Wednesday, March 27, 2013

Germany belief in its reliance on Deutsche Bank outweighs scandals

Reuters ran an interesting article in which it looked at how Germany's belief in its reliance on Deutsche Bank gave the bankers at Deutsche Bank immunity from scandals.

Germany has become so dependent on Deutsche Bank to grease the wheels of its export driven economy that it looks willing to gloss over scandals involving its largest bank.
Germany is not alone as similar observations could be made in the rest of the EU, Japan, the UK and the US when it comes to giving bankers immunity from scandals.
Deutsche is one of several European banks under investigation by regulators in Europe and the United States for its suspected role in rigging benchmark interest rates. It is cooperating with German authorities in a separate inquiry into alleged tax fraud. Deutsche has denied allegations it misvalued derivatives and mis-sold mortgage-backed securities. 
Such an array of inquiries could be expected to damage any bank's reputation.
Such an array of inquiries would be unnecessary if Deutsche Bank and the other banks were required to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

It is well known that sunlight is the best disinfectant and this level of ongoing disclosure would encourage a culture where every action the bank takes is an action the bank would be willing to see on the front page of Der Spiegel.
But back-up from business leaders and key members of the bank's supervisory board appear to be helping Deutsche's new co-chief executives Anshu Jain and Juergen Fitschen put the scandals behind them. The two men, with more than 40 years experience at Deutsche between them, took over as co-CEOs on June 1. 
This bedrock of support is crucial for Deutsche, especially in a German election year when banks' perceived excesses and misdemeanours could become a campaign issue.
The bank's behavior risks becoming a campaign issue because there is no distinction being made between the bank as an institution and the individuals who worked for the bank who engaged in or oversaw the areas that engaged in misbehavior.

This distinction is important as it highlights the simple fact that individuals from the top of Deutsche Bank down can be punished without destroying the franchise or hurting its ability to support the German economy.
The newest revelations for Deutsche will come in the next few days when the German regulator issues a report on the bank's alleged involvement in the manipulation of Libor, a global interest rate benchmark.
If the bank was engaged in manipulating Libor, anything less than dismissal of everyone who engaged in or oversaw the areas, and oversight of the areas goes all the way to the bank's supervisory board, that engaged in manipulating Libor is an insufficient response.

After all, does Germany and Deutsche Bank really want to have individuals who were responsible for overseeing an area and failed to prevent it from engaging in manipulating a global benchmark interest rate around?
The report will test Germany's commitment to keeping Deutsche strong for the sake of its export led economy. That commitment is a common theme to surface in interviews Reuters has conducted with current and former Deutsche staff, business leaders, sources at the regulator and bank directors. 
Several sources familiar with the regulator's report have said it will focus on "organisational flaws" rather than placing blame on Jain or Fitschen, making it less likely the Berlin political establishment will call for them to go....
Regulatory capture at its finest.  But then again, the regulators didn't catch Deutsche manipulating Libor either and this suggests that a number of regulators should also lose their jobs.
Crucially for Jain and Fitschen, Deutsche's supervisory board chairman, Paul Achleitner, supports their strategy. 
A former Goldman Sachs executive who helped Deutsche make one of its biggest expansions into investment banking in 1998, when he advised it on a deal to buy Bankers Trust, Achleitner is a firm believer in a strong German investment bank. 
"What we need as a society is to come to an agreement over what we want. Do we want Germany to be home to a major bank of global importance? There aren't that many companies left in the financial sector capable of competing with U.S. firms," Achleitner said in a written statement in response to questions....
There is no reason that Germany cannot be home to a major bank of global importance.

After all, who would global clients rather deal with:  a bank that provides ultra transparency and prides itself on a culture of honesty or a bank that hides behind the veil of opacity provided by current disclosure rules and has a culture that actively supports manipulating benchmark interest rates for profit?

When the question is asked this way, ultra transparency is seen as a competitive advantage over US firms.
To ensure they retain the support of corporate Germany, Jain and Fitschen need to prove that 'Project Pharos,' a plan to become a more client focused lender really means a change in style. 
The restructuring efforts, set to be completed by 2015, has already seen about 1,400 jobs axed out of the investment bank, which had 9,094 staff at the end of 2012. 
The proprietary trading division, which used the bank's own money to make bets with a notional value of up to $128 billion on mortgage-backed securities, has been shut. 
Deutsche has pared back risk taking, reducing the value at risk at its main trading units to 57.1 at the end December, from 95.6 at the end of 2010. A lower number for value-at-risk indicates a reduced likelihood of potential losses....
Voluntarily adopting ultra transparency is a logical extension of Project Pharos.  After all, management wants to show that Deutsche has been cleaned up and to change its culture.
The bank has beefed up a 'risk and reputation' committee, which now includes four members of the Group Executive Committee, the bank's 18-member senior management panel. Potentially controversial business is discussed by the head of compliance, the chief risk officer and legal counsel.... 
Deutsche's problem is that the changes, underway since 2009, take time to filter through to the outside world, insiders say. 
"There is a lag between perception and practice," a senior Deutsche Bank executive said....
There is nothing that says you have changed as a bank like the adoption of ultra transparency.  It dramatically cuts down on the lag between perception and practice.

In the absence of ultra transparency, like Barclays recent announcements, Project Pharos can be seen as simply happy talk with no real substance behind it.
Senior Deutsche Bank staff say the reform process is credible. 
"Anybody who was involved in anything illegal is no longer with the bank, so it's unfair to keep drawing parallels between now and then," a second senior bank executive said. 
But critics says the investment bank's DNA still bears the legacy of Edson Mitchell, the American banker who helped lay the foundations of its global investment banking franchise by introducing a more Anglo-Saxon management style and Wall Street sized paychecks. 
"The vast majority at the bank doesn't need a cultural change. It's just the traders," said a Deutsche investment banker specialising in merger and acquisitions. "They have shown over and over again that they care more about themselves than about the bank's reputation."... 
Ultra transparency would provide an instant culture change to the trading floor.  Gone would be proprietary trading.  Only market making would survive.

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