bank could provide more services to major corporations. The timing of this effort was coincidental with BT’s emphasis on the build-up of mergers and acquisitions advisory capacity, which in turn related very well to the growing ‘‘leveraged buyout’’ (LBO) phenomenon, and ensured a superior return on equity.
Mr Beim followed an employment policy of hiring the best and paying accordingly. Traditional domestic corporate lending was de-emphasised in favour of initiating and completing highly leveraged deals and other specialised lending operations.
By early 1985, BT had placed several groups of asset product managers and sales officers in New York, Tokyo, London and Hong Kong. The asset product management group worked with account officers to design the loan sale structure and related documentation. Most of the business was directed at large companies seeking substantial funding and broad access to the financial markets. The group could recommend financing programmes to improve the market access of such companies. Corporate finance product specialists might also be involved, so the bank provided credit expertise, technical advice and sales knowledge when working with customers.
Sales officers targeted investors as potential purchasers of the loans, and kept in close contact with them. Loans were sold to foreign banks, pension funds and insurance firms. Sales officers would spend weeks educating potential investors. The whole process ensured that a high proportion of the BT loan portfolio was in liquid form.
The ‘‘tactical asset and liability committee’’ was BT’s policy-making body for loan sales. It met on a weekly basis to decide on the quarterly pricing of loan sales. The Committee focused on credit risk, market conditions and liquidity needs; it also sought out new opportunities for the loan origination function.
Credit policy
In line with the greater emphasis on merchant banking and the loan sale programme, credit management procedures at BT were also tightened. The old credit review system had required loan approval by at least two account officers. The new process required at least one signature to be from a credit officer. Thus, credit officers became lending officers.
Line management was responsible for the credit approval process. Each department had to write a credit policy statement and specify lending authority for its line and credit officers. For example, division managers would be given a credit approval limit. Loan amounts within this limit could be approved with the signature of an account officer and the division manager. Larger loans required the signature of the group credit head and the loan officer. Loans larger than the group head’s credit limit went to the department credit officer. Loans in excess of $200 million required the signature of the department head or the chief credit officer.
Using RAROC, management could assess the amount of credit risk embedded in all areas of the bank. Risks were placed in 60 industry categories, which were graded according to expected performance. The ranking was based on variables such as technical change, regulatory issues, capacity constraints, business cycle sensitivity, ability to protect pricing and margins, and structural stress. These variables were considered important because of their effect on growth and cash flow variability over both near and intermediate term horizons.
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Global markets
Global markets were considered to be of increasing importance. For example, foreign exchange facilities were expanded to provide 24-hour market-making capacity with 10 geographic locations. The bank was actively involved in the global syndicated loan euronote market and equity-linked derivatives.
Global markets was a functional division under the financial services side of BT. It had seven divisions. Half dealt with market-related activities, such as short-term funding and foreign exchange. The rest were concerned with financing activities, such as public fixed income markets, private placements, commodities, short-term and variable rate finance, and multiple currency derivatives. The objective was to assist clients in the management of their own risk positions and to establish product areas whose profitability was uncorrelated, to achieve a natural diversification and sustain profitability, no matter what the market situation.
The seven divisions had 60 profit centres, globally organised across time zones, which helped interaction. Customer, product and geographic variables were connected through a process of synergy. Employees of ‘‘global markets’’ numbered about 2200 and made up about 20% of the BT payroll. They were located in seven countries and 10 cities, including all the major world financial centres.
The nature of the divisional organisation emphasised a global product focus across time zones, at the expense of a more client-oriented regional focus. The system did appeal to large corporate clients wanting to structure multi-market financing for a cross-border acquisition. However, the organisational structure discouraged the development of local client relationships – BT acknowledged that the local clients had to be sold the approach by being shown the superiority of the product. There was an ongoing debate about whether the lack of strong client relationships would undermine the attempt to establish a leadership position BT had in financial engineering, deal making and trading.
