EDITORIAL: Deutsche Bank: from hubris to a tail between its legs
The bank’s decision to shed 18,000 jobs as it abandons its ambitions to compete with US banks makes for a cautionary tale
In just over two months, it will be 11 years since the collapse of Lehman Brothers captivated audiences across the world, with the sight of just retrenched workers walking out with boxes containing their goods.
Even as that was unfolding, very few expected what would follow. It was an unprecedented event caused by the Federal Reserve defying what was then unanimously accepted orthodoxy, that the central bank would step in and save “too big to fail” financial institutions.
After all, just a few months earlier, in March 2008, it had stepped in to prevent the collapse of the smaller Bear Stearns. That was the first rescue of a broker since the Great Depression early in the 20th century and culminated in the company being taken over by another US banking giant, JP Morgan.
Others, including insurance giant AIG, also received assistance, which partly explained the shock that greeted the decision to let Lehman Brothers, which just a year earlier had been rated by Fortune magazine as No. 1 among “most admired securities firms”, file for bankruptcy.
Bear Stearns’ fate turned out to be a mere foretaste of what was to befall financial markets and the global economy, thanks partly to the Fed’s decision to let Lehman Brothers collapse, which caused chaos in financial markets, froze credit and sparked fears that other big financial institutions would similarly collapse, causing them to lose their ability to borrow.“”
The consequences of letting Lehman go down as it struggled to roll over existing debt reverberated across the globe, plunging economies into recession.
Ironically the worsening financial crisis forced central bankers to rescue other banks, directly contributing to ballooning government debt in Europe and sparking the sovereign debt crisis that would almost lead to the collapse of the euro.
In a way the sight of former workers exiting what was once the world’s biggest financial services company, if briefly, in the same manner that befell Lehman Brothers’s employees a decade earlier is just a reminder that the consequences of that crisis are still very much around, though the decline of the former German powerhouse had its own peculiar reasons, including a broader decline of investment banking in Europe.
In announcing about 18,000 job cuts and exiting its equities business, Deutsche Bank conceded defeat in its long ambition to compete with the US-based global banks. It will now go back to its roots, mostly catering for German industrial companies.
Not that markets were overly impressed, with the shares dropping more than 5% after the restructuring plan was announced.
The tale of Deutsche Bank is just one among many for a financial system that went completely off the rails in the boom years, marked by hubris, arrogance and inadequate regulation.
The bank was among those that were hit with fines over the Libor scandal, where commercial lenders were found to have rigged an interest-rate system against everything from business loans to mortgages. Deutsche Bank’s share was more than $2bn.
It was also a key player in the subprime debt crisis that sparked the global financial crisis and in 2016 faced a $14bn charge in the US, before eventually reaching a $7.2bn settlement with the US department of justice. More recently, the bank has been mired in controversy over links with the US president, Donald Trump, and his family. And just this week it emerged that the bank is being investigated over a money-laundering scandal in Malaysia.
In one last reminder that old habits die hard, Deutsche Bank was left red-faced when it was reported that just as workers were being told they were losing their jobs, some of its senior managers in London were being fitted with £1,200 (R20,964) suits.
Deutsche Bank’s historic retreat won’t cause another global crisis and might even secure its future. It’s just a cautionary tale, for those with short memories, of what happened to the global financial system when hubris and complacency were allowed to reign.