A few weeks ago someone wrote on this site about how wonderful it was to work for Deutsche Bank's equities business on Wall Street. That article has since been passed around just about everyone I know from DB, with everyone agreeing on how wonderful it was at 60 Wall Street.
As someone who worked there too, I'd like to take a moment to rain on this narrative.
Yes, I imagine that Deutsche equites was a great place to work if you were in sales and had nothing to do but to sell an underpriced product. The issue was that when fully priced, the equities business was losing money. DB didn't price its funding and capital costs properly. This plagued equities so much, that when funding was charged properly their business became a massive loser - in the hundreds of millions. If you can transfer hundreds of millions of value to clients, AND get paid on revenues, it would have been GREAT to work there, but a bit less great for shareholders.
It wasn't just equities. Some of the other businesses that have been trimmed under the new strategy suffered from a similar problem. The rates business, for example, also had a reputation internally for undervaluing its costs. When the original NonCore Operating Unit was wound down, it was combined it with a big rates derivatives block that was over-valued in early 2017. A news article in 2018 suggested that the whole €60bn non-core portfolio was costing DB €500m a year.
I worked in the back office at DB. Our role was pretty much to keep the “brilliant” traders' success going by making sure the business was valued in a way that reflected this. I did this for decades and eventually I left DB of my own accord. I could see the headwinds and I was right: the rates and equities businesses are being slimmed down and closed.
The question now then, is what happens to credit, which is being held up as the new Deutsche Bank success story as Deutsche grows 'with a focus on the more complex areas of the credit markets'. The bank seems to be changing under Christian Sewing, and this may be a good thing. In future it will be less easy to make money in credit as Basel changes the rules on the internal ratings based approach (IRBA) for commercial real estate and structured finance and therefore compels Deutsche to hold capital much more closely aligned to competitors. These new rules, along with others that make it necessary to disclose losses due to underpricing, are changing the dynamic of that business.
I'd therefore like to wish my former colleagues good luck, but I'd also like to add a dose of realism to the sentimentality surrounding Deutsche Bank. Valuation issues will always get you in the end, and Deutsche people who find new jobs elsewhere should be mindful of this. After all, you don't want to make the same mistake twice now, do you?
Joe Pierce is a pseudonym.
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