Skip to main content

The transformation and decline of Deutsche Bank

Shares of Deutsche Bank and Credit Suisse have been dropped from the prestigious Stoxx Europe 50 share index. Is European banking in decline? And if so, what are the factors that led to its current parlous state?

Remember the days when bankers were bankers, not "investment bankers," and thought of as sober-suited, cautious accountant types, risk-averse to the point of being thought rather dull and unimaginative?

Back in those days, business was still based on long-term relationships, not just on quarterly results. A handshake was worth as much as a written contract. In terms of public prestige, senior bankers were on a par with leading university professors, or the sort of senior physicians who head up medical clinics. In Germany, during the years of the Wirtschaftswunder (post-war economic miracle), Deutsche Bank in particular was a deeply respected, almost sacred institution.

But that was before the events which an article in "Zeit Online," a leading German news website, called the "inside-job robbery" of Deutsche Bank. That started 27 years ago, in 1989, as Deutsche's executive team under then-CEO Alfred Herrhausen bought British investment bank Morgan Grenfell and made it a unit of Deutsche. Suddenly, hundreds of financial markets experts and securities dealers flooded into Germany's biggest private bank. This ended up fundamentally changing its culture and character.

What had once been a staid, solid institution that made its money by extending credit to industrial companies looking to expand their production lines increasingly became a casino more and more focused on making bets in the financial markets on its own account.

Ten years later, in 1999, Deutsche Bank also bought up the big American investment bank Bankers Trust. As a result, Deutsche temporarily achieved a new status as the largest bank in the world, measured by the size of its balance sheet. More importantly, the takeover of Bankers Trust completed the transformation of Deutsche. The investment bankers dominated the fused entity.

Bank robbery from inside

In contrast to the bank's directors, Deutsche's investment bankers weren't legally liable for their deals. They took - and still take - far higher risks than the Deutsche Bank of the pre-Morgan Grenfell, pre-Bankers Trust days, and they rake in huge bonuses - estimated to have amounted to a total of 40 to 50 billion euros ($44 to $55 billion) within a span of just 15 years.

That's despite the fact that Deutsche's investment banking arm may not have actually booked any profits, on a net basis, over that time frame. By the end of the period, Deutsche had dropped from number one to somewhere in the 40s in terms of balance-sheet size. Its share price crashed by two-thirds within the past year, from 33 euros a share to 11, and valuable, long-held shareholdings of major industrial companies were sold in an effort to shore up the bottom line. Those measures were ultimately the price Deutsche paid for the 40 or 50 billion euros in bonus payouts. That's what critics mean by "bank robbery from the inside."

The investment bankers changed the corporate culture of Frankfurt's biggest banking house into one that seemed to scorn ethical and legal norms. Worldwide, more than 7,000 lawsuits are underway against Deutsche, alleging a long list of financial crimes, including large-scale money laundering, interest rate manipulation, and tax evasion. Deutsche presently has 5.4 billion euros set aside in a special fund to pay for litigation costs. Last year, fines, settlements and litigation costs weighed on the bank's bottom line to such an extent that it reported a record loss of 6.8 billion euros.

Provisional nadir

The low point in the bank's reputation - to date, at any rate - came this spring, when CEO John Cryan and CFO Marcus Schenck felt compelled to reassure investors that Deutsche would continue to be able to pay interest on its bonds, now seen as high-risk. When a corporate CEO comes out saying that sort of thing, it's often because his company is at the brink of insolvency.

Even if that appears not to be the case with Deutsche, it's not a reassuring signal. Investors such as pension funds, which are mandated to put their money into safe, long-term investments, have been pulling their money out of Deutsche Bank shares. Moody's, the US-based ratings agency, has adjusted Deutsche's rating accordingly; it's now just two notches above "junk" status. That, in turn, is driving up the bank's refinancing costs.

Meanwhile, things don't seem to be going much better for other European banks. On the Tuesday afternoon a couple of business days after the European Banking Authority's stress-test results of the 51 biggest European banks were released, bank shares all over Europe took a dive. Italy's Unicredit, which owns the German bank Hypo-Vereinsbank as a subsidiary, lost 7.2 percent, followed by Spain's Santander, down 5.3 percent, and BBVA, down 4.9 percent. The Netherlands' ING Group, parent of Germany's ING Diba bank, lost 4.6 percent.

