Wall Street

Deutsche Bank’s U.S. Mea Culpa

Cryan diagonal imago
John Cryan's trying the honest approach.
  • Why it matters

    Why it matters

    John Cryan is trying to change the reputation of Deutsche Bank by ushering in a new plain-talking style. The proof will be in the implementation.

  • Facts

    Facts

    • Deutsche Bank co-CEO John Cryan, appointed in July, says the bank must tackle the “root causes” of misconduct that has plagued the bank since the 2008 crisis.
    • Mr. Cryan vowed that the bank would continue operating in the United States, even as it shrinks many of its other operations around the globe.
    • Japanese authorities on Tuesday called for fining Deutsche Bank’s Japanese subsidiary after an analyst allegedly passed on a company’s earnings before they were made public.
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It’s not often that bankers admit their bank’s mistakes. Deutsche Bank co-chief executive John Cryan is doing his best to re-write the script.

Germany’s largest bank, and Europe’s largest investment bank, has long had a difficult reputation in the United States, even before the 2008 financial crisis struck. Often labeled by critics as a “trader’s shop,” the Economist magazine in 2004 called the bank a giant hedge fund that made risky financial bets with borrowed money.

Even after the financial crisis, as the bank promised a change in culture, it was co-led by Anshu Jain, the bank’s co-chief executive from 2012 until June of this year, who was often criticized in Germany for his background as a trader and investment banker.

Mr. Cryan, who took over as co-chief executive in July from Mr. Jain, has made few public appearances since taking charge – his first in-person appearance only came when the bank announced an overhauled strategy in October. But the appearances he has made are offering a new openness that is uncharacteristic of most bankers.

Speaking Tuesday at an investor meeting organized by rival investment bank Goldman Sachs in the United States, Mr. Cryan recounted a series of things that had gone wrong at the bank in the past, confirming many of the critics’ claims about its culture.

Mr. Cryan criticized the bank’s operating mode in the past for a “headlong pursuit of revenues,” being led too much by the front office staff and priding itself on complex products that couldn’t be easily controlled.

“There’s been a lot of misconduct…we have to go and look at the root causes of some of this,” he said, adding that he wanted to make employees more responsible and accountable for the risks and costs associated with doing business: “We’re trying to make everyone feel as though they own the business,” he said.

All this is in part designed to improve the bank’s reputation in the United States, where Mr. Cryan confirmed the bank is committed to maintaining its operations even as it pulls back from other regions around the globe.

“There’s been a lot of misconduct….we have to go and look at the root causes of some of this.”

John Cryan, Deutsche Bank co-CEO

While he acknowledged that the United States “is becoming quite an expensive place to do business,” he added that: “not to be in the United States would just be inconceivable.”

He acknowledged the bank had mulled refocusing on Europe instead when the bank reconsidered its strategy over the summer and early fall, but decided against it. “We can’t do without the U.S. operations if we want to be a leading European bank,” Mr. Cryan said.

Under Mr. Cryan’s leadership, Deutsche Bank has already begun to reduce its total headcount by 35,000, more than a third of its workforce, by closing and selling operations, including its retail bank Postbank, to increase profitability.

Mr. Cryan’s restructuring also intends to break with a culture which led to high profits before the 2008 financial crisis, but thousands of lawsuits in its aftermath and billion-dollar legal fees and fines. The bank agreed to pay a $2.5 billion fine in April to settle charges with U.S. and British authorities it had rigged benchmark interest rates.

And yet, other news from Tuesday signaled just how difficult a change in culture can be.

Japan’s stock exchange regulator SESC called for fining Deutsche Bank’s Tokyo subsidiary after one of its analysts was found to have leaked information about a company’s earnings to a client.

Closer to home, in Munich, an ongoing criminal trial against co-chief executive Jürgen Fitschen and a number of former top managers turned heated. In the trial, which revolves around accusations that Deutsche Bank conspired in 2002 to bring down the German Kirch media empire, prosecutors accused the bank of prepping managers to respond to witness testimony in so-called “mock trials.”

Deutsche Bank strongly denied the accusations, and announced it would stop cooperating with prosecutors as a result. The case, which could see Mr. Fitschen and other former managers including Josef Ackermann and Rolf Breuer go to jail if found guilty, will still take a while to resolve.

The ongoing criminal case, which takes place every Tuesday in Munich, marks perhaps the most visible example of the challenge John Cryan continues to face.

But Mr. Cryan signaled at Tuesday’s investor meeting that his strategic overhaul involved a broader shift in exactly how the bank does business and uses its balance sheet to generate profits.

Calling the bank an “endemic underperformer” for a number of years, Mr. Cryan said the bank could no longer use its balance sheet in the same manner as it had done in the past. It should operate more as a broker-dealer and more quickly sell its positions.

“We’re suffering from that excessive operating leverage and we have to simplify the company,” Mr. Cryan said.

Deutsche Bank was willing to take on more risks in the field of loans, Mr. Cryan said. Because many companies have the same credit rating as Deutsche Bank, it was hard to make an attractive margin. To increase interest rate margins, Mr. Cryan said he wants to lend more money to counterparts who had slightly higher risks profiles and therefore offered higher margins.

 

Christopher Cermak and Gilbert Kreijger are editors with Handelsblatt Global  Edition. Frank Wiebe is the Handelsblatt’s New York correspodent. To contact them: cermak@handelsblatt.com, kreijger@handelsblatt.com, wiebe@handelsblatt.com

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