The Music Stops at Deutsche Bank

The recent resignations by the Co-CEO's of Deutsche Bank, Juergen Fitschen and Anshu Jain have come as a bit of a surprise to many.

To me it was just a matter of time before the music of the investment banking merry-go-round that was Deutsche Bank would stop and there would be far too few chairs for everyone to find a seat.  

Mr Jain, an excellent salesman who honed his skills in the 90's forging excellent relationships with the hedge fund community was one of the first people Mr Mitchell took with him when he left Merrill to join Deutsche in 1995.  

The Deutsche Bank they joined was essentially a large commercial bank with a poor investment banking franchise outside of Germany where it was big player in a small pond. The Merrill Lynch Mr Mitchell joined in the mid 80's had been a similar animal.  A player with the slow accounts, and pretty much not involved with fast money.  It was known as a wire house which essentially traded in between the institutional and the retail market.  

Upon joining Deutsche Bank they set about turning it from a "broker" into one of the premier principal houses on the street.  At Merrill everyone wanted to be Goldman Sachs, but the retail broker mentality of the senior management never understood risk and so were always uncomfortable with it.

The cultural gap between a Deutsche Bank, or a Merrill and a Goldman was that the former were big and ponderous and the latter was smart. very smart, and utterly ruthless. In addition to this despite the fact that it had gone public, which in and of itself was a reflection of their smarts and their ruthlessness, the partnership culture hadn't been defaced.

Deutsche didn't necessarily yearn to be a Goldman Sachs, but they were certainly not happy to be a big fish in the (relatively) little pond of Germany.  Under Mitchell and Jain the way forward would be to work with the fast money, essentially becoming one of them, willing to take serious principal risk and looking for the slow money, institutional or retail to help take them out. 

And although Mitchell and Jain were certainly smart enough and definitely ruthless enough to work at Goldman, Deutsche offered the best of both worlds.  They could replicate Goldman's culture, but unlike Goldman, use OPM- other people's money.  

And those other people were the shareholders, large and small, representing one of the bastions of the German financial, social and political establishment. 

Moving over to Mr Fitschen for a moment, he was part of that German establishment.  That is not necessarily a compliment.  Without going into a longwinded history of Germany there are still remnants of what Prof. George Stein described as "feudal modernity" in Germany, especially in such institutions such as Deutsche Bank.

Meritocracy is not a hallmark of such institutions.  Many would say that the only reason Mr Fitschen was elevated to Co-CEO  was that he was a Deutsche Bank insider. Mr Ackermann who picked up where Mr Mitchell left off* with the added benefit that he could speak German could fit into the Deutsche Bank hierarchy.  Anshu Jain could not.  

The Co-Head solution is the worst solution an institution can impose.  The suggestion that the world could be split into a domestic and non-domestic market was a throwback to pre-Mitchell days.  

And so, regardless, the co-head structure meant that as long as Mr Jain could deliver profits, his star would stay aloft. 

But his profits stagnated, and his organisation began to find itself embroiled in regulatory/legal disputes which took much management time and in the end would require far-reaching changes in the way the Bank operated.  

Enter Mr John Cryan.

A Brit, who speaks German.  A finance guy which is bankspeak for someone who not only looks at the revenue side of the balance sheet, but also the cost side.  

Under Mitchell Deutsche Banks cost ratio was continually bumping up against 98-99%.  My motto was that one wanted to work at Deutsche Bank, but not own the stock.  This continued under Ackermann and as recently as the end of 2014 it was still over 75%. 

Most investment banks target a cost income ratio below 65% and in really good years are in the 55% range.  Those with high cost income ratios tend to focus on revenues, or more specifically revenue growth.  Those with lower ratios look very closely at costs.

I should expect that Mr Cryan will swing a sharp blade cutting into much of the fat at Deutsche Bank.  He will certainly cut into muscle.  The question is will he cut into the bone.
Cost ratios are important.  As are capital ratios.  Human capital is probably the most expensive, and so it is where Mr Cryan will focus, followed by capital usage.  

The question is whether the accountant Mr Cryan will be able to square the circle of cost cutting while maintaining the revenues.

I understand he left UBS because he found the stress of the turnaround overwhelming.  

Herzlich willkommen nach Deutschland.....

*Mr Mitchell died in a private plane crash December 2000.