WEBVTT - David Enrich on Deutsche Bank’s Clean-Up (Podcast) 0:00:02.200 --> 0:00:06.800 This is Masters in Business with Barry Ridholts on Bloomberg Radio. 0:00:07.320 --> 0:00:09.840 This week on the podcast, I have a special guest. 0:00:09.960 --> 0:00:12.559 His name is David Enrich and he is the finance 0:00:12.680 --> 0:00:15.239 editor at the New York Times. Previously he was a 0:00:15.320 --> 0:00:18.720 journalist at The Wall Street Journal. Last time we spoke 0:00:18.760 --> 0:00:21.600 with David, it was when his new book The Spider 0:00:21.640 --> 0:00:27.120 Network came out. That was back in all about libor manipulation. 0:00:27.680 --> 0:00:30.720 His new book is Dark Towers. It's all about Deutsche 0:00:30.760 --> 0:00:35.800 Bank and how what was once a sleepy, backwater German bank. Okay, 0:00:35.880 --> 0:00:39.640 they also helped funds the Holocaust and the Nazi war machine, 0:00:40.120 --> 0:00:43.960 but how they ended up having global aspirations in the 0:00:44.040 --> 0:00:47.920 nineties and two thousand's, briefly becoming the biggest bank in 0:00:47.960 --> 0:00:53.160 the world before an epic collapse. David is a really 0:00:53.159 --> 0:00:57.560 interesting investigative journalist. He does a wonderful job flashing out 0:00:58.160 --> 0:01:01.560 the characters in his book, who are all real people. 0:01:01.640 --> 0:01:05.520 This isn't fiction. He is telling a story about what happens, 0:01:05.880 --> 0:01:09.160 how it happens, and why. And he had access to 0:01:09.240 --> 0:01:12.959 a treasure trove of documents and emails. In the Deutsche 0:01:12.959 --> 0:01:18.120 Bank story, it's just utterly utterly compelling if you're at 0:01:18.120 --> 0:01:23.240 all interested in stories of malfeasan set joint financial institutions. 0:01:23.280 --> 0:01:26.720 This is up there with When Genius Failed and other 0:01:26.880 --> 0:01:32.360 such issues, only this one involves criminality, not bad training decisions. So, 0:01:32.400 --> 0:01:35.280 with no further ado, my conversation with The New York 0:01:35.280 --> 0:01:40.840 Times David Enrich. This is Masters in Business with Barry 0:01:40.920 --> 0:01:44.800 Ridholts on Bloomberg Radio. My special guest this week is 0:01:44.880 --> 0:01:47.840 David Enrich. He is the finance editor at The New 0:01:47.920 --> 0:01:51.360 York Times. Previously, he was an investigative journalist at The 0:01:51.360 --> 0:01:54.440 Wall Street Journal. He is the author of several books, 0:01:54.840 --> 0:01:58.800 most recently Dark Towers, Deutsche Bank, Donald Trump, and An 0:01:58.840 --> 0:02:02.920 Epic Trail of Destruction. Previously, he wrote The Spider Network, 0:02:03.320 --> 0:02:08.520 a book about the libor manipulation. David Enrich, Welcome back 0:02:08.720 --> 0:02:11.639 to Bloomberg. Thanks for having me to Barry. So we 0:02:11.720 --> 0:02:14.360 had you on a couple of years ago to discuss 0:02:14.639 --> 0:02:19.079 The Spider Network, which I thought was a fascinating tail. 0:02:19.280 --> 0:02:23.480 It it read like a spy novel almost and a 0:02:23.680 --> 0:02:27.919 very short period of time elapse between that book and 0:02:28.080 --> 0:02:32.960 Dark Towers. Obviously there's some overlap with Liebor and Deutsche Bank, 0:02:33.639 --> 0:02:37.359 but why so quick? Between the two books? How did 0:02:37.360 --> 0:02:40.400 the new one come about? Well? Why so quick? Is 0:02:40.440 --> 0:02:43.560 the same question I've gotten from a number of people, 0:02:43.560 --> 0:02:47.640 including my wife. And you know what the reality is, 0:02:47.680 --> 0:02:49.960 