Deutsche Bank — 20 years after the deal that sealed its fate

Twenty years ago today, Deutsche Bank announced the deal that made it the biggest bank in the world — and sealed its fate.

The German bank paid $10.1bn for Bankers Trust, the largest foreign takeover of an American bank and an acquisition that saw Deutsche leapfrog UBS and Citigroup to become the world’s largest bank by assets.

In a sign of things to come, Deutsche committed $400m in bonuses to retain Bankers Trust staff. Some individuals received $10m each.

Since then no other foreign institution has committed more capital to making it on Wall Street.

At times during those two decades, the land grab looked to have paid off.

Before the crisis, with a balance sheet that could outmuscle the competition and star bankers attracted by Deutsche’s willingness to pay above the market rate, Deutsche brought in hundreds of millions of dollars on daring derivatives trades. Trader Greg Lippmann was immortalised in The Big Short for an outrageously successful bet against the US housing market.

Indeed, as US investment banks migrated away to midtown Manhattan, Deutsche was the last bank in the cradle of US finance, the only “Wall Street firm” that fully justified the term.

Yet it was mostly a mirage, paving the way for the turmoil that continues today — police raids, capital calls, management upheaval.

Mike Mayo, a long-time bank analyst who worked at Deutsche between 2005 and 2007, says: “It’s always hard to make an investment bank acquisition work because you have to pay twice — once for the business and then for the people.”

It feels like Deutsche and long-suffering shareholders have paid many more times for Bankers Trust — including in multi-billion-dollar penalties for a staggering array of flouted rules.

“Deutsche Bank reflects a trifecta of pain due to an acquisition, lost share and lack of capital,” says Mr Mayo.

Patience and prudence — all those qualities that used to be associated with German financial behaviour — were ignored. If Deutsche had husbanded capital and made safer bets rather than rushing to conquer the world with the Bankers Trust acquisition, it might today be in a place to be the universal banking champion that Europe lacks.

But the US deal cast the die, which was then used to gamble money away. This is the bank that literally owned a Las Vegas casino and yet acted like the high-rolling punter (with a fully loaded credit card). This was the bank of last resort for Donald Trump.

After the 2008 crisis, proud to have avoided a government bailout, Deutsche did not engage in the cost-cutting and capital conservation that much of the rest of the industry did. Never mind that its income statement was flattered by hidden losses. Never mind that the rules had changed.

Even as he announced the Bankers Trust deal in November 1998, Deutsche’s then chief executive plotted even more. “Our shareholders, if the story is right, will be more than ready to furnish more money,” said Rolf Breuer.

Shareholders have indeed furnished more money, though for survival not further expansion — paying up to plug capital holes.

Even now there is hope. New investors are attracted by the thesis that the bones of Deutsche are sound and that finally there may be a determination to cut away the rotten flesh. Pivot from trading to serving the interests of globe-trotting European multinationals and there is a good profitable business. Yet even if Deutsche finally follows the prudent path, its fascination with the dicier parts of investment banking has proved a colossal waste of time, effort and money.

tom.braithwaite@ft.com