Deutsche Bank & the Ballad of the Bumbling Germans

You know, Deutsche Bank was really well-respected once upon a time.

I am old enough to remember a time when the now-infamous Deutsche Bank had one of the highest credit ratings of European banks. But that was before the turn of the millennium--a long, long time ago in a political economy far, far away. What happened between then and now? The curse of (global) ambition, that's what. Just as American giants like Citigroup and European ones like HSBC thought that harnessing economies of scale represented the way of future, Deutsche too embarked on a multi-country expansion into different product lines. Today, of course, the era of the global universal bank dream is well and truly over:

Other global banks are also rethinking their models. Barclays Plc is looking to sell down its business in Africa and has stopped trading stocks in Asia. Royal Bank of Scotland Group Plc, once Europe’s largest lender, has abandoned almost all foreign operations, retreating to its home market in the U.K., and is getting out of most capital-markets businesses. Deutsche Bank AG wants to sell a German consumer bank it bought in 2010 and is cutting back bond trading.

The question remains: OK, if major banks had already begun the process of retrenching--especially post-global financial crisis--then why is Deutsche Bank especially in trouble? Simply, its leadership still harbored delusions of globe-spanning grandeur as late as 2014:

It was the defining bet of Anshu Jain’s reign at Deutsche Bank. In 2014, as most European banks were retrenching in the face of slackening markets and tightening regulation, the German lender’s then co-chief executive took the opposite course.

Two weeks after Barclays — Deutsche’s European arch-rival — capitulated to market pressure and slashed its debt trading business, Deutsche launched a plan to raise €8bn in capital. The move was, in part, designed to give Germany’s biggest bank the firepower to win market share as its rivals faltered, and to position it as the last remaining European challenger to the US titans on Wall Street. Deutsche, Mr Jain said at the time, would be the “only truly universal bank based in Europe”.

That bet failed: markets remained slack and regulation kept tightening. Two years on, Mr Jain and Jürgen Fitschen, with whom he shared the top job, have stepped down. Deutsche’s investment bank has lost its top three ranking. The group’s capital position is under scrutiny. And Mr Jain’s successor, the former UBS banker John Cryan, has embarked on a painful curtailing of Deutsche’s global ambitions.

Mr Cryan faces a formidable task. Deutsche’s markets business, which accounts for a third of its revenues, is struggling to cope with a world of lower trading volumes, tougher capital requirements and increasing US dominance. Its retail bank in Germany, where margins were always thin, is suffering under Europe’s rock-bottom interest rates. Total costs are stubbornly high and the bank is grappling with legal challenges that could cost it billions of euros. Last year, Deutsche — a pillar of Germany’s postwar economic strength, and a cog in global capital markets — made a €6.8bn loss amid a host of fines and writedowns. Analysts predict an €860m loss this year.

Today's Deutsche thus has a wafer-thin capital cushion and several unprofitable lines of business. This amidst all sorts of "legacy" costs emanating from its past activities. While the $14B fine proposed by US Department of Justice for Deutsche's past mortgage security-related indiscretions will likely be reduced, even a fine half of that would severely strain the bank's resources.

The bank's troubles are putting German leaders in a pickle. Having insisted to other countries that they should not bail out their troubled lenders come hell or high water during recent years, Chancellor Angela Merkel and Finance Minister Wolfgang Schauble would rightly be accused of being hypocrites if they came to Deutsche Bank's rescue. That said, the pan-European effects of its demise would be huge and likely hurt other Europeans too:

A few years into the eurozone crisis, Chancellor Merkel and her finance minister, Wolfgang Schäuble, led a charge against state-sponsored bank bailouts. Instead, they championed new European rules, now in force, that compel creditors—mainly bondholders and, in some cases, depositors—in troubled banks to chip in before the government steps in.

“State aid won’t happen,” Thomas Oppermann, floor leader of the ruling Social Democrats, told reporters on Tuesday. “It’s now, first of all, up to the bank to solve the problems.” Still, few analysts expect that Deutsche Bank could be left to fail or be forced into a bail-in. The risk, many say, would spread far beyond Germany. Deutsche is a large and highly networked bank on a continent replete with fragile lenders and economically hamstrung after years of low growth.

It's a no-win situation for Germany. I think its leadership will lean on the US to lessen the fine or even defer a portion of it, but the reputational damage is already done. Germans have a reputation for competence and efficiency, but modern-day Deutsche Bank is strictly Amateur Nite. To paraphrase Pink Floyd, encumbered forever by desire and ambition, this is the sad end for a hunger left unsatisfied.