when you've got a good idea for a book, they 0:02:49.960 --> 0:02:51.960 don't come around that often, at least not for me, 0:02:52.400 --> 0:02:55.800 and so you kind of jump at it at the 0:02:55.840 --> 0:02:59.240 opportunity while you can. In this case, I mean, I've 0:02:59.280 --> 0:03:03.320 been upset things about Deutsche Bank for really the better 0:03:03.360 --> 0:03:06.680 part of the decade. Um back. I've been working with 0:03:06.680 --> 0:03:10.680 the Wall Street Journal in London from two thousand two sixteen, 0:03:10.960 --> 0:03:14.680 and during that period I was covering with banking and finance, 0:03:14.880 --> 0:03:18.160 and you know, the biggest most troubled bank at that 0:03:18.160 --> 0:03:21.120 time was Deutsche Bank, and it was it was pretty 0:03:21.120 --> 0:03:25.000 technical and industry specific story. It was not something that 0:03:25.080 --> 0:03:27.880 captured much public imagination, I don't think outside of the 0:03:28.320 --> 0:03:31.480 finance world. But with the election of Donald Trump and 0:03:31.760 --> 0:03:34.520 given his very close ties to Deutsche Bank over a 0:03:34.520 --> 0:03:37.600 long period of time, the story kind of started becoming 0:03:37.600 --> 0:03:40.560 a much more palatable story for the general public. And 0:03:40.960 --> 0:03:42.440 I felt like I was in a really good position 0:03:42.480 --> 0:03:45.360 to tell that, so I, you know, just grabbed the 0:03:45.400 --> 0:03:50.760 opportunity while I could, and I do wish in hindsight, 0:03:50.880 --> 0:03:54.000 I had It's hard writing a book, you know, it 0:03:54.040 --> 0:03:57.080 takes a lot of time, and it's this labor of 0:03:57.160 --> 0:04:01.080 love but also his objects of complete in total obsession, 0:04:01.440 --> 0:04:04.760 and I've got little kids, and so it was. It 0:04:04.840 --> 0:04:07.880 was not the easiest couple of years doing this, especially 0:04:07.880 --> 0:04:11.640 when you're writing about a topic that is changing in 0:04:11.720 --> 0:04:17.520 real time, ongoing investigations, ongoing soft price fluctuation. How did 0:04:17.560 --> 0:04:21.880 you deal with the fact that this story continued past 0:04:22.160 --> 0:04:25.640 when you put your pen down. Well, that's an interesting question. 0:04:25.720 --> 0:04:28.600 I made a decision pretty early on in the consulta 0:04:28.600 --> 0:04:31.640 issue with my publisher that this is not going to 0:04:31.760 --> 0:04:34.880 be a book that told you everything in the world 0:04:34.880 --> 0:04:36.800 about Deutsche Bank, and tried to break a lot of 0:04:36.839 --> 0:04:40.840 news about the current ongoing kind of reorganizations at the 0:04:40.839 --> 0:04:43.920 bank and restructurings and things like that. There was it 0:04:44.000 --> 0:04:47.359 was going to be, and you know, as you probably know, 0:04:47.600 --> 0:04:50.760 like eight percent of the book of the book is 0:04:51.000 --> 0:04:54.839 the story of how Deutsche Bank grew from this provincial, 0:04:55.560 --> 0:05:00.279 really German focused bank into this global juggernaut and into 0:05:00.320 --> 0:05:05.000 this epic disaster, and so much less of the book 0:05:05.080 --> 0:05:09.000 is spent focusing on the past, basically from the two 0:05:09.000 --> 0:05:12.920 thousands sixteen period, two seventeen period onward, where the bank 0:05:12.960 --> 0:05:17.479 has been in this pretty hardcore cleanup mode. And so 0:05:17.920 --> 0:05:21.200 I had the liberty of just kind of drawing a 0:05:21.279 --> 0:05:25.159 line basically around the time that shortly after the time 0:05:25.400 --> 0:05:30.920 that the bank's leadership changed for you know, the eighteenth 0:05:30.960 --> 0:05:34.800 time and uh, and so I really that made it 0:05:34.800 --> 0:05:37.520 a lot easier to kind of put blinders on. Obviously, 0:05:37.520 --> 0:05:40.479 I focused very I paid a lot of attention to 0:05:40.880 --> 0:05:44.200 what was going on with the various reorganizations and the 0:05:44.240 --> 0:05:46.039 new leadership. And I said a lot of time talking 0:05:46.080 --> 0:05:48.680 to people who were involved in that. But what I 0:05:48.720 --> 0:05:53.960 was not particularly worried about every little incremental twist and 0:05:54.000 --> 0:05:56.359 turn as related to the bank and its financials. I 0:05:56.400 --> 0:05:59.640 was much more interested, frankly, in in terms of things 0:05:59.680 --> 0:06:03.760 that were moving, uh, you know, as I was writing, 0:06:04.040 --> 0:06:09.039 as it related to investigations on money laundering and Donald Trump. 0:06:09.200 --> 0:06:11.480 And so I spent I did spend a lot of 0:06:11.520 --> 0:06:14.800 time both in the book and also doing reporting and 0:06:14.800 --> 0:06:18.560 writing for the New York Times, uh, on those kind 0:06:18.560 --> 0:06:21.240 of live topics. The other things that were much more 0:06:21.240 --> 0:06:24.159 coming out of Germany, where I you know, just in 0:06:24.200 --> 0:06:27.320 addition to not think move that core to the narrative 0:06:27.360 --> 0:06:29.920 in the book, I also just simply wasn't as well sourced. 0:06:30.120 --> 0:06:34.040 So um, I kind of just narrowed my field of 0:06:34.120 --> 0:06:37.160 vision a little bit, which I think was it is 0:06:37.200 --> 0:06:39.359 a little bit of a gamble, and I think it frankly, 0:06:39.360 --> 0:06:42.440 it will probably make the book a little you know, 0:06:42.600 --> 0:06:47.320 less satisfying in some ways to a certain um slice 0:06:47.480 --> 0:06:50.919 of the world that is really obsessed with understanding where 0:06:50.960 --> 0:06:54.480 the bank currently is. Uh, But I think for the 0:06:54.560 --> 0:06:57.200 vast majority of readers it's a pretty good look at 0:06:57.200 --> 0:07:00.320 how the bank and how the bank on to some soone, 0:07:00.360 --> 0:07:02.520 how good companies in general get into someone trouble in 0:07:02.520 --> 0:07:05.240 the kind of decisions and incentives that are set up 0:07:05.240 --> 0:07:08.839 along the way that really lead down this pretty disastrous path. 0:07:08.920 --> 0:07:12.120 And to me, going to bank is just this classic 0:07:12.200 --> 0:07:15.920 case study and how not only how not to run 0:07:15.920 --> 0:07:19.960 a business, but the perils of growing too fast and 0:07:20.000 --> 0:07:23.680 incentivizing people to essentially make just very bad decisions over 0:07:23.720 --> 0:07:26.920 and over to them. So you hit on exactly a 0:07:27.080 --> 0:07:28.920 question I was going to ask later, but I might 0:07:28.960 --> 0:07:31.600 as well ask it now. When we look at some 0:07:31.680 --> 0:07:35.280 of the biggest disasters of the past decade, whether it 0:07:35.400 --> 0:07:38.680 was the collapse of We Works or all the trouble 0:07:39.120 --> 0:07:42.320 that Uber got into, or go back to Lehman Brothers, 0:07:42.960 --> 0:07:47.880 Deutsche Bank did many of the same things, disregardful legality, 0:07:48.560 --> 0:07:55.520 incentivizing people for profits regardless of the consequences, effectively short 0:07:55.640 --> 0:07:59.280 term versus long term greedy. Is that a fair assessment 0:07:59.280 --> 0:08:04.200 of Deutsche Bank. Yeah, absolutely, I