BT had very little in the way of a distribution and sales network typical of most Wall Street houses. To maintain a competitive edge, the bank increasingly looked to financial engineering or structured finance, inventing complex and often lucrative products for specific clients. BT normally relied upon other firms to provide the distribution and sales functions it needed.
Management style
The organisational changes at BT were designed to promote cooperation among BT business units, so as to provide a high-quality, innovative service to its clients. For this reason, it moved from a hierarchical structure typical of a commercial bank to the horizontal structure of most investment banks. However, there was hostility to the change among long-time BT employees, who were concerned with the stress on entrepreneurial initiative.
BT modified relationship banking by requiring staff to delve into product specialities and relate these to business lines required by each customer. Staff moved between the main centres loosely assigned to institutional clients, improving, it was hoped, organisational agility and fostering innovation and creativity. The approach should sustain enough flexibility in the organisation to allow BT to take advantage of new market opportunities
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immediately, whether in the form of a long-term relationship or a one-off profit-making opportunity. Though employees were encouraged to foster relationships with clients, they were also advised to look for opportunities to assist with an individual transaction.
Thus, the BT banking style differed from that of investment banks, where employees were rigidly assigned to either corporate or institutional customers, and from commercial banking, which tended to rely on ‘‘hands off’’ relationships to generate spread income.
To attract the top people into the organisation, BT dispensed with the standard commercial bank compensation scheme. Incentive compensation was introduced in the resource management department (RMD), then extended to other parts of BT. Traders were paid according to their performance, as measured by a high risk-adjusted rate of return on capital, as opposed to limits. The top performers received bonuses of 100% or more. In the corporate finance department, BT also linked compensation to performance, but, unlike RMD, bonuses were based both on the profitability of a new business and the degree to which the officer cooperated with others in the organisation to foster ‘‘excellence through common purpose’’. For example, in commercial banking, bonuses could now exceed 100% of salary (compared to a previous limit of 50%). The size of the bonus pool was not just a function of a department’s profitability, but of total profits generated throughout BT.
Trouble with Swaps: 1993–98
In 1993, net profits at BT were $1.07 billion, $596 million of which came from proprietary trading and advising corporations on the management of different types of market risk, such as currency and interest rate. The bank congratulated itself for being a model modern investment bank with a performance-driven culture and innovative trading strategies such as the use of derivatives to manage risk on BT’s own trading book, and for its corporate clients, too.
However, in the spring of 1994, this part of BT was suddenly faced with serious problems. Several firms announced losses arising from swaps sold to them by Bankers Trust, New York. In March 1994, Gibsons Greetings Inc. announced losses amounting to $19.7 million from leveraged interest rate swaps, and in September of that year, commenced legal action – suing BT for $23 million to cover its derivatives losses, and $50 million in punitive damages. The case was settled out of court in January 1995 – BT paid $14 million to Gibson Greetings, after a tape revealed a managing director at Bankers had misled the company about the size of its financial losses. Bankers Trust had already (in December 1994) paid a $10 million fine to US regulatory authorities in relation to the affair. It was also required to sign an ‘‘agreement’’ with the Federal Reserve Bank of New York, which required BT to:
žAllow the regulator to monitor and closely scrutinise the leveraged derivatives business at Bankers Trust.
žEnsure clients using these complex derivatives understood the associated risks.
žFund an independent investigation into the affair, to be undertaken by an experienced counsel.
Two other firms also announced large losses from BT’s swaps. They also accepted out of court settlements – $67 million to Air Products and $12 million to Federal Paper Board Company. At this point BT had paid out over $100 million in the settlements and fines
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relating to improper behaviour by its leveraged swap group. The bank sacked one manager, reorganised the leveraged derivatives unit and reassigned staff to other jobs.
