Archegos wasn’t the first blowup that Deutsche Bank sidestepped under Sewing. The bank last year avoided taking a potentially damaging financial and reputational hitfrom the collapse of payments firm Wirecard,having cut its exposure as doubts about the company’s business grew. It also hasn’t taken a direct hit fromGreensill Capital,the supply-chain finance firm whose demise forced Credit Suisse Group to liquidate a $US10 billion group of funds.
Of all those pitfalls,Archegos had by far the biggest potential to do lasting damage to the green shoots of Sewing’s turnaround. Deutsche Bank had joined several other investment banks in dealing withthe family office of Bill Hwang,who was barred from the investment advisory industry after pleading guilty to wire fraud on behalf of his shuttered hedge fund in 2012. Many firms had been willing to accept more risk in return for the hefty fees Archegos provided. Credit Suisse,for instance,allowed it to borrow up to ten times the value of its collateral. The Swiss bank ended up with some $US5.5 billion in losses,the most of any firm.
Deutsche Bank had run up an exposure worth several billions of dollars,according to people familiar with the matter. But it hadn’t lent as aggressively and its arrangement with Archegos allowed it to ask for more collateral to back up what looked like an increasingly imbalanced house of cards.
The bank,which was conducting daily analyses of Archegos’s holdings,had noticed already in February that concentration risk was rising. In early March,it started to request more collateral,the people said,asking for anonymity discussing internal information.
By March 24,when Lewis explained the situation to Sewing in that phone call,he told the CEO that the bank’s internal models were pointing to relatively minor potential losses. Still,that didn’t prevent some heightened nerves in the firm’s ranks over the next two days as Archegos was found in default and a standstill agreement that some lenders had tried to broker fell apart.
When it became clear on Friday that rivals were cutting their lifelines and getting out,Lewis got on a 20-minute call with his team,and the bank decided to liquidate. The firm’s traders sold most of the positions that Friday to multiple buyers including Marshall Wace,one of Europe’s largest hedge fund managers. The bank used direct sales,aiming to avoid spooking the markets. Within a few days,it recovered all of its money and even had some collateral left.
Navigating minefields without a hit is a new experience at a lender that over the prior decades had developed a reputation for putting quick profits and bonuses before the interests of clients,let alone the broader public. When the world stepped up scrutiny of the industry in the wake of the 2008 financial crisis,Deutsche Bank ended up footing the biggest legal bill of any European bank,spending more than $US19.4 billion on fines and settlements.
Its lost decade stood out even in a post-crisis period that was tough for many European lenders. Among the 25 biggest banks in the world,it was the only one to have a net loss over the past 10 years,while many rivals racked up more than $US100 billion of profits.
The CEO early in his tenure made it a top priority to rein in the conflicts between the various businesses — and their executives — to combat the internecine warfare that had plagued many of his predecessors. After inheriting a bank that had unceremoniously dumped former CEO John Cryan and seen open revolt across the management board,Sewing moved quickly to consolidate power. Out were those of questionable loyalty,often replaced by internal confidantes with whom he’d risen through the ranks.
Both Deutsche Bank and its crosstown rival Commerzbank have embarked on aggressive cuts to their branch network and staff. Between the two lenders,some 650 locations and 28,000 jobs are being cut.
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“The years since the financial crisis have really been a lost decade for investors in German banks,” said Florian von Hardenberg,a UBS banker who advises German lenders on acquisitions and other strategic questions. “But the new restructuring plans have more ambition than previous ones,and they’ve worked through their legacy issues. For the first time in a long time,they actually have a chance to achieve a healthy level of profitability.”
Sewing is a proponent of consolidation,though he has ruled out a transaction in which Deutsche Bank would be the junior partner. But after the bank’s share price recovered,transformational deals are becoming conceivable for top management,people familiar with the matter said. Credit Suisse has recently come up as one option in internal talks,they said.
Deutsche Bank could also revive merger talks with Commerzbank. The two held talks in 2019 at the urging of the government,but decided to focus on their respective restructurings instead.
For Sewing,that decision has worked well so far. Finding a cure for Deutsche Bank’s disease has kept his turnaround plan on track. Ultimately,though,he’ll have to come up with one for the ills plaguing German — and,by extension,European — banking.
“Deutsche Bank has managed a remarkable turnaround in the past quarters,” said Andreas Dombret,a former top official at the German central bank who used to supervise the lender. “Now it’s about making sure that is sustainable.″
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