STACEY VANEK SMITH, HOST:
This week, Deutsche Bank made a pretty shocking announcement. First of all, it is basically getting out of the investment banking business.
PADDY HIRSCH, BYLINE: Also, it's laying off 18,000 workers, cutting expenses by 25% and splitting off some of its businesses.
VANEK SMITH: All of this is an attempt for Deutsche Bank to reorganize and save itself from going under. The bank lost more than $3 billion in about three months.
HIRSCH: It tried to lock down a merger, but that failed. And now it's just trying to survive. And we're not potentially looking at the slow, bloody swan song of one of the biggest banks in the world.
VANEK SMITH: This news did not surprise Mark Williams. He's a professor at Boston University's Questrom School of Management (ph) and a former Federal Reserve Bank examiner.
MARK WILLIAMS: I just shook my head when I read the news.
VANEK SMITH: Why? What'd you think?
WILLIAMS: I said it's just a shame it's been mismanaged. And this is just another attempt to shore up something which keeps on becoming smaller and smaller. It's just a giant shrinking bank. I mean, that's really - its burn rate is it's losing billions and billions of dollars every year.
HIRSCH: But how did this happen? Where did Deutsche Bank go wrong? This is THE INDICATOR from Planet Money. I am today's substitute, Paddy Hirsch.
VANEK SMITH: And I'm Stacey Vanek Smith. There are no substitutes. Paddy is our fearless editor. And today on the show, we talk about what happened to Deutsche Bank. How did it go from one of the biggest, wealthiest, flashiest banks in the world with operations in dozens of countries to a shadow of its former self, just selling off parts to survive?
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HIRSCH: Today's indicator is $7.40. That's just about how much a share of Deutsche Bank was trading out at the end of trading today. And from Mark Williams, that number breaks a crucial barrier.
WILLIAMS: When a global bank stock drops below the price of a large pepperoni pizza, then you know you're in dire straits.
HIRSCH: That's about 10 bucks, by the way.
VANEK SMITH: And why is that - (laughter) why is the pizza your metric of choice?
WILLIAMS: Well, perception is extremely important for a global bank. And if investors are perceiving the stock as not being even worth double digits, then customers flee that global bank. And we actually saw that with Lehman Brothers. When - as soon as Lehman's price dropped below the large pepperoni pizza or below $10, then people fled, and profits dropped further. And, eventually, the bank collapsed.
HIRSCH: Now, Lehman Brothers, of course, was the big financial institution that failed in 2008, basically kicking off the Great Recession.
VANEK SMITH: But how did this happen to Deutsche Bank? How did one of the biggest, most international, well-established banks in the world break the pizza barrier?
HIRSCH: The pizza barrier.
VANEK SMITH: The pizza barrier.
HIRSCH: Ten dollars.
VANEK SMITH: (Laughter).
WILLIAMS: It's been a case study that I've used at Boston University for the last decade.
VANEK SMITH: Really? What's it a case study of?
WILLIAMS: Well, to really appreciate how to run a bank, do the opposite of what Deutsche Bank does.
VANEK SMITH: Really? It's the cautionary tale.
HIRSCH: In fact, Mark says you could almost look at Deutsche Bank and JPMorgan as a tale of two banks. Back in 2008, they started out in roughly the same place - two big, respected, wealthy investment banks. But while Deutsche Bank is breaking the pizza barrier, JPMorgan's stock is trading at about $113 a share.
VANEK SMITH: That's an expensive pizza.
HIRSCH: That's - (laughter) that's a really good - yeah.
VANEK SMITH: (Laughter).
HIRSCH: That's a Whole Foods pizza.
VANEK SMITH: That's a Gucci pizza.
VANEK SMITH: And Mark says the reason for this kind of boils down to Deutsche Bank's personality.
WILLIAMS: It's been known to be the riskiest global bank.
VANEK SMITH: Has it been sort of, like, risky in a - like, a kind of a cool way? Like, was it like James Dean risky or was it kind of like, these guys don't know what they're doing?
WILLIAMS: Well, Deutsche Bank has developed this reputation over the years as taking excessive risk in regard to bending ethics and having lax controls in the pursuit of profit.
VANEK SMITH: Maybe not too surprising that when the financial crisis hit, Deutsche Bank was up to its neck in toxic mortgage loans. In fact, it was one of the biggest players in the toxic mortgage market.
HIRSCH: And when the financial crisis started, Deutsche Bank got hammered.
WILLIAMS: And Deutsche Bank itself, eventually, was exposed for its amount of mortgage-backed securities it sold. And eventually, it had to settle with fines and fees of over $7 billion.
HIRSCH: But only after getting hundreds of billions of dollars from the government in a massive bailout - because Deutsche Bank was deemed too big to fail. It was so big and so enmeshed in the financial system that even though it's a German bank, U.S. taxpayer money was used to save it. It was considered to be that important.