However, another big loser appeared determined to have their day in court. In April 1994, the chairman of Procter and Gamble (P&G) announced losses of $157 million on leveraged interest rate swaps. In 1993, the corporate treasurer at Procter and Gamble had purchased these swaps from Bankers Trust. One of the swaps was, effectively, a bet and would have yielded a substantial capital gain for Procter and Gamble had German and US interest rates converged more slowly than the market thought they would. In fact, the reverse happened, leading to large losses. The second swap was known by both parties as the ‘‘5 – 30 swap’’, and involved P&G receiving a fixed rate pegged to the 5-year US Treasury note and the 30-year Treasury bond and paying a floating rate pegged to the commercial paper rate. According to P&G, Bankers Trust guaranteed P&G would pay 40 basis points below the commercial paper rate. However, short-term rates fell relative to long rates, so P&G ended up facing a loss. Procter and Gamble refused to pay Bankers Trust the money lost on the swap contracts. P&G claimed it should never have been sold these swaps, because the bank did not fully explain the potential risks, nor did the bank disclose pricing methods that would have allowed Procter and Gamble to price the product themselves. Bankers Trust countered that P&G owed the bank close to $200 million. The question is why these instruments were being used for speculative purposes by a consumer goods conglomerate, and whether the firm had been correctly advised by Bankers Trust.
In late 1994, BT set aside $423 million as a provision for derivatives contracts that might prove unenforceable; $72 million was written off immediately. This provisioning suggested BT could lose over $500 million. Furthermore, the bank’s trading division was bound to see a decline in business because so much of it depended on reputation and clients’ trust in the bank – trading had already experienced a steep decline in profits. Bankers Trust faced potential severe financial difficulties and even collapse because of this derivatives-related scandal.
The publication of internal tapes which revealed a cynical attitude in the treatment of customers was unhelpful for the bank. In one video instruction tape shown to new employees at the bank, a BT salesman mentions how a swap works: BT can ‘‘get in the middle and rip them (the customers) off. . . take a little money’’, though the instructor does apologise after seeing the camera. Another explained how he would ‘‘lure people into that total calm, and then totally f- - - - them’’.62 Further revelations came to light in pre-trial hearings, with, for example, a reference to an acronym used by BT derivatives staff: ‘‘ROF’’, for rip-off factor.
Several rulings were made by the judge63 over the two years leading up to the trial:
žP&G’s argument that swaps came under federal jurisdiction was rejected, as was their claim that BT has a fiduciary duty to P&G.
žP&G had to prove the bank had committed fraud before it could ask the courts to judge whether BT had engaged in racketeering.64
62Source: The Economist, ‘‘Bankers Trust-Shamed Again’’, 7 October 1995.
63US District Court Judge John Feikens.
64In the USA a firm or individual found guilty of racketeering (running a dishonest business) faces enormous fines and often jail.
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žThe judge ruled that P&G knew the risks associated with one of the contracts and, unless it could prove otherwise, should assume financial responsibility for that contract.
žHowever, the court also ruled that Bankers Trust had a duty of good faith under New York State commercial law. Such a duty arises if one party has superior information and this information is not available to the other party.65
Even though the judge appeared to be favouring Bankers Trust, if it went to court, the trial would be by jury, and US banks often lose cases because juries see them as unscrupulous profit machines. Both companies also had reputations to maintain. BT’s reputation had already suffered and losing a court case would make matters worse. For Procter and Gamble, if the details of the case were discussed in open court, they could reveal that P&G, an enormous conglomerate, had a financial team with little understanding of financial derivatives.
More than two years after P&G announced its losses, and 11 days before the trial was due to begin, the two parties reached an out of court settlement. It came after new rulings by the judge, who dismissed or ruled against more allegations against BT made by P&G. P&G agreed to pay Bankers Trust $35 million in cash, and the bank was to absorb the rest of the amount ($160 million) in the dispute. P&G would also transfer $14 million worth of securities to Bankers Trust in relation to another derivatives transaction, which P&G claimed was not part of the law suit.66
Recall one of the conditions set by US regulators: that the affair was to be investigated by independent counsel. The report, co-authored by a regulator and a lawyer, was published in July 1996, after the law suits had been settled. It cleared Bankers Trust of any intention to defraud when it sold risky derivatives investments. However, it criticised the bank for failing to hold the derivatives section under senior management control. Certain employees had created an environment focused solely on profit at the expense of good risk management controls. The report called for disciplinary action to be taken against certain individuals (not named) who had failed to meet their responsibilities and/or engaged in misconduct with respect to these derivatives. By this time, most of the management team connected to these incidents had left the bank. In response to the report, Mr Newman noted that the entire section had been revamped with state of the art risk management techniques.