The long descent

The balance sheets of many European banks are still weighed down from the fallout of the global financial crisis of 2007-8. Hundreds of billions of euros in nonperforming loans are still on their books. The most recent stress-tests show that some big banks - including Germany's two biggest private banks, Deutsche Bank and Commerzbank - still have a rather thin core capital ratio, the cushion of paid-in shareholders' money and retained earnings that's meant to absorb any losses during a downturn. And all the banks are suffering from a sustained reduction in profitability resulting from very low interest rates, which are now all the more likely to stay low in the wake of Brexit.

The weakening of the big European banks is now making itself evident in one of the continent's most important stock indices, the Stoxx Europe 50. Deutsche Bank and the Swiss giant Credit Suisse were dropped from the Europe Stoxx50 index, which includes Europe's most important companies, as of today. If the two banks were football teams, this would be like dropping from the Premier League down into the second division.

The future doesn't look particularly rosy. Thomas Mayer, formerly chief economist of Deutsche Bank and today a professor at the University of Witten-Herdeke, a year ago prophesied the "downfall of the traditional banks." His prognosis suggested that their business model could become obsolete as a result of several developments: technical developments in finance, or "fintech," allowing new players to enter the market, more stringent new regulations, and the near-zero interest rate policy imposed by central banks will combine to squeeze banks' margins.

Future dangers

Central banks' low-interest rate policy, Mayer argues, will hit profit margins of banks in the traditional business of granting credit to borrowers, "and the longer the low-interest-rate phase lasts, the more will banks have to give up on this core business."

Increasing government regulation tends to squeeze margins, according to Mayer, who has argued that "the supplemental equity capital requirements for systemically important banks, and the obligation to be able to wind up a bank that enters insolvency without any recourse to taxpayers' money, will make the business model of global universal banks obsolete."

But the banks' biggest enemy, Mayer says, is technological progress - because it could lead to banks' losing their core payments and credit-brokerage businesses to 'fintech' companies. Payments "could in future increasingly be made via novel electronic payments systems, in which information technology companies have technical advantages."

Classic credit brokerage activities could also be threatened by new competitors, Mayer warns: "The rise of crowd funding shows that social enterprises can bring together savers and investors with borrowers."

The traditional banks are responding, however, by monitoring the fintech startups closely and in some cases teaming up with them or investing in them.

Source:

Comments

Popular posts from this blog

Greece is about to become the blueprint for modern feudalism

globinfo freexchange
After almost ten years of an unprecedented crisis, Greece has been trapped into an ongoing, slow motion recession. The economy still struggling hard to recover, with unemployment and national debt being permanently in a red alarm mode.
As has been already pointed out, the result of the recent Greek national elections could be characterized "paradoxical" mainly for two reasons: 
First, the voters gave a clear governmental order to one of the traditional powers of the old political system, which are highly responsible for the Greek crisis that erupted in 2010. Several top names of the new government, and even New Democracy leader, Kyriakos Mitsotakis, have been accused of being involved in various corruption scandals, in the not so distant past.

Second, the fact that the voters elected perhaps the most fanatically neoliberal government ever. This means that Mitsotakis administration is expected to implement the brutal neoliberal policies imposed by Greece&…

How Joe Biden’s privatization plans helped doom Latin America and fuel the migration crisis

On the campaign trail, Joe Biden has boasted of his role in transforming Colombia and Central America through ambitious economic and security programs. Colombians and Hondurans tell The Grayzone about the damage his plans did to their societies.
by Max Blumenthal
Part 8 - Gutting public healthcare, driving more migration
The Alliance for Prosperity also commissioned the privatization of health services through a deceptively named program called the Social Protection Framework Law, or la Ley Marco de Protección Social.