think that the bank, 0:08:05.440 --> 0:08:08.400 and I think it's actually deeper than that in some ways. 0:08:08.440 --> 0:08:12.720 I mean, thanks are obviously kind of peculiar beasts, right, 0:08:12.760 --> 0:08:17.320 I mean, they are entrusted with essentially operating the economy 0:08:17.360 --> 0:08:19.640 to a large extent for the entire world. And so 0:08:19.960 --> 0:08:23.120 unlike an Uber we Work, which is important in its 0:08:23.120 --> 0:08:24.880 own right, and it is kind of transformed the way 0:08:24.920 --> 0:08:29.640 we live or work. It's banks occupied this very special 0:08:29.720 --> 0:08:32.160 role at the heart of the financial system and therefore 0:08:32.280 --> 0:08:35.800 the heart of the economy. And to me, there's one 0:08:35.800 --> 0:08:38.640 of the most important shifts that taken place in the 0:08:38.640 --> 0:08:41.280 global finance in the past I don't know, thirty years 0:08:41.280 --> 0:08:44.280 at this point, I guess, is the transition from banks 0:08:44.320 --> 0:08:47.960 being viewed as these kind of the profitable but not 0:08:48.360 --> 0:08:52.640 egregiously profitable. They really, um, they have been much more 0:08:52.760 --> 0:08:56.120 like public utilities. And they're to kind of grief the 0:08:56.960 --> 0:09:00.040 years of the global economy and this transition that a 0:09:00.120 --> 0:09:02.800 place that the coincides large was a big wall throught 0:09:02.840 --> 0:09:06.800 firms going from private partnerships into publicly traded companies and 0:09:06.800 --> 0:09:12.160 then later becoming banks. Uh, toward these just ridiculously fat 0:09:12.200 --> 0:09:15.920 profit margins has been It's been very destructive for the 0:09:15.920 --> 0:09:18.120 banks themselves in many cases, but it's also been very 0:09:18.120 --> 0:09:21.319 destructive for the economy and for the financial system, I think. 0:09:21.400 --> 0:09:26.200 And so Deutsche Banks transition from being this you know, 0:09:26.320 --> 0:09:30.480 pretty plain vanilla German lender that was primarily focused on 0:09:30.600 --> 0:09:34.959 helping big German companies spread their wings internationally and to 0:09:35.040 --> 0:09:38.080 a lesser extent, helping non German companies enter the German 0:09:38.160 --> 0:09:41.840 or European markets. And you know, those were very study 0:09:42.520 --> 0:09:45.600 businesses and very important businesses. And in Deutsche Bank, as 0:09:45.600 --> 0:09:48.560 a result of that, played a leading role in the 0:09:48.640 --> 0:09:51.760 development of railroads in the nineteenth and early twentieth centuries. 0:09:51.800 --> 0:09:56.440 It played a leading role in the reconstruction redevelopment of 0:09:56.480 --> 0:09:59.600 Europe after World War Two and going out into the 0:09:59.600 --> 0:10:02.840 mid nine reason as the iron curtains cell it played. 0:10:03.000 --> 0:10:07.400 The bank played a leading role in helping to globalize 0:10:07.600 --> 0:10:13.760 the economy and knocked down by unhealthy barriers to economic 0:10:13.800 --> 0:10:16.680 development in some countries, and it was the banks CEO 0:10:17.720 --> 0:10:20.160 up until the late nineteen eighties was a leading advocate 0:10:20.200 --> 0:10:23.040 of forgiving thirdal depths, for example. And so it was 0:10:23.080 --> 0:10:26.480 a bank that occupied this role not only you know, 0:10:26.559 --> 0:10:29.520 providing banking services, but was it viewed its role as 0:10:29.600 --> 0:10:34.360 kind of essential and intertwined with the fate of Germany 0:10:34.400 --> 0:10:38.000 and the fate of