ever heard of the German Mittelstand? [1] Family-owned companies, long-term and low-risk business strategies, social responsibility, regional ties... I think that's the kind of provincialism the article talks about. Not bad, just boring.
Deutsche Bank wanted to become a global player. Doing investment banking in New York and London instead of giving a small loan to Herr Müller's crankshaft oil seal factory in Hintertupfingen.
If you have 25 minutes to spare, there's a great documentary called "Bavarian Fairytale" [1] about the Mittelstand. The core theme is how Bavaria survived the global financial crisis, but I think it does a good job of explaining the Mittelstand values through interviews with the people running the companies. (Making quality products / craftsmanship seems to be another core value.)
This may be specific to banking, and it's a bit of a hypothesis by the authors, but here's how I understand it:
German banks have traditionally operated on the local level – mortgages, financing local businesses, sometimes a medium-sized manufacturer.
The opposite model is anglo-saxon investment banking: m&a, hedge funds, HFT, leverage.
There are cultural components to both these models as well. Under the first, a good banker spends his nights drinking too much beer with the small-town mayor.
Investment bankers spend their nights doing coke with some actress in a Hong Kong rooftop bar.
(both exaggerated for effect)
Now, the story goes, Deutsche Bank felt so inferior when they watched Wall Street that their traditional, stable business was relegated to second class. They no longer cared about the low end (everyday) market.
The two problems they ran into were (a) investment banking turned out to be a rather volatile business, and they no longer had the steady income stream to support it, and (b) they probably tried so hard play blank, without actually having the necessary structures/experience etc. Cargo-Cult investment banking basically. (Fargo-Cult?)
There was a good documentary about the financial crisis and the banking crisis from the view of a former German banker called Master of the Universe [0] (has been on public television, but I was not able to find it from a quick search).
In this documentary, the banker describes how the Germans were eager to learn from the US bankers in the late eighties and early nineties and how they did not question anything, but behaved like stupid sheep, who wanted to play with the big guys. They did not understand the products at all.
The phenomenon that makes this "German provincialism" and not just provincialism is that you can see a pattern here. You can spot it in different areas: the BND and the NSA, the entertainment industry and Hollywood, politics and the US president (especially Obama).
Germans have this schizophrenic trait, that on the one hand they think the US is totally nuts with all it's guns and broken systems and on the other hand very much care what the US does and what it thinks about them.
I really like the style that the main/only actor/narrator is filmed in an abandoned former bank's office buildung.
[x] The Federal Agency for Civic Education, FACE (German: Bundeszentrale für politische Bildung, bpb) is a German federal government agency responsible for promoting civic education.
I love BPB. Common sense would suggest that they must be the worst mouthpiece of government propaganda imaginable, but that expectation makes them so obscure that no political actor would ever consider it worthwhile influencing them. A very valuable arrangement, impossible to deliberately set up from scratch.
The thesis made semiclear on Page 2 is that DB previously was staid and very German, and in what would later become their own view, behind the times.
> The bank's German clients were increasingly discovering the enterprising nature of international financial institutions and Deutsche had to be careful not to be left behind.
This is expounded on Page 2, but basically it led to global expansion of the bank in search of growth beyond what was possible with boring old German domestic banking.
I think its important to note that they didn't end up this way because they were stupid or power hungry.
Like alot of companies, they made decisions that made sense at the time that ended up having poor long term consequences.
When they decided to really grow it was due to a couple of things..
1) Their competitors were all doing the same thing and they almost needed to grow their investment arm and international presence just to stay in business.
It used to be that Audi, Porchse etc would come to them for basic loans etc and business was good. But as these firms grew internationally they also needed a bank that did the same.
Audi sells in Brazil it needs a bank with a presence there as well. And along comes the big american and European banks who start selling themselves to Deutsche's current clients as a one stop shop who can do what Deutsche does but also all these new things that international modern companies need.
A company needs to get a currency or interest rate swap, well Goldman Sachs can do that, so Deutsche followed suit.
From this perspective its easy to see how they started down the road they did.
And once you start building out a international team of investment bankers and traders that means you're now competing for talent with the rest of the big players.
So how do you hire the best traders/investment bankers?
You pay them like everyone else does, which is to say you have to pay them..... alot.
You have to provide perks like New York/London/Tokyo offices and the ability to trade the hottest products and markets.
You need to let your traders make money like other firms do or they'll just leave for those other firms.
All just to keep your existing clients.
And before long you are just like everyone else.
Then in the mid 2000's during a huge bull market you have one of wall streets stars Boaz Weinstien (https://en.wikipedia.org/wiki/Boaz_Weinstein or read "The Quants") running your derivatives desk. And they made money hand over fist..... at the time.
Now the funny thing about bull markets, is that even bad trades can make money during them because everything is up and to the right.
And even if you think you are putting on too much exposure, tough, remember that so is everyone else and if you stop, then the good traders and bankers quit and go to competitors who will let them make money.
It's sort of like raising money as a startup in frothy markets. You'd just better raise money because if you don't and all your competitors raise 20 million then even if you're better they'll often win because they can survive longer than you.
It just happens that Deutsche didn't quite understand the game that was eing played, and when the music stopped, they were holding the bag so to speak.