In 1994, derivatives sales and trading were the firm’s most profitable business by a long way. Bankers Trust had excelled at selling derivatives to companies for hedge purposes (to protect firms from fluctuations in interest rates, foreign currency values and commodity prices) and to speculate, or bet on moves in these rates and prices. The bank also profited from proprietary trading. The scandals not only undermined BT’s reputation, but the bank also lost its main source of profits.
To avoid future law suits, BT decided to send product contracts to several members of a client firm, not just the finance officers. In February 1995, a senior committee was formed to look at ways of improving BT customer relations, including employee compensation
65A third criterion for duty of good faith was noted by the court: the informed party knows the other party is acting on the basis of misinformation, though the duty would arise even if this did not apply.
66Source: Lamiell, P. (1996), ‘‘Analysts: Both Sides are Winners in Derivatives Settlement’’, The Associated Press, 9 May.
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schemes that emphasised the importance of teamwork and longer-term client relationships, not just high sales. Also, new information systems were introduced. In May 1995, Mr Sanford announced his resignation as chairman, effective in 1996.
10.8.4. New Chairman. . . New Strategy
In April 1996 Frank N. Newman (a former deputy secretary of the US Treasury) was named as the new chairman of Bankers Trust, succeeding Mr Sanford. He had been president and chief executive officer of Bankers Trust for a short time before being made chairman. The appointment was a clear signal that the bank was determined to put its house in order, especially in the area of risky derivatives. It is no coincidence that the P&G case was settled a month after his appointment. Newman’s job was clear cut – he had to restore the bank’s reputation, and ensure adequate risk management schemes were in place. Mr Newman also decided to reduce the banks’ dependence on risky derivatives, and not only because of the 1994 leveraged derivatives fiasco. In July 1996, the risk management services group lost $22 million (up from a loss of $9 million the previous year) due to losses in commodity derivatives after copper prices plunged in June. In Newman’s view, a more diversified bank was a safer, more profitable bank. In several statements, Newman made it clear that rather than being known solely for its expertise in proprietary trading and foreign exchange operations, the bank had to develop a high reputation and be able to offer a full range of investment banking services to global customers in the developed and emerging markets. He appeared to be backed up by the figures. In the second quarter of 1996, BT’s profits were largely due to the investment banking division.
An important move to boost investment banking was the acquisition, in late 1996, of a niche investment bank, Wolfensohn & Co., for $200 million in BT stock. The firm was known for its mergers and acquisitions and corporate advisory services. Its chairman, Mr Paul Volcker, agreed to stay on. A former Chairman of the Federal Reserve, he would help to improve BT’s reputation as a reformed bank, unlikely to repeat earlier mistakes. In early April 1997, BT announced that the highly respected and oldest US investment bank with a retail stock broking interest, Alex Brown and Son Ltd, was to merge with Bankers Trust. This was the first merger between a US securities house and a commercial bank. At the time Alex Brown was a highly reputed stockbroker based in Baltimore. A stock swap (1 Alex Brown share for 0.83 shares of BT) valued the acquisition at roughly $1.7 billion. According to the BT chairman, the bank would gain strength from Alex Brown’s US equity markets, research, institutional investor sales, high income retail67 and distribution underwriting. Its blue chip reputation would also help BT. Alex Brown would have access to syndicated lending derivatives, and risk management.
The purchase reflected the changing scene in US financial services from a regulatory standpoint. Congress was proving very slow in repealing the Glass Steagall Act, which since 1933 had separated commercial68 (BT) from investment banking (Alex Brown). The courts
67Alex Brown’s had 460 brokers who focused on high income clients.