Europe. And that sifted very dramatically 0:10:38.040 --> 0:10:40.680 starting in the mid when the bank got a taste 0:10:40.679 --> 0:10:43.199 for Wall Street and it decided that it was going 0:10:43.240 --> 0:10:47.240 to prioritize short term profits above everything else. And you know, 0:10:47.440 --> 0:10:49.640 I think we'll probably get into this later, but that 0:10:49.760 --> 0:10:53.000 led to a complete transformation of the bank's culture and 0:10:53.120 --> 0:10:55.760 one where literally the only thing you were supposed to 0:10:55.760 --> 0:10:58.640 look at when deciding whether to do a certain transaction 0:10:58.920 --> 0:11:01.880 or to bring on a certain client or make certain 0:11:01.920 --> 0:11:05.319 investments as a business was what will the impact of 0:11:05.400 --> 0:11:09.040 this decision be on our profits this quarter or maybe 0:11:09.040 --> 0:11:11.880 this year. But there's no consideration to what will this 0:11:11.920 --> 0:11:15.080 dud our reputations. What will this dud our business five 0:11:15.200 --> 0:11:18.079 years from now? Is this sustainable? Is this smart? And 0:11:18.640 --> 0:11:22.960 you know that that kind of just blinders on short 0:11:23.080 --> 0:11:27.920 term decision making has very anticipatable consequences, and in a 0:11:27.960 --> 0:11:31.800 business like banking that is highly levered, the seriousness the 0:11:31.800 --> 0:11:36.400 gravity of those mistakes is dramatically amplified, to say the 0:11:36.520 --> 0:11:40.080 very least. Removing the risk from the risk reward analysis 0:11:40.679 --> 0:11:44.840 naturally leaves to certain outcomes. So let's talk a little 0:11:44.880 --> 0:11:49.600 bit about that rise and fall we discussed earlier. In 0:11:49.720 --> 0:11:54.240 the nineteen eighties and nineties, Deutsche Bank was a sleepy 0:11:54.640 --> 0:12:00.880 regional bank in Germany. Of its profits came from testing banking, 0:12:01.559 --> 0:12:07.160 and once this transformation and embrace of derivatives and aggressive 0:12:07.880 --> 0:12:11.920 risk and trading and leverage took place, that shut up 0:12:11.960 --> 0:12:15.520 to eighty five percent a year later. How did this 0:12:15.600 --> 0:12:19.320 happen and how did it change the culture at Deutsche Bank? Well, 0:12:19.400 --> 0:12:23.880 the in those kind of two very related questions, and 0:12:23.880 --> 0:12:26.480 and the way it happened is that starting in the 0:12:26.520 --> 0:12:32.120 mid the banks leaders saw that the big American banks 0:12:32.280 --> 0:12:34.840 were making a tremendous amount of money on Wall Street 0:12:34.920 --> 0:12:37.360 and also making a tremendous amount of money and kind 0:12:37.360 --> 0:12:41.200 of approaching on the turf of European banks like Deutsche 0:12:41.240 --> 0:12:45.720 Bank and Goldman Facts. Famously one a big deal taking 0:12:45.760 --> 0:12:48.599 Deutsche Telecom private, and that that was a kind of 0:12:48.600 --> 0:12:55.240 assignment that had traditionally gone to the hometown banks, European banks. Instead, 0:12:55.360 --> 0:12:57.360 Deutche Bank got a role in that deal, the Goldman 0:12:57.440 --> 0:13:00.200 Facts as the lead and that was a huge wake 0:13:00.240 --> 0:13:02.840 up call to Deutsche Bank executives that, you know, Wall 0:13:02.840 --> 0:13:05.600 Street was coming to invade their turf. Maybe it's time 0:13:05.640 --> 0:13:08.400 for them to go invade Wall Streets turf. And so, 0:13:08.559 --> 0:13:13.880 starting in the bank went on this epic hiring spree 0:13:13.920 --> 0:13:18.079 where it brought in initially a small group of