Back in 2008, when the business cycle was sharply turning, leading to a dramatic shortage of business for the major US investment banks which in the preceding years had gone on a hiring spree, one solution was to “shutter” one or more key competitors. This, according to some, was the underlying motive behind the elimination of the “outsider” banks, first Bear Stearns and then fixed income giant Lehman Brothers. Of course, their failure unleashed a series of unprecedented events (or as some have also dubbed them, “fringe taxpayer funded benefits”) for the banking sector, which involved a highly unpopular multi-trillion bailout, and as a result the elimination of competitors – even with the government’s blessing – is now generally frowned upon. However, merely crippling them, that’s another story.
Being crippled is what may soon happen to Deutsche Bank, whose next chapter in its melodramatic saga will involve the bank exiting some if not most of its US operations. According to a report in German newspaper Welt am Sonntag, “Deutsche Bank may be forced to shrink its U.S. activities as part of the settlement deal with the DOJ.“
Die Welt, sourcing unidentified people in the banking industry, said that radical changes to the business model are typical requirements in settlement arrangements with the U.S. government. Deutsche Bank “must clarify one or two things” before an agreement can be struck, the person said, cited by Bloomberg. Germany’s largest bank will probably give up part of its U.S. investment banking business, the newspaper cited unidentified people in the banking industry as saying. As Reuters adds, while abandoning the United States, its most important market, altogether was very likely out of the question for the bank, it could consider scaling down its activities, so as to focus more on the needs of German corporate clients overseas.
A U.S. pullback is among options that were discussed by the supervisory board and would be more likely than a sale of the asset-management business, German daily Sueddeutsche Zeitung reported Friday.
Deutsche Bank had 10,842 employees in North America at the end of 2015, about 10 percent of the 101,104 it employs worldwide. Under Chief Executive Officer John Cryan’s restructuring plans announced last year, the lender is already seeking to eliminate 9,000 jobs, including 4,000 positions in its home market. Yesterday Reuters reported that another 10,000 DB workers are on the chopping block, which could bring the total number of laid off workers to one in five.
In a message to divisional chief operating officers on Wednesday, Deutsche Bank said hiring will be put on hold with immediate effect, people familiar with the matter told Bloomberg. Chief Financial Officer Marcus Schenck told staff representatives last month that the lender may need to cut an additional 10,000 jobs to lower costs, Reuters reported Friday.
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So why the sudden demand by regulator to force DB out of the US market? For the answer look no further than yesterday’s impressive fixed income revenue gains for US-based banks…
… which beat across the board; gains, which as Bloomberg put it, “may be due to Deutsche Bank AG’s woes, according to John Gerspach, Citigroup’s chief financial officer. The Frankfurt-based lender has said it’s losing out on business as it battles to retain confidence amid mounting legal charges. “Some of that could be related to some of what’s going on at Deutsche” Gerspach said Friday in a conference call.
Think of it as two birds with one stone: the US retaliates for Apple’s $14 billion tax bill with a $14 billion settlement (which will likely end up far lower), and US banks benefit from gaining the market share that Deutsche Bank will be forced to abandon in the US, marking an optical victory for both the DOJ, which is seen as “battling” tough banking foes, and also the US banks themselves.
As for Deutsche Bank, well as long as it is merely crippled and not killed, Germany will not protest too much. And even in a worst case scenario there is a scapegoat: Mario Draghi, whose NIRP the German lender has already bashed many times as an existential threat to the bank. Should something “terminal” happen to Deutsche Bank, all fingers will point at the Italian former employee of Goldman Sachs…