68As explained in Chapter 5 (see section on US regulation), a reinterpretation of section 20 of the Glass Steagall Act made it possible for commercial banks to engage in investment banking operations provided the revenues
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and regulators responded with more lenient treatment of commercial banks that wanted to test the boundaries. The purchase of Alex Brown is a good illustration of this point.69 The deal was possible under section 20 of the Act because the revenues earned from Alex Brown would amount to about 20% of BT’s total earnings in underwriting. Under the old regulations (limit of 10%) the merger would not have been allowed. However, this limit had been raised to 25% earlier in 1997, which meant there was no violation of section 20 of the Glass Steagall Act. It is interesting that at this juncture, Bankers Trust was, for regulatory purposes, classified as a commercial bank, even though the strategy was to transform it into an investment bank.
Bankers Trust opted to buy a highly reputable investment banking businesses instead of organic growth. The jury is still out on which option is superior, if either. Other commercial banks, including some foreign ones such as Union Bank of Switzerland, had committed themselves to building up investment banking expertise over time. In the UK, attempts by the large commercial banks (Barclays, Midland, National Westminster Bank) to take advantage of regulatory reform (‘‘Big Bang’’, in 1986) and move into investment banking (whether through organic growth or purchase of existing investment banks) largely failed and by the late 1990s, some of these banks had largely divested themselves of their investment banking business.
It was not expected the merger would result in a high number of redundancies or cost savings because the two firms’ activities complemented each other. BT Alex Brown kept its headquarters in Baltimore. The firm handled IPOs for small companies, specialising in technology, retail, communications and health care. It also had a fund management group and offers stock brokerage services to high income individual investors.
In the same month, BT announced it had acquired NationsBank’s institutional custody business, which increased the bank’s total global assets under custody by just over $130 million to roughly $2000 billion. BT also acquired National Westminster’s equity underwriting business in 1998. These acquisitions – Wolfensohn, Alex Brown, equity underwriting and a bigger custody business – showed how Mr Newman was changing the strategic direction of Bankers Trust. The bank was in a position to offer a broad range of investment banking/wholesale commercial banking products, though it remained in the second tier and was vulnerable to takeover by one of the major global players.
In March 1997, Bankers Trust signalled a substantial commitment to emerging markets when it announced the formation of a new subsidiary: Emerging Europe, Middle East & Africa Merchant Bank (EEMA), to be managed from London. The idea was to consolidate its trading and investment banking activities in Central and Eastern Europe, the Middle East and Africa. London was to run BT’s offices in the Czech Republic, Greece, Hungary, Poland, Turkey, Russia, South Africa, Bahrain, Egypt and Israel.
from the securities activities were limited to some percentage set by the Federal Reserve, and appropriate firewalls were in place to keep areas where there might be a potential conflict of interest separate.
69 In February 1997, Morgan Stanley, the investment bank with big corporates as their clients, merged with Dean Witter Discover, a largely retail brokerage and credit card company. The more liberal interpretation of the Glass Steagall Act began in 1984 when the Supreme Court used section 20 of the Act to rule that the Bank of America could buy a discount brokerage house (Charles Schwab) – it has since been sold. See Chapter 5 for more detail on section 20 subsidiaries.
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10.8.5. New Problems and Merger Talks
Unfortunately, less than a year after Mr Newman had singled out emerging markets as part of BT’s new diversified strategy, the company announced a major reduction in its emerging market operations, and any remaining emerging market activities were integrated into its core businesses. BT had been hit hard from its exposure in Thailand and Indonesia, where it reported trading losses, due to the Asian crisis. The bank lost about $72 million in both the last quarter of 1997 and the first quarter of 1998. However, in the investment banking business, net income more than doubled to $177 million, reflecting the success of its merger with Alex Brown. It also benefited from increased sales and trading in its New York office. Income from European emerging markets, Africa and the Middle East also improved.