salesmen 0:13:18.160 --> 0:13:21.160 and traders from Mary Lynch and basically gave them a 0:13:21.200 --> 0:13:24.360 blank check to hire as many people as they could, 0:13:24.520 --> 0:13:27.880 and they went on to hire thousands of people from 0:13:28.040 --> 0:13:31.640 the big Wall Street firms of the time, very very quickly, 0:13:31.840 --> 0:13:35.200 and that very quickly transformed that or began to transform 0:13:35.280 --> 0:13:39.840 the culture from an institution that was primarily a German 0:13:39.840 --> 0:13:43.080 one to one that was much more international, and the 0:13:43.160 --> 0:13:46.160 locals of power started to shift slowly but surely from 0:13:46.360 --> 0:13:50.600 Frankfort and Berlin to London and to a lesser extent 0:13:50.679 --> 0:13:55.000 in New York. And even with spending billions of dollars 0:13:55.280 --> 0:13:58.960 hiring thousands of people in this very fast manner, the 0:13:58.960 --> 0:14:02.160 bank up much biggers actually in derivatives, but it still 0:14:02.280 --> 0:14:04.760 was kind of a second tier, maybe even third tier 0:14:04.800 --> 0:14:08.199 player on Wall Street and in many other many markets 0:14:08.200 --> 0:14:10.959 around the world. So in the late ninety nineties, so 0:14:11.000 --> 0:14:13.720 a few years after it started this expansion, the bank 0:14:13.800 --> 0:14:17.000 decide that it really needed to double down on this strategy, 0:14:17.240 --> 0:14:20.480 and so they went shopping for a big Wall Street 0:14:20.520 --> 0:14:24.000 firm to buy, and they, you know, they were looking 0:14:24.000 --> 0:14:27.920 at the likes of Mary Lynch Lehman Brothers, Uh and 0:14:28.080 --> 0:14:30.960 Bankers Trust, which at the time was kind of one 0:14:31.000 --> 0:14:33.880 of the most swashbuckling firms on Wall Street. It was 0:14:33.920 --> 0:14:38.000 in pretty serious financial trouble because of very bad that 0:14:38.200 --> 0:14:41.280 it's made on derivatives, and the FED was actually looking 0:14:41.400 --> 0:14:45.600 for a stronger financial institution to come in and acquire 0:14:45.640 --> 0:14:48.440 bankers Trust and basically take the mess off the FITS hands. 0:14:49.080 --> 0:14:51.880 And so the SAD learned that Deutsche Bank was in 0:14:51.920 --> 0:14:54.840 the market for a deal and kind of broker disagreement 0:14:54.880 --> 0:15:00.200 where Deutsche Bank in would spend ten billion dollar ers 0:15:00.280 --> 0:15:03.440 to buy bankers trust, and so that deal happened and 0:15:04.360 --> 0:15:08.520 almost overnight the bank was transformed. I mean, as you mentioned, 0:15:08.600 --> 0:15:12.920 the share of the bank's overall profits that came from investment, 0:15:12.920 --> 0:15:16.840 banking and sales and trading went up and more than 0:15:16.880 --> 0:15:20.080 tripled basically at the stroke of the pen. And but 0:15:20.080 --> 0:15:23.560 it also are more important, really just completely changed the 0:15:23.560 --> 0:15:27.000 bank's culture and the power had gone from being in 0:15:27.080 --> 0:15:30.680 Germany and now is clear that since the overwhelming majority 0:15:30.720 --> 0:15:33.880 of the bank's profits were coming from London and New York, 0:15:34.280 --> 0:15:37.080 that's where the power centers should be. And so you 0:15:37.120 --> 0:15:42.040 know that there were kind of very there's some cosmetic 0:15:42.200 --> 0:15:44.880 changes where I think pretty symbolic, like the bank's official 0:15:44.960 --> 0:15:48.000 language went from being German to English. But the more 0:15:48.040 --> 0:15:52.680 important ones were that the supervisory