Promoted by Honduran President Juan Orlando Hernández as a needed reform, the scheme was advanced through a classic shock doctrine-style episode: In 2015, close associates of Hernández siphoned some $300 million from the Honduran Institute for Social Services (IHSS) into private businesses, starving hospitals of supplies and causing several thousand excess deaths, mostly among the poor.
With the medical sector in shambles, Hondurans were then forced to seek healthcare from …

As Boris Johnson unleashes ultimate threat against Bremain capitalist faction, the British working class is suddenly in front of a unique opportunity

globinfo freexchange

In the merciless endo-capitalist war around Brexit, Boris Johnson decided to unleash the ultimate threat against Bremain capitalist faction. That is, a snap election with the 'danger' of a Labour victory under Jeremy Corbyn, which would be neoliberal capitalists' worst nightmare.
As already pointed out, despite the capitalist civil war, both major factions of the British capital remain deeply neoliberal in their ideological core. And therefore, both factions see a potential Labour government under Jeremy Corbyn, as a major threat.
Indeed, as ZeroHedgereported
As Prime Minister Boris Johnson faces the prospect of his rule being cut short, wealthy Britons have a message for Johnson's most likely successor: A 'no deal' Brexit makes no difference to them. But if Labour leader Jeremy Corbyn becomes PM, they will flee in droves, taking their money with them

[...]

The chairman of one Swiss asset manager who helps wealthy Britons shield th…

Tucker Carlson accidentally promotes one of the most anti-capitalist, real-Left positions!

globinfo freexchange 
We wouldn't believe it if we wouldn't have seen it and hear it with our own eyes and ears, but the following phrase came out from Tucker Carlson's mouth:

                    Every minute you are angry about race, is a minute you are not thinking about class, which, of course, is the real divide in this country. Working class people of all colors have a lot more in common - infinitely more in common with each other, than they do with some overpaid MSNBC anchor. And if you are allowed to think about that for long enough, you might start get unauthorized ideas about economics. And that would be disruptive to a very lucrative status quo. So, they whip you into a frenzy of racial fear so that it never enters your mind. It's a diversion. Everyone hates each other, they get to keep their money.
Here's why they're pushing racial division: so you won't notice the real divide, which is economic. pic.twitter.com/ZVLvQn2u9O — Tucker Carlson (@Tuck…

Manufacturing uncritical thinking

by system failure
I was thinking about writing something related to a certain behavioural pattern that we often meet in the mainstream media journalist army. I was inspired by the impressively loud example of The New York Times' Bari Weiss, and how it was presented by Jimmy Dore in his show.


During this particular discussion with Joe Rogan, Weiss rushed to paint US presidential candidate, Tulsi Gabbard, as an "Assad toady", without even knowing what the characterization means. As Dore aptly pointed out: "That's what's called a 'received opinion'. So, it's not her own opinion. She has heard other people in her neoliberal bubble say that stuff, so she just repeats it. She doesn't even know what the insult means."
Ben Norton wrote on Twitter: "Neocon NY Times columnist Bari Weiss smeared Tulsi Gabbard (who bravely opposed regime change and US support for Salafi-jihadist contras) as an "Assad toady," then couldn't spell/de…

Bernie finally declares war on neoliberal fascists who destroy the planet

globinfo freexchange
Bernie Sanders proved again why he should be the next president of the United States. This time, he declared war on the neoliberal fascists who are destroying the planet on behalf of the corporate beasts.
Bernie tweeted:
                    Climate change is a global emergency. Bolsonaro and his corporate cronies are burning the Amazon rainforest for personal profit and jeopardizing our planet's survival. My Green New Deal will impose climate sanctions against corporations that threaten our global climate goals.
Climate change is a global emergency. Bolsonaro and his corporate cronies are burning the Amazon rainforest for personal profit and jeopardizing our planet's survival.

My #GreenNewDeal will impose climate sanctions against corporations that threaten our global climate goals. https://t.co/erZzHozviQ — Bernie Sanders (@BernieSanders) August 22, 2019
Recall that the previous right-wing corporate puppet in Brazil, Michel Temer, opened the door to t…

Roger Waters for Julian Assange

globinfo freexchange
On Monday, 3 Sept, Roger Waters of Pink Floyd will perform his classic 'Wish You Here' for Julian Assange outside the Home Office (interior ministry) in Marsham Street in the heart of London. John Pilger will be speaking. Join us at 6pm in solidarity with Britain's political prisoner.

