How Did Deutsche Bank become a Wall St. Giant? (w/ David Enrich & Ed Harrison)
ED HARRISON: That's basically when it all started. That's when the transformation happened. What time period are you talking about? Who was at the helm at Deutsche at that time? DAVID ENRICH: The CEO of Deutsche Bank at the time was a guy named Alfred Harryhausen, who was he had been-- and he was a statesman in Germany and internationally. He was one of the world's leading advocates for the forgiveness of third world debts, for example. He's someone who took a very global and almost diplomatic role or view of his role and his bank's role in world affairs. He wanted to make money, but he also viewed Deutsche Bank as having this historical responsibility for making the world a better place. The view was that in the long run, that's good for profits for Deutsche Bank because of the global economy is growing, that lifts the financial system along with it and so he dove into this by buying in 1989 this venerable British investment bank called Morgan Grenfell, which was an offshoot of the old JP Morgan Empire. That was a first baby step that Deutsche Bank took into the wild Western world of investment banking and sales and trading, but it was a very small step. Within several years of that, it became clear-- Harryhausen, by the way, was assassinated barely a week after announcing the Morgan Grenfell acquisition, he was viewed as this great symbol, in Germany, this symbol of global capitalism and so he was assassinated by I think it was a group called the-- ED HARRISON: RAF. DAVID ENRICH: Yeah, the Red Army Faction, which was trying to have viewed Deutsche Bank as the, I guess, the vampire squid of the time and that turned out to be obviously assassinating people is not a good policy decision for the most part, but in this case, it turned out to be especially bad, because Harryhausen's replacements were people who viewed Deutsche Bank's mission as much narrower and much more oriented toward maximizing short term profits, than Harryhausen, the statesman, had viewed it and so the mission of Deutsche Bank went from under Harryhausen and his predecessors, their goal is to serve a bunch of different constituencies, shareholders are one of them but so are customers, so are employees, so are the communities in which the bank operates so it is really the global community. It went from being that broad, holistic view of things to being a much narrower vision, which is that we exist to serve our shareholders and in the short term in particular and so a succession of executives after Harryhausen's assassination, they really stepped on the gas and dove headfirst into Wall Street and the City of London as really the defining generational opportunities that they faced, and the result initially was very successful. Deutsche Bank went from being essentially a non-contender on Wall Street in the City of London within several years and having spent billions of dollars hiring people in the US and in London, became a formidable competitor to the really established Wall Street banks. It was one of what I described in the book as one of the great migrations in Wall Street history where the leaders of Deutsche Bank are, who themselves are Credit Suisse or Merrill veterans, are hiring thousands and thousands of people in a matter of months to come build from the ground up this swashbuckling new investment bank. ED HARRISON: Actually, we were talking about this maybe two days ago, and I was telling you, that's when I came to Deutsche Bank in the late '90s. It was under I think Breuer was the head at that time, and Edson Mitchell was a Merrill guy, was the guy who was bringing all the swashbucklers in and he brought in Anshu Jain who later became the CEO. It was under the guise of Deutsche Morgan Grenfell. They took the Morgan Grenfell acquisition and made it into this is who we are now. As I remember, that was exactly what all the other investment banks were doing, SBC Warburg, there was Dillon Reed. We had [indiscernible], who went on with-- DAVID ENRICH: Well, that is a name I haven't heard for quite some time. ED HARRISON: All of the continental banks were taking these investment banks in the UK and saying, look, now we are just as good as the Americans. We have this Anglo-American thing, and we're going to do it in London. It seemed that London was the place to be. DAVID ENRICH: Well, London's in the middle of the world. In a lot of ways, it's the middle. It's a time zone that bridges Europe or bridges Asia and the US. It's a melting pot, you've great easy access to markets all over Europe, Middle East and Africa. Also, it just traditionally going back many centuries is a global financial crossroads for the world. This became, especially for European banks, London became this new financial hub where, through a combination of acquisitions and very aggressive hiring, all of these banks started to remodel themselves in the Wall Street model. I would argue none more successfully and comprehensively than Deutsche Bank. ED HARRISON: What does that mean, like the Wall Street model? What was different about the Wall Street model than the model that Deutsche and these other banks had before? DAVID ENRICH: Well, there was just, for the most part, they didn't have big sales and trading operations. They would help, if Deutsche Bank pre, let's say pre-1989 or probably even pre-1995, if they had a big European client, they wanted to say, I don't know, wanted a loan to build a railroad in Brazil, Deutsche Bank would probably provide the loan to do that. What it would not do, though, is provide any hedging services. It wouldn't provide derivatives to protect them against swings in interest rates or any political or environmental event or weather instability, anything like that. It wouldn't provide foreign currency services on any sophisticated level, it maybe would help convert dollars into Deutsche Marks into I don't know, other currencies but it's not for writing any-- ED HARRISON: Advance, bespoke type of services. DAVID ENRICH: Yeah. In other words, helping the companies deal with, in a sophisticated way anyway, of having an increasingly global workforce. It was built for a very simple time when a company would come to Deutsche Bank and need a loan to finance a particular project in a particular of the world. That's a pretty simple solution, to provide, you underwrite the loan, you can look at the risks, and then you set interest rates and loan terms based on the risk so that you make a profit, but a very easy or very simple service override. It was just being left behind by these Wall Street banks that could come in, offer these products with all these bells and whistles, they were offering the prospect of more or less complete protection from any uncertainty in the future. For that privilege, the banks would charge very fees. That made-- but look, those are valuable services. If you can eliminate risk from a business, that's the holy grail of capitalism. Of course, it didn't quite work out that way, but Deutsche Bank viewed the rich pool of profits that awaited and the ability to be able to serve clients, their clients and new clients in a comprehensive, global way as a very attractive proposition and I think that is part of what lord all these other banks down the similar path as well. ED HARRISON: Extensively, their huge balance sheets are a benefit to them relative to the likes of Morgan Stanley, Merrill Lynch, or Goldman Sachs, who were the guys who were coming in, along with JP Morgan. JP Morgan obviously had the balance sheet as well. DAVID ENRICH: Especially at that time, for Goldman, or Morgan Stanley became banks. Deutsche Bank had, like some of its competitors had this ability to they were taking in huge amounts, through deposits and through ability to borrow in the markets that they could then lend out or use for other purposes at a much lower cost than a Goldman or a Morgan Stanley and so that provide them a huge advantage. Their balance sheet grew very quickly as a result of doing that. For a while, as long as it was a benign macroeconomic environment and a benign regulatory environment. This was a very easy way to very quickly become a global player.