board of the bank, 0:15:52.720 --> 0:15:59.720 which was primarily consisted of German industrialists and corporate chieftain 0:16:00.200 --> 0:16:06.040 and even labor leaders, was completely It was just neutered essentially, 0:16:06.200 --> 0:16:11.240 and instead the mandate became, look, we're going to step 0:16:11.240 --> 0:16:13.120 on the gas. We want to be as big as 0:16:13.160 --> 0:16:16.360 we can, as profitable as we can, as quickly as 0:16:16.400 --> 0:16:20.480 we can. And so the bank just underwent this really 0:16:20.560 --> 0:16:25.600 revolutionary change where they had metrics that measured how profitable 0:16:25.640 --> 0:16:27.360 they were, how quickly and that was they were. They 0:16:27.360 --> 0:16:30.560 were using a metric called return on equity, which traditionally 0:16:30.720 --> 0:16:34.440 a banks return on equity would be in the maybe 0:16:34.520 --> 0:16:38.360 high single digits, very very low double digits. And the 0:16:38.680 --> 0:16:42.600 newly appointed CEO in two thou too, Joe Ackerman, who 0:16:42.720 --> 0:16:46.800 is himself a credit Swiss veteran, came in and said 0:16:47.160 --> 0:16:49.520 that we want in the next two years for our 0:16:49.640 --> 0:16:53.240 return and equity to go to and you know, that 0:16:53.360 --> 0:16:55.600 was a huge jointment. At the time that he made 0:16:55.640 --> 0:16:58.040 that prediction. I think the return on equity was four 0:16:58.160 --> 0:17:00.240 or five percent, So he was basically called in the 0:17:00.280 --> 0:17:03.120 period of two or three years for that to increase 0:17:03.560 --> 0:17:06.600 what I guess which is you know, exbraordinary. And the 0:17:06.680 --> 0:17:10.119 crazy thing is they achieved it, and he by the 0:17:10.160 --> 0:17:13.600 mid two thousands Deutsche Bank had gone had become one 0:17:13.600 --> 0:17:16.800 of the most profitable places on the planet and the 0:17:17.600 --> 0:17:20.679 but again, the decision, the way they achieved that was 0:17:21.240 --> 0:17:24.760 it really wasn't that complicated. They started evaluating every transaccident 0:17:24.800 --> 0:17:27.840 and every client they did based on it's the return 0:17:27.880 --> 0:17:30.320 on equity. So they were not going to be able 0:17:30.359 --> 0:17:35.359 to make a profit on a loan or another transaction, 0:17:35.400 --> 0:17:37.399 they simply wouldn't do it. And if a client like 0:17:37.480 --> 0:17:41.800 a German mid sized business for example, wasn't going because 0:17:41.840 --> 0:17:45.479 that relationship wasn't going to generate that huge return, they 0:17:45.480 --> 0:17:48.480 would drop the clients. And so the reality was that 0:17:48.640 --> 0:17:51.199 most of the business the bank had been doing in 0:17:51.280 --> 0:17:53.560 Germany it was not all that profitable, and part because 0:17:53.600 --> 0:17:57.000 the German banking system has this huge lot of banks, 0:17:57.000 --> 0:18:00.439 so there's intense competition, which drives prices way down. So 0:18:00.520 --> 0:18:02.680 let me let me circle back to something you said 0:18:03.000 --> 0:18:06.480 before we drift too far away the supervision of the bank. 0:18:06.680 --> 0:18:08.680 What is the valve stat I don't know how to 0:18:08.680 --> 0:18:14.240 pronounce the divorce the divorce and the management board, and 0:18:14.280 --> 0:18:16.920 then there's the supervisory board, which is really supposed to 0:18:16.960 --> 0:18:21.119 be the oversight board. So between those two entities and 0:18:21.320 --> 0:18:27.119 the Federal Reserve and the UH, the various regulators in 0:18:27.