By September 1998, matters looked more serious. Many western banks were caught out by the suddenness and magnitude of the Russian crisis (see Chapter 6), when Russia declared a moratorium on its foreign debt. But Bankers Trust faced problems on several fronts. First, its exposure to Russia was large relative to its size. In July and August of 1998, trading losses from its Russian exposure hit $260 million, bringing total trading losses to $350 million. BT’s other sources of income had slowed. High-yield corporate (junk) bonds were hit by the Asian and Russian crises. Also, BT Alex Brown Inc. was suffering from the slowdown in initial public offerings and other equity underwriting. For these reasons, it posted a net loss for the third quarter of 1998, of $488 million.70 This came soon after a report in the Financial Times (October 1998) that BT was in merger talks with Deutsche Bank (DB). By November, rumours were rife that the two banks were close to reaching a deal.
The merger talks indicated that after the enormous third-quarter loss, the senior executives at Bankers Trust concluded that a strategy of diversification, with a number of different specialised businesses (which should have ensured the bank could weather downturns), had not worked. As a mid-sized player with large losses, they appear to have decided that it was important to build up its capital base through a merger with a large financial institution. Better to choose the partner than to risk being taken over. It was well known that Mr Rolf Breuer, chief executive of Deutsche Bank, had been looking for a suitable US bank so DB could expand its investment banking business and become one of the world’s leading banks. In November 1998 the rumours were confirmed when the Wall Street Journal71 reported the lawyers from the two banks were meeting in New York. In late November 1998, the two banks announced a merger agreement had been reached, which, at the time, created the world’s largest bank, with about $840 billion in assets.72 Bankers Trust was also a bargain, having lost more than 42% of its value between July and October 1998, though the share price had recovered somewhat on rumours of a takeover. The $9 billion sale price was 2.1 BT’s book value and a 43% premium over BT’s share price at the time of the announcement.
70In the fourth quarter the firm managed a profit of $133.1 billion, so annual losses from 1998 were lower than expectedBT lost $6 million. A strong showing in the fourth quarter was particularly important for the $133.1 billion-asset company. In the third quarter – before that deal was reached – Bankers Trust posted a $488 million loss.
71‘‘Deutsche Bank, Bankers Trust Near Pact – Deal for About $9.7 Billion Would Create Largest Financial-Services Firm’’, The Wall Street Journal, 23 November 1998, p. A2.
72At the end of 2003, Deutsche Bank ranked 12th out of 1000 banks in terms of tier 1 capital, and 6th if measured by assets. Source: The Banker, July 2004, p. 211.
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10.8.6. An Odd Couple or Good Match?
On the face of it, the marriage seemed an odd one. Deutsche had been trying to build up its investment banking business – spending $3 billion73 on it over the last decade. Bankers Trust own strategy of moving into investment banking had not worked very well. However, Deutsche (especially the chairman, Herr Rolf Breuer) thought a move into investment banking essential because of the change in how corporate clients financed their activities. Most were no longer looking to save or borrow, but instead wanted direct access to the capital markets. Hence the bank needed to refocus its activities on arranging, acting as lead managers, underwriting issues, brokering, advising and fund management.
At the time of the merger Herr Breuer spoke of a target ROE of 25% by 2001, up from 6.4% in 1997. The cost of ‘‘restructuring’’ was estimated at $1 billion, to pay for redundancies in overlapping areas. Just under 6% of employees, mainly based in London and New York, would be made redundant in areas of overlap: IT, operations, global markets and global equities.
Herr Breuer was keen to see Bankers Trust absorbed into Deutsche’s investment and global operations as quickly as within three months of the takeover. This attitude was in marked contrast to when Deutsche took over Morgan Grenfell in 1989 but the firm continued to operate under its own name for nearly a decade. DB appeared to have learned a lesson from the Morgan Grenfell experience: the firm was given a great deal of autonomy which made the task of integrating it into the DB culture very difficult. The name, Alex Brown, was kept – Deutsche Alex and Brown was to run the US investment banking and equity businesses.
