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NYT
In 2005, Deutsche Bank, then a powerhouse in the selling of risky derivatives on a global scale, was minting money.
To mark the moment, the bank's profit engine ” its global markets division ” commissioned a book about itself. The remembrance would celebrate how Deutsche Bank, once a sleepy lender to German car companies, had transformed itself in just 10 years into a force in financial engineering, selling interest-rate swaps, credit derivatives and opaque tax-slashing investment vehicles to the world's wealthy elite.
In the view of one senior executive, it all came down to masterly salesmanship by a single man, Anshu Jain, the chief promoter of the bank's hottest product: risk.
"The size just kept mounting and mounting," this person marvelled in a passage in the book, referring to the growing demand for some of Deutsche's raciest fare. And it was Jain, the bank's eventual leader, who"dramatically accelerated that delivery of complex structures to the broader client base."
Today, these words read more like an epitaph than a commemoration. On Dec. 22, the bank agreed to pay $7.2 billion to settle a claim with the Justice Department that it pushed toxic mortgages on investors in the years leading up to the American housing bust.
The fine was one of the last ” and among the stiffest ” penalties imposed upon global investment banks by the Obama administration for their role in the financial crisis. And it was also a fitting coda to a turbulent 21-year run by the trading and banking unit at Deutsche that was inspired by three derivative specialists who had been poached from Wall Street years earlier.
In addition to Jain, they included Edson Mitchell, a charismatic builder of businesses at Merrill Lynch who, in 1995, was given a mandate by Deutsche to create a world-class investment bank in London and spare no expense in doing so.
Mitchell recruited two colleagues from Merrill to help him in his task. William S. Broeksmit, a derivatives trader with a risk manager's nose for spotting financial dangers, was one. And Jain, then just coming into his own as a purveyor of the exotic to hedge funds around the world, joined him.
Today, two of these three men are dead.
Mitchell died in a plane crash in 2000 at age 47. Broeksmit committed suicide in 2014 at 58.
As for the 53-year-old Jain, his carefully crafted plan to finish what his mentor, Mitchell, started at Deutsche Bank has ended in disappointment.
In the years since the financial crisis, many investment banks have had to pay significant amounts to atone for their various sins. And while the sum of Deutsche's fines is in the middle of the pack, the bank has been drawn into some of finance's furthest frontiers when it comes to the pursuit of profit.
Deutsche has been a primary offender in two of the biggest banking scandals of the past decade: promoting toxic mortgages to unwitting investors and manipulating for profit the main lending rate for banks in London. In the process, it has agreed to pay over $9 billion in fines and consumer relief. The bank has sold tax-reduction products to hedge funds, and is alleged to have helped Russian investors illegally move money overseas.
This is also a bank that marketed complex derivatives to Europe's sickliest bank, Monte dei Paschi in Italy. And it is one of the largest lenders to Donald J. Trump, having extended roughly $300 million in loans to the president-elect's businesses.
Analysts calculate that of the 20 billion euros in profits that Deutsche's trading and banking unit accumulated since 1995, as much as 15 billion euros will ultimately be returned to regulators via fines and penalties. Of course, not all of this lands in the lap of Mitchell ” and more recently, Jain.
The investment bank they created remains a power in bond and foreign currency trading worldwide. And from the beginning, it was overseen by a strong-willed German board that knew well the risks and rewards that came with such a business.
It is also the case that when Jain became co-chief executive of Deutsche in 2012, one of his first priorities was lowering the bank's risk, which he did by unloading opaque, hard-to-trade assets. In spring 2015, Jain put in place his own plan for reforming the bank, which his CEO successor, John M Cryan, has not entirely abandoned.
That said, Cryan has made it clear that his Deutsche Bank will be markedly different from Jain's. Since taking over last year, Cryan has preached simplicity, less risk, better internal controls and reduced reliance on derivatives. As for the investment bank he inherited from Jain, he has said that he is committed to it but that it will be a very different institution under him.
Through spokesmen, Jain and Deutsche Bank declined to comment.
Following Trump's election, Deutsche's stock has been on a tear, up over 30 percent on the hope that the combination of a banking-friendly president and a more cautious leadership under Cryan will help the bank chart a new path.
When an investment bank trips up in spectacular fashion, human misfortune is often a consequence. That could mean a cashiered chief executive seeing his career and reputation ruined. Or a rogue trader who loses billions of dollars and ends up in prison.
But there have been few instances in which the personal toll surrounding a bank's rise and fall has been as profound as this one.
Out of chaos, efficiency
By December 2000, Mitchell seemed to have accomplished the impossible. In just five years, he had hired thousands of traders and bankers from firms all over Wall Street (an effort that got a boost by the acquisition of Bankers Trust in 1999), forging not just a strong culture but also a highly profitable business.
While there were numerous deposit-driven banks in Europe that made a play for American investment banking business in the 1980s and 1990s, none did it with the zeal of Deutsche Bank under Mitchell and later Jain.
Even before he moved to London, Mitchell had developed a reputation for being one of Wall Street's premier recruiters, with a pied-piper-like ability to attract, and keep, the best traders and bankers around. He had a special methodology in his choosing, inclining toward those who came from big families and played team sports in college, because he felt that these traits would give him"athletes" capable of working well together in the large competitive grouping of a trading floor.
"It was as if entropy was his vision ” that out of this chaos would emerge a greater efficiency," said Kevin Ingram, a former top bond executive at Goldman Sachs whom Mitchell recruited in 1996 and who left Deutsche Bank in 1998 and later pleaded guilty to money-laundering charges."He did an extraordinary job in managing egos."
At Merrill, Mitchell, Jain and Broeksmit had used their expertise in derivatives and swaps to carve out market share from established players like Goldman Sachs and Morgan Stanley. As Broeksmit would recount in an unpublished interview with a reporter for Bloomberg News, the strategy worked because of Jain's skill, while at Merrill, in enticing his hedge-fund clients into volatile yet profitable investments ” such as bond futures, swaps and other derivatives.
"He was persistent and persuasive and able to show it would make good economic sense," Broeksmit said, according to an email exchange with the reporter. Broeksmit's son, Val, provided documents and email communications from Broeksmit's files to The New York Times. A musician, the younger Broeksmit taught himself finance, and for several years he has been looking into his father's career at Deutsche in a search for answers as to why he took his life.
The plan was to use a similar strategy in London with Deutsche Bank.
"I remember Edson called me up and said, 'I have just been given the keys to the kingdom at Deutsche Bank ” we can do whatever we want,'" recalled Michael G.= Philipp, one of the first Merrill executives to follow Mitchell to Deutsche;"2,500 people in 18 months ” it has never been done since."
Mitchell's untimely death in 2000 was a devastating blow to the bank and more so to his many friends and followers. But it did not alter the bank's mission, the mantle of which was eventually taken on by Jain.
By the time of the financial crisis, 90 percent of the bank's profits would come from the London-based global market's division ” fueled mostly by derivatives-driven trading bets and its dominant positions as a foreign currency trader.
All that changed in late 2008.
With one investment bank after another going bust, Deutsche's board had become increasingly concerned as to the bank's derivatives holdings, according to documents reviewed by The Times. In October 2008 the bank's derivatives exposure, net of cash collateral, was 181 billion euros, these documents show, a sizable sum given its equity cushion of just 30 billion euros.
Starting in 2007, Jain had already taken steps to materially reduce Deutsche's risk profile. However, he and his team pushed back hard against the view that the investment bank's power should be significantly curtailed.
"This underlines the paradox of DB" read a briefing paper for Jain prepared in advance of the bank's general executive committee meeting in mid-December 2008.
