Deutsche Bank's Evolution: The Good, Bad, and Ugly (w/ David Enrich & Ed Harrison)
ED HARRISON: I think we were talking just before the cameras started rolling about how a lot of the mainstream outlets will focus on the Trump factor, and we'll certainly get into that. I think from my perspective, it's really about the financial system. I want to go back to the transformation that Deutsche has made over the last 20, 25 years to get a sense of how that banks transformed and how that's emblematic of the transformation that we've seen in the system. What did Deutsche Bank look like before it became this giant financial behemoth? DAVID ENRICH: Let me just say before I even answer that, that I think that's a really good approach because Deutsche Bank in a lot of ways, it's an interesting tale of its rise and fall but it also is just as nearly perfect case study in how not to run a major global financial institution or major global company of any nature, really. I think it's a pretty interesting tale. Deutsche Bank was founded in 1870. This is its 150th birthday, happy birthday. It was founded as basically an institution that was supposed to help German companies spread their wings internationally. This is the dawn of the industrial era. They're big, proud German companies like Siemens in particular that were looking for a German bank that could help them, help finance their projects all over the world, really. That's what Deutsche Bank was doing, it was also financing infrastructure projects, really, basically in most continents in South America, in the US, all over Europe and Asia. It was a pretty traditional institutional lender that was really helping the economy grow at a point in world history where there's a lot of economic growth to be had, and that trajectory went on basically uninterrupted for about six decades. Deutsche Bank was becoming one of the biggest banks in the world even at that point, and this is obviously an era before globalization. Banks were much more national or continental in nature than they are today, but it was becoming one of the biggest most important financers of infrastructure and development and industrial projects anywhere in the world. Then in the 1930s, the Nazis come to power in Germany and Deutsche Bank goes from being this international development bank to being the financial wing of the Nazi Party essentially. It helps bankroll the German military, it helps pay for the construction of concentration camps, helps pay for the manufacturer of poison gas and for selling gold, some of which was extracted from the teeth of Jews for the Nazis all over Europe and Asia. It'd become very quickly goes from being this global bank to being one that is focused on helping Germany take over the globe, which in fairness to Deutsche Bank was something a lot of big German companies were doing at the time. ED HARRISON: They were basically co-opted into it because state capitalism, that's what the National Socialism was. DAVID ENRICH: Yeah, that's absolutely right. Although, I would argue, especially with the benefit of hindsight, that this was an institution, and these were executives at this institution who got pretty caught up in it as well. They were not members of the Nazi Party, and one of the bank's leaders at the time was serving on the board, not just at Deutsche Bank, but of the chemical company, those manufacturer of the gas, this is not a case of them just following orders. This is a case of them looking to continue to thrive in an era where thriving meant being complicit in genocide. That's a trade that they made. After the war, they were accused, the institution was accused of being a war criminal and its leader was convicted of being a war criminal. The US tried to liquidate the bank and that would have been the end of Deutsche Bank, except that the British government, which was still owed reparations from World War I from Germany, really wanted Deutsche Bank to exist and they helped basically pulled Germany out of this deep depression that it was in, helped rebuild Germany, and helped rebuild and reunite Europe. The Brits prevailed and Deutsche Bank over the next several decades became, once again, one of the leading financers of development, infrastructure and corporate projects all over Europe, and it played a really leading important role in the reconstruction, redevelopment and ultimately, the reunification of Europe. ED HARRISON: Where were the French by the way during that period of time, what were they thinking about? Because my understanding is they were against letting the Germans rise up, if you will. DAVID ENRICH: Yeah. The French had some trust issues with the Germans. It's interesting. I actually don't know the answer to what the French view on the liquidation versus maintenance of Deutsche Bank was. That is interesting, because Berlin obviously was split into quadrants. The Deutsche Bank's old headquarters happened to be in the British quadrant. That was a very fateful random outcome, but it meant that the Brits ultimately were the ones who had a say over what was going to happen with this bank. It didn't just get back to normal. It's actually split into 10 or 11 different little institutions, but they all continue to operate basically under the Deutsche Bank umbrella and within less than 10 years, they were legally and formally reunited themselves. ED HARRISON: Deutsche Bank, Deutsche means German and when people think of the bank that is Germany, that's the first bank that they think of. The leading German bank in terms of, as you said, bringing Europe back together, reunification, when we get to the reunification period and beyond, what does Deutsche Bank look like compared to say, other national banks, the likes of UBS or of BNP Paribas and those kinds of institutions? DAVID ENRICH: Through the 1980s, the banking industry was really pale in comparison of what it became in the '90s, 2000s and even today. These leading national champion banks, whether it's in Germany, or Switzerland, or France or the UK, are really much more traditional lenders than what we've seen today. They're providing slightly different services depending on the geography and the Swiss were always really big in wealth management for example, but these are banks that had, in Deutsche Bank's case, a limited retail presence. They've been founded, by the way, with zero interest and serving retail investors, purely an institutional focused bank. It remained that way, for the most part, and they did have a retail franchise, but it was not that exciting, in part because retail banking in Germany is not very lucrative. I think the same goes for the international footprint of a BNP Paribas or a UBS or Deutsche Bank, it was in serving big companies from their home countries and from the continent, helping them finance projects overseas. It was a pretty plain vanilla type of business activity and that increasingly into the late '80s became a problem for banks like Deutsche Bank, because the world was globalizing at this point and it was becoming much easier for investors to whether they were in Germany or the US or Hong Kong to have a choice in where they put their money. If they wanted a certain amount of exposure to a big international bank, they obviously are going to look for the investment opportunity that presents the highest returns. If you're an investor, that used to be that that's in Germany, but in usage, it's automatically have a choice between two or three big German banks, you've now got a menu that expands on the globe, pretty much. Banks like Deutsche Bank were looking and watching with increasing envy and alarm as US banks, especially the old Wall Street partnerships converted into publicly traded companies and were just minting money and had returns on equity that were orders of magnitude higher than what Deutsche Bank was achieving. of Disaster The same goes for UBS or BNP Paribas or any number-- Barclays in the UK. The solution to that at the time was pretty simple. It was that banks like Deutsche Bank needed to get into the same game that allowed to the Goldmans and the JP Morgan's and the Citi Groups of the world to be just raking in the revenue, and that was Wall Street. It was investment banking, it was sales and trading, and it just opened up this entire new world of opportunity for these banks.