From a regulatory standpoint, there do not appear to be any major problems. Bankers Trust is a wholesale commercial bank with few retail consumers. Though Deutsche, as a universal bank, had commercial interests, regulation K allows foreign banks operating in the USA to keep these interests, provided a minimum of 50% of the bank’s profits and assets come from outside the USA. Approval of the acquisition had to come from the European Commission, The New York State Bank Regulator and the Federal Reserve Bank. Approval was forthcoming from the Fed, the last of the regulatory hurdles, in May 1999. The merger took place in June 1999, a good 18 months after the acquisition plan was announced.
In March 1999, Bankers Trust was in the press again, for all the wrong reasons. It pleaded guilty to a felony in US District Court for misappropriation of client funds, and was fined $60 million. Dating back to 1996 (pre-Newman as chairman), it involved the client services processing division which misappropriated $19.1 million of client funds from dividend cheques sent out to shareholders but not cashed. Apparently the money was used to fund parties, offset expenses, or to make it look like the division was earning more income than it really was. Deutsche Bank was lucky: the US Department of Labor allowed Deutsche Bank to continue to manage pension assets despite an admission of fraud by its newly acquired US operation.
73 Peterson, T. (1998), ‘‘Bankers Trust is the Last Thing Deutsche Needs’’, Business Week; 2 November, p. 52.
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The question was whether the acquisition was going to work. To quote The Economist:
‘‘Take a transatlantic combination of a lumbering, accident-prone universal bank with a prickly, free-wheeling investment bank, and only the foolhardy would bet on success.’’74
A $400 million retention or ‘‘handcuff’’ fund was set aside to retain the best of the DB and BT staff. Deutsche proved successful in retaining some staff, but lost some key players. Mr Newman resigned because he had been promised a seat on the Deutsche management board at the time of the acquisition agreement, only to be refused membership after the merger took place. However, many in the bank were content to see him go, though it was an expensive departure – Newman collected up to $67 million.
There were others Deutsche definitely wanted to keep on board. In 1998 (before the takeover announcement), Frank Quattrone left, taking about 100 of the technology group he had built up with him. The chief financial officer at BT, Richard Daniel, went in June 1999, despite being offered a $9m retention bonus. Other department heads and deputies left around the same time, and the CSFB poached all the staff working in the US health care area. Several top Deutsche staff also departed the bank. In July 1999, a small but profitable team of index fund managers joined Merrill Lynch. 1999 also saw the loss of some senior experts in the leveraged finance/junk bond area, and Alex Brown lost a few stars. The defections raised questions about what DB stood to gain from the acquisition: in the absence of expertise, areas such as high-yield bonds, asset management, custody and high-tech IPOs could flounder.
Breuer’s key objective was to create a new type of universal bank with strengths in both wholesale commercial and investment banking, de-emphasising the traditional holdings of commercial concerns in Germany. Deutsche’s $22 billion of German industrial and commercial holdings were hived off to a separate profit centre, making it possible they would be sold off at a future date.75
Analysts had thought Deutsche would lose many American clients post-acquisition, but they were proved wrong. 1999 turned into a record year for underwriting high-yield debt, equities and eurobonds, though the bank made few inroads into the M&A business. In 2000, Herr Breuer announced that the bank was to merge with the second largest German bank, Dresdner. Many of DB’s investment bankers in London and New York were against the deal because Dresdner was perceived as old-fashioned, and very weak in investment banking. Dresdner pulled out of the deal after senior investment bankers persuaded Breuer that if the merger did go through, Dresdner’s investment bank should be shut down.
The London office proved instrumental in DB’s success in investment banking. Two names stand out. Mr Mitchell joined Deutsche Bank in 1995 from Merrill Lynch, and Mr Ackermann arrived in 1996 from Credit Suisse. Mitchell managed to attract hundreds of employees from other top investment banks. Though Ackermann avoids publicity, he too helped build up the London office. By this time, the acquisition of Bankers Trust was being seen in a new light: it had given Deutsche a foothold in the US securities markets just before one of the greatest bull runs in stock market history. Profits from investment banking rose to
74‘‘Because it was there’’, The Economist, 28 November 1998, p. 73.
75If they were sold off, Deutsche would be the first German universal bank to end the tradition of holding equity shares in commercial outfits.