According to the article they were both stupid and power hungry and yet you make it sound like they accidentally manipulated Libor or bet against their own clients.
Should we feel pity for them or what? They could have expanded AND kept some control of what the investment bankers were doing.
Other banks managed to reduce their exposure while DB was blisfully sailing ahead, so your assertion that "so is everyone else and if you stop, then the good traders and bankers quit and go to competitors who will let them make money" is incorrect. This is mentioned in the article.
It also says right in the article that traders were amazed how poor the oversight from HQ was.
My point was that their transformation from a regional bank into an international bank wasn't just a power grab or kingdom building but a very natural progression, that lots of their competitors, to keep their existing customers.
it then turned out that one of their new areas, derivatives desk, was minting money like crazy so it became tougher for them to reign in that team, and as a side effect the risk that team generated, until it was painfully clear that they'd gone too far.
Their problem wasn't in the idea of growing and transforming the bank but in the implementation, and I believe I laid out in pretty easy to follow detail, why they went the way they did.
I reread your original message and the underlying theme seems to be the inevitability of ending up more or less in a situation similar to the one of today.
I don't believe the natural progression theory fully explains what happened and I was trying to emphasise that the article contradicts your theory in several places.
In particular:
* their failure to learn the lessons of 2008, which most other banks did learn.
* several power struggles for key leadership positions
* outright incompetence in risk management.
To summarise: your analysis about the forces at play is likely correct. However one needs to mix in incompetence and greed to get today's result, something which you explicitly excluded in your first sentence.
I am outraged at what happened (I am a Deutsche customer) and some of that slipped into my message. I do apologize for that.
The last time I visited Wall St., in 2015, I noticed a giant inflatable rat, directly in front of the Deutsche bank building. I figured someone was pissed off about something.
Lovely long-form piece. Seems very analogous to the choice many tech companies face: focus on growing a moderately successful, proven model, or lever up to the gills with VC money and shoot for the moon. The later being sexier and higher status, but also risking catastrophic failure.
One has to view it from the long term perspective. Germanys success doesent seem very stable from the inside. The age pyramid is similar to japan, and a working social system + lots of future retirees means, there is a lot of unseen future debt here.
The main industry - the car industry is flailing and failing, by falling behind when it comes to e-mobility (except for BMW, but thats just the premium segment). Because of that perfectionism streak in engineering and a attitude against "untouchable" aka not real products, we suck at Software, which shows in particular when you look for example on the digital entertainment market. Pols have the Witcher and lots more, Czechoslovakians have Arma and lots more- what do we got? We make chips and databases- both important fields- but both closer to the german mindset.
Europe is falling apart as we speak, and the inability to fix it shows, as politicians promises the glue that held it together is loosing its binding power.
They should have abandoned the brussel parliament, and made a virtual parliament from all the national ones- in this way unifying the whole continent, by having a voted for legislator- that actually has something to say to those who rule the continent.
Also germans democracy suffer from the same symptoms as the US- aka the partys kill it with sleeping pills. The media and they political party system) does not allow and does not show any hard debate (reason: "the citizens dont like it when mummy and daddy fight"), but this creates the impression that the voters causes are unheard and not worth fighting over for. It doesent show who fights for them, and as the eternally same faces deliver the eternally same messages (Too Long Did Not Change; TLDNC: "There is going to be a little bit of hardship, but its going to be good, once we are through it, we take the citizens problems very serious, we will take care of all your problems, as long as you dont have any.."). The state is rife with untouchable special interest groups who basically degenerated to something similar to the regressive left in the US. Lobbyism is even more of a problem- the state literally allows to hire company employees into ministry's, to write on the laws legislating themselves.
While all this is going on, the citizens never get a chance to vote a head of this hydra, thus some "populist" alternative has formed, which is going to win the next Vote, and similar to France is going to rip Germany out of the heart of Europe. Which is a shame- in a world where the big bullys push you around on the schoolyard- being small has lost all the comfort remembered from the cold war.
If you have all this in mind and a picture of the outside world, germanys strategy seems like a long term suicide- and what do you do if your own strategy is failing? You blindly copy whatever strategy the successful competitors employ - of course without understanding whats at its core (careful risk management).
I wouldn't wonder if something similar at some point happens at the German software industry (mainly embedded electronics and databases). Because silicon valley seems so much more successful, blindly try to copy the structure and place some German engineering in it. Then wonder why you always get incremental improved products way to late, instead of brittle cutting edge. Anyway that's the state of the nation, which spawned this bank.
I used to work with DB throughout the 2000s. Occasionally, I was surprised on the levels of incompetence of middle management. It isn't uncommon in investment banks, especially when the economy is good enough, but DB upped it to the whole new level.
- starting from a more "elite", business customer focus
- went pioneering into online banking to get younger customers
- merged the online customers when broadening out online
- tried to get rid of lower revenue customers
- bought the Postal Bank (which was focused on low income customers and had a huge number of them)
- tried to sell Postbank
The back and forth on the local German banking retail market made no sense whatsoever. Twice they were eyeing pools of lower income customers (younger, Postbank), did not fully integrate them and then backed out again.