VANEK SMITH: But in spite of all that help, says Mark, Deutsche Bank never really got its groove back after the financial crisis. It started cycling through CEOs. It had five CEOs in 10 years.
HIRSCH: Unlike JPMorgan, of course, whose CEO, Jamie Dimon, stayed on, steering the bank through the financial crisis and the recovery and, perhaps, most importantly, kept JPMorgan out of the riskiest parts of the mortgage trading business.
VANEK SMITH: But even in spite of all of Deutsche Bank's leadership changes, the bank never really changed its tactics, says Mark. It kept doing really risky business deals, getting into trouble and paying big fines to regulators.
HIRSCH: It recently paid a $600 million fine to regulators for apparently laundering billions of dollars for Russian investors.
VANEK SMITH: And a bunch of its records have been subpoenaed for a series of questionable dealings Deutsche Bank did with President Trump's company, the Trump Organization, including one deal where Trump's company defaulted on a big loan that it had taken out from Deutsche Bank. And then Deutsche Bank sued Trump's company, and then Trump's company borrowed money from Deutsche Bank to pay its settlement with Deutsche Bank.
HIRSCH: (Laughter) What?
VANEK SMITH: (Laughter) That happened.
WILLIAMS: Their reputation was if you couldn't get a loan from JP or C, go to, you know, Deutsche Bank because they probably will give you that loan.
VANEK SMITH: Oh. Well, that's...
WILLIAMS: You know, as well as with the Federal Reserve - the Federal Reserve came out - and FDIC - and also said they were a highly risky bank, which, you know, puts into question, who wants to do business with a highly risky bank?
VANEK SMITH: Why did they keep doing risky stuff? I mean, it seems like they were doing risky stuff, and they really got stung for it. And then they kept doing risky stuff.
WILLIAMS: Well, I think the view was as the bank and the capital position declined, the bank needed to take more risk to try to get in step with their competition, meaning that as JPMorgan became more and more successful - and Citi - they took greater risks to try to catch up with their competition.
VANEK SMITH: Oh, it's like they fell behind, and then they had to start making bets that were riskier to try to catch back up.
WILLIAMS: Yeah. This bank has really doubled down.
VANEK SMITH: In fact, the International Monetary Fund named Deutsche Bank the world's most dangerous bank in 2016.
HIRSCH: (Laughter) Most dangerous bank.
VANEK SMITH: I know (laughter).
HIRSCH: I would love to see that list.
VANEK SMITH: I wonder if that comes with a plaque.
HIRSCH: Anyway, in spite of all of this risky behavior, Or maybe because of it, Deutsche Bank still couldn't seem to make any money or not enough money, anyway. So now Deutsche Bank is cutting a bunch of costs, getting out of some of its key businesses and focusing on its corporate banking business.
VANEK SMITH: How likely is this to work?
WILLIAMS: I'm skeptical that this plan's really going to work. I think that probably what will happen is the various parts of this bank will be broken up and sold to stronger parties.
VANEK SMITH: Mark says if the right leadership had come along or if there had been one CEO at the company for the last 10 years, it's possible Deutsche Bank would be in a stable, even a strong position, like JPMorgan, which is now worth about $366 billion - more than 20 times what Deutsche Bank is now worth.
WILLIAMS: And just to show you how weak this bank is - so Deutsche Bank is located in 59 countries. But yet, its market cap at under 16 billion now is less than the value of Citizens Financial Group, which is located in Providence - little Providence, R.I. It's remarkable - the fall of this giant.
HIRSCH: Back in 2008, Deutsche Bank was saved by its bigness. But 10 years are shrinking, and now it's just about the right size to fail or to fit into a matchbox and throw into the trash.
VANEK SMITH: (Laughter) Jeez - a $16 billion matchbox. That's a nice matchbox. That's a Gucci matchbox.
HIRSCH: (Laughter) It's a Gucci matchbox. Well, Mark thinks that that failure is a real possibility. And if Deutsche bank does fail, he'll fold this into his cautionary tale to students on how to not run a bank.
VANEK SMITH: What is the comment that you hear the most from students about Deutsche Bank?
WILLIAMS: Why do the CEOs make so much money considering the investors are losing so much money?
VANEK SMITH: Ah, the eternal question.
HIRSCH: Well, Deutsche Bank's current CEO, Christian Sewing, was paid $8 million last year, making him one of the best-paid CEOs in European banking.
VANEK SMITH: I want a raise.
HIRSCH: Oh, the irony.
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HIRSCH: This episode of THE INDICATOR was produced by Constanza Gallardo, fact-checked by Emily Lang. And it's a production of NPR.
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