On Monday, 3 Sept, Roger Waters of Pink Floyd will perform his classic 'Wish You Here' for Julian #Assange outside the Home Office (interior ministry) in Marsham Street in the heart of London. I will be speaking. Join us at 6pm in solidarity with Britain's political prisoner. pic.twitter.com/Lytg2GCZVQ — John Pilger (@johnpilger) August 30, 2019


Καταιγίδα επιχειρήσεων αποπροσανατολισμού από το Μητσοτακικό καθεστώς με τη βοήθεια της τραπεζομιντιακής χούντας

globinfo freexchange

Ο μηχανισμός του εγχώριου νεοφιλελεύθερου καθεστώτος επιδόθηκε τις τελευταίες μέρες σε έναν καταιγισμό επιχειρήσεων αποπροσανατολισμού προς τέρψιν του πόπολου, το οποίο έδωσε αυτοδυναμία στην πολιτική του συνιστώσα. Δηλαδή, στη χειρότερη δεξιά της μεταπολίτευσης.
Μετά το ταξίδι Μητσοτάκη στη Γαλλία, όπου είδαμε ένα χιλιοπαιγμένο έργο, το σόου του αποπροσανατολισμού ξεκίνησε από το Μάτι. Εκεί είχαμε ένα διπλό χτύπημα. Από τη μια τον Μητσοτάκη να ποζάρει στα καμμένα, διατυμπανίζοντας τη δήθεν αποτελεσματική του κυβέρνηση. Από την άλλη, την διαφήμιση των "καλών ιδιωτών", οι οποίοι ως καλοί Σαμαρείτες, ανέλαβαν δήθεν αφιλοκερδώς (Αφιλοκερδώς ΑΕ, όπως έλεγε και ο αξέχαστος Τζιμάκος), να καθαρίσουν την περιοχή από την επικίνδυνη καύσιμη ύλη.
Αμέσως μετά, απολαύσαμε άλλη μια κωμωδία από τις δυνάμεις καταστολής που έκαναν έφοδο στα Εξάρχεια για να τα "καθαρίσουν" από τους μετανάστες. Οι νεοφιλέλεδες της δεξιάς και τα ακροδεξιά δεκανίκια τους είναι μανο…

Citibank blocks funds for insulin: more than 450,000 Venezuelans affected

The US bank Citibank blocked, in August this year, part of the funds destined to import 300 thousand doses of insulin, a criminal act that affects more than 450 thousand patients, the Venezuelan Ministry of Economy and Finance reported.

On the other hand, the BSN Medical laboratory, based in Colombia, after receiving payment for the purchase of 2 million units of antimalarial treatment, denied the clearance of the drugs.
The ministry indicated that this fact caused the Swiss bank UBS AG to block the transactions made by the country with the Pan American Health Organization (PAHO), destined for the purchase of vaccines for the immunization program.
Given this circumstance, Venezuela and PAHO sought alternatives with banks from other countries, although this situation led to a 4 month delay in the immunization program.

The national government also revealed that other pharmaceutical transnationals such as Pfizer and Novartis refuse to sell medicines, reagents and supplies to Venezuela.
F…

The untold Socialist history of the United States

globinfo freexchange

Abby Martin spoke with renowned Marxist Economist Richard Wolff to discuss the growing popularity of Socialism under Trump and its historical roots in America, misconceptions about Russia and China’s economic success and Marx’s theory of alienation and monopoly capitalism.

Wolff explains:

A hundred years ago, 1916 to be precise, was the first time that the Socialist Party of America put forward a candidate for president. His name was Allan Benson and he ran for president a hundred years ago and he got 600,000 votes in the United States. That worked out to three percent of the vote.
The Socialist Party thought that was a good beginning, so they ran again four years later, in 1920, little less than a hundred years ago, and they had a different candidate. A man named Eugene Victor Debs, a head of the railway Workers Union, very good orator. And he did better. He got 900,000 votes. That's a 50% increase in four years, four percent of the total vote.
Four yea…