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Insight: German reliance on Deutsche Bank outweighs scandals

A Deutsche Bank logo is pictured in front of the Deutsche Bank headquarters in Frankfurt February 24, 2011. REUTERS/Ralph Orlowski
A Deutsche Bank logo is pictured in front of the Deutsche Bank headquarters in Frankfurt February 24, 2011. REUTERS/Ralph Orlowski

By Edward Taylor and Philipp Halstrick

FRANKFURT (Reuters) - Germany has become so dependent on Deutsche Bank to grease the wheels of its export driven economy that it looks willing to gloss over scandals involving its largest bank.

Deutsche is one of several European banks under investigation by regulators in Europe and the United States for its suspected role in rigging benchmark interest rates. It is cooperating with German authorities in a separate inquiry into alleged tax fraud. Deutsche has denied allegations it misvalued derivatives and mis-sold mortgage-backed securities.

Such an array of inquiries could be expected to damage any bank's reputation. But back-up from business leaders and key members of the bank's supervisory board appear to be helping Deutsche's new co-chief executives Anshu Jain and Juergen Fitschen put the scandals behind them. The two men, with more than 40 years experience at Deutsche between them, took over as co-CEOs on June 1.

This bedrock of support is crucial for Deutsche, especially in a German election year when banks' perceived excesses and misdemeanors could become a campaign issue.

The newest revelations for Deutsche will come in the next few days when the German regulator issues a report on the bank's alleged involvement in the manipulation of Libor, a global interest rate benchmark.

The report will test Germany's commitment to keeping Deutsche strong for the sake of its export led economy. That commitment is a common theme to surface in interviews Reuters has conducted with current and former Deutsche staff, business leaders, sources at the regulator and bank directors.

Several sources familiar with the regulator's report have said it will focus on "organizational flaws" rather than placing blame on Jain or Fitschen, making it less likely the Berlin political establishment will call for them to go.

THE INDUSTRIAL HEARTLAND

A web of support for Deutsche has emerged among German blue-chip and mid-sized companies, which have grown more dependent on the country's largest bank since rivals including IKB, WestLB, LBBW, Commerzbank and Dresdner Bank shut down or slashed international investment banking and lending.

Burkhard Lohr, Chief Financial Officer at K+S Group, a supplier of specialty fertilizers and salt, with activities in Canada, Chile and Brazil said a strong Deutsche was vital. "We need banks with a global network, because our markets are also global," Lohr said.

That view was echoed by Stefan Sturm, Chief Financial Officer of German healthcare group Fresenius SE. "What's crucial is intellectual and financial capital. Particularly in the case of large complex projects which need to be completed seamlessly and in a short period of time," he said.

Thomson Reuters data show how Deutsche's role as lender to German companies has grown since the financial crisis.

In 2008, it ranked only fifth among the biggest lenders to German companies, behind HVB, Dresdner Bank, Royal Bank of Scotland and Commerzbank. Deutsche loaned 4.52 billion euros to German firms, giving it a market share of 7.23 percent.

Four years later, Deutsche Bank is the second-biggest provider of large loans in Germany behind Commerzbank, with a lending volume of 10.82 billion euros, or 15.9 percent, the data show.

The need for a global German bank is even more acute for small and medium sized companies, the backbone of the economy. These small highly specialized manufacturers export goods around the world, but don't have the capacity to maintain multiple relationships with banks to sort out their foreign exchange, interest rate hedging and export finance.

Anshu Jain, who once cultivated trading superstars like Boaz Weinstein and Greg Lippmann, is using his new role to expand support in the "real economy" and in political circles.

Since taking office, the Indian-born banker has met with approximately 50 German chief executives and visited Berlin around 10 times to meet high-ranking politicians.

On one trip, he knocked on the doors of Vorwerk, a maker of vacuum cleaners and kitchen appliances which exports to more than 70 markets from its base in Wuppertal, Germany.

"Anshu Jain came to us well-prepared. He was exceptionally interested in our business," said spokesman Michael Weber. "As an internationally operating company, it is important for us to have as our bank a global partner who is present in many different markets."

WINNING MARKET SHARE

Meanwhile, senior Deutsche staff see a huge opportunity to win market share in an environment which has seen Barclays disrupted by the departure of its CEO and UBS pull out of segments like fixed income.

Crucially for Jain and Fitschen, Deutsche's supervisory board chairman, Paul Achleitner, supports their strategy.

A former Goldman Sachs executive who helped Deutsche make one of its biggest expansions into investment banking in 1998, when he advised it on a deal to buy Bankers Trust, Achleitner is a firm believer in a strong German investment bank.

"What we need as a society is to come to an agreement over what we want. Do we want Germany to be home to a major bank of global importance? There aren't that many companies left in the financial sector capable of competing with U.S. firms," Achleitner said in a written statement in response to questions.

