Shocking Culture

Pulling No Punches

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A hard-hitting report from Germany's financial regulator.
  • Why it matters

    Why it matters

    Deutsche Bank’s reputation and businesses could continue to suffer if does not clear itself of accusations of wrongdoing.

  • Facts


    • Germany’s largest bank is struggling to free itself from a string of investigations, criminal convictions and record fines.
    • The bank was fined $2.5 billion by U.S. and U.K. regulators in April to end a five-year probe into manipulation of Libor and Euribor interest rates.
    • John Cryan became co-CEO on July 1, taking over from Anshu Jain, and will be the sole CEO from next May.
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Deutsche Bank has long hoped to draw a line under the past. “Cultural change” has been the bank’s new maxim since the 2008 financial crisis. No longer was profit to be the be-all and end-all. The whole issue of risk – and how profits were generated – were reevaluated.

But the past isn’t letting go easily. A 37-page letter from Germany’s Federal Financial Supervisory Authority, BaFin, to Deutsche Bank is a damning indictment of the culture that prevailed at Germany’s biggest bank and one of the top investment banks globally in the run-up to the 2008 financial crisis – and even after. The letter, details of which had been reported by Handelsblatt last month, was obtained and published in full on Friday by the Wall Street Journal.

It’s a culture that has cost Deutsche Bank dearly over the past few years. In April the bank was handed a record $2.5 billion fine by U.S. and U.K. regulators to end a five-year probe into its manipulation of the London-based Libor and Brussels-based Euribor interbank interest-rate benchmarks. Thousands more legal cases against the bank are still pending.

The legal cases were also part of the reason for the firing of Deutsche Bank’s chief executives Anshu Jain and Jürgen Fitschen last month, though Mr. Fitschen is staying on for another year in a transitional role together with the bank’s new CEO, John Cryan.

In the years before the financial crisis in 2008, BaFin said that a reorganization of the bank’s trading department, orchestrated by Mr. Jain, created a conflict of interest that helped pave the way for the manipulation of interbank interest rate benchmarks.

Even after the allegations of manipulation were made public, Deutsche Bank did not immediately react. When supervisory authorities intervened, they were given incomplete or false information, according to BaFin’s letter, which is dated May 11, 2015.

Deutsche Bank, in a reply to the letter on Thursday, strongly repudiated some of the accusations that its management played any role in the manipulation by its traders.

“We paid a high price and deeply regret the mistakes made,” it said in a statement. But further regulatory consequences can be expected.

The letter from BaFin records in minute detail when and which suspicious factors became known and what reactions there were to them – if any.

The letter from BaFin records in minute detail when and which suspicious factors became known and what reactions there were to them – if any.

The entire letter provides ammunition for critics, who have long argued that a good portion of the exorbitant profits generated for years in Deutsche Bank’s investment banking division were made dishonestly.

But it is also a slap in the face for everyone at Deutsche Bank who took seriously and pursued intensively the call that was made for a “culture change“ with more risk awareness and honesty – a call made by Mr. Jain and Mr. Fitschen when they took over as co-CEOs in 2012.

Frauke Menke, the author of the letter and head of BaFin’s department responsible, attacked not just former bank co-chief executive Mr. Jain, who headed the bank’s investment banking division at the time. She also attacked other board members: Stefan Krause, who was chief financial officer at the time,  Stephan Leithner, the legal affairs officer, and Stuart Lewis, risk officer, as well as Richard Walker, legal counsel. Mr. Fitschen, who is still in power, was not directly mentioned in the letter.

Josef Ackermann, Deutsche Bank’s CEO from 2002 to 2012, is also criticized for disregarding indications about wrongdoing, as is former board member for risk, Hugo Bänziger.  Mr. Ackermann and Mr. Bänziger had in the past been given credit for bringing the bank safely through the financial crisis that hit banks globally in 2008 and 2009.

There are two recurring themes. Firstly: Anshu Jain was very close to events, both in terms of the organization and his personal contacts. And secondly: As long as revenues were generated, nobody was interested in specific explanations about their provenance.

“The focus was clearly on profits and not on employees adhering to prevailing rules,” the letter said.

According to the BaFin report, Mr. Jain was responsible for a new organization of the trading department, in which the interbank market business and the preparation of information for the official interest rate, the Libor, were put together.

Instead of preventing conflicts of interest, i.e. exchanges of information, with so-called “Chinese walls,“ such an organizational separation was consciously removed. One of the traders later said that the business was organized in a way which made open communication possible, and he could not remember management ever addressing possible conflicts of interest.

The incentive to manipulate the official interest rate to benefit traders’ own deals was even intensified by correspondingly high bonuses. Two of the section’s top traders, whom Mr. Jain told Mr. Ackermann were ”our best guys,”  were awarded €130 million between them in 2009. No action was taken when they repeatedly exceeded their limits, i.e. incurred greater risks than those limits permitted.

The consequence of the reorganization was a huge increase in profits. And although as early as 2008 there were reports in the media of conspicuous differences between official interest rates in interbank trading and those actually paid, apparently nobody thought to question the source of the profits.

Mr. Jain did order an investigation 2009, but it was to check that the profits were “genuine,“ i.e. that they were not the result of false evaluations or internal settlements – and indeed they weren’t.

Ms. Menke’s comment on that:  “In my opinion, it would also have been necessary to investigate the profits from the point of view of whether prevailing rules were adhered to, or if manipulation was possible, instead of just establishing that they were real and not just on paper.”


Frank Wiebe is a New York correspondent for Handelsblatt. He focuses on finance policy. To contact the author:

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