But Deutsche is still paying the price for its more free-wheeling past.

Last week, it was forced to restate its 2012 earnings because of new litigation provisions of 600 million euros related to mortgage-related lawsuits and other regulatory issues including Libor. Seven employees have been suspended or dismissed for suspected involvement in manipulating inter-bank lending rates.

To ensure they retain the support of corporate Germany, Jain and Fitschen need to prove that 'Project Pharos,' a plan to become a more client focused lender really means a change in style. The restructuring efforts, set to be completed by 2015, has already seen about 1,400 jobs axed out of the investment bank, which had 9,094 staff at the end of 2012.

The proprietary trading division, which used the bank's own money to make bets with a notional value of up to $128 billion on mortgage-backed securities, has been shut.

Deutsche has pared back risk taking, reducing the value at risk at its main trading units to 57.1 at the end December, from 95.6 at the end of 2010. A lower number for value-at-risk indicates a reduced likelihood of potential losses.

Internal rivalry once promoted at the bank has been toned down in favor of a greater emphasis on teamwork, insiders say. Sales teams, who once regarded one another as competitors, now coordinate client visits. On the trading floor, the climate is more collegiate.

Traders now get a 'red flag' for breaching rules, including for things previously regarded as trivial - such as failing to attend a compliance course within a five day deadline. Red flags mean lower bonuses and hinder promotion.

The bank has beefed up a ‘risk and reputation' committee, which now includes four members of the Group Executive Committee, the bank's 18-member senior management panel. Potentially controversial business is discussed by the head of compliance, the chief risk officer and legal counsel.

Traders are no longer given the kind of leeway they once enjoyed and need to take "MTA" or mandatory time away, surrendering their trading positions to a colleague who can check whether they make sense and conform to risk limits.

Deutsche's problem is that the changes, underway since 2009, take time to filter through to the outside world, insiders say.

"There is a lag between perception and practice," a senior Deutsche Bank executive said.

RESURGENT INVESTMENT BANKERS

Jain's past as a former head of the investment banking division and the expanding influence of that unit, implicated in several of the bank scandals, are part of the reason why 'Project Pharos' has so far struggled to win over critics.

While Barclays signaled a return to its high street roots when it appointed Antony Jenkins, the head of its retail division, to replace former Wall Street trader Bob Diamond as CEO, Deutsche has chosen to promote veterans from the investment bank. Henry Ritchotte, a former chief operating officer (COO) of the investment bank and of the global markets division, is now COO of the entire bank. Michele Faissola, a former global head of rates and commodities, was made head of asset and wealth management.

While trading for years generated the lion's share of profits for Deutsche, it is also the division that is under investigation for alleged interest rate manipulation and the alleged mis-sale of mortgage-backed securities.

Senior Deutsche Bank staff say the reform process is credible.

"Anybody who was involved in anything illegal is no longer with the bank, so it's unfair to keep drawing parallels between now and then," a second senior bank executive said.

But critics says the investment bank's DNA still bears the legacy of Edson Mitchell, the American banker who helped lay the foundations of its global investment banking franchise by introducing a more Anglo-Saxon management style and Wall Street sized paychecks.

"The vast majority at the bank doesn't need a cultural change. It's just the traders," said a Deutsche investment banker specializing in merger and acquisitions. "They have shown over and over again that they care more about themselves than about the bank's reputation."

One of the star bankers Mitchell hired was Jain. Mitchell died in a plane crash in 2000. Today Jain emphasizes greater teamwork between the bank's different divisions.

APPEASING THE GODS

Deutsche Bank has a sometimes uneasy relationship with politicians. The lender angered lawmakers last year when it declined to send Jain to appear before a parliamentary hearing into the Libor scandal. The head of compliance, Stephan Leithner, went instead.

Deutsche also infuriated the German Agriculture Minister and anti-poverty campaigners this year when it decided to lift a self-imposed moratorium on dealing in financial derivatives linked to commodities.

Late last year of bank's Frankfurt headquarters were raided as part of an investigation into tax evasion, money laundering and obstruction of justice over a trading scam involving carbon permits. Fitschen and Stefan Krause, the bank's chief financial officer, are among 25 employees being investigated.

But even if Germany's establishment loses patience with the bank's new leadership, many within Deutsche remain convinced it will be difficult for them to replace Jain and Fitschen.

"Show me the banker who in 2008 did not have some issue. If you want a CEO who is unblemished you need somebody with less than four years experience. You end up with a 25-year-old graduate," a senior Deutsche Banker said, before asking, "Do you have to eliminate investment banking altogether to appease the sacrificial gods."

(Additional reporting by Andreas Kroener and Matthias Sobolewski in Berlin; Editing by Alexander Smith, Carmel Crimmins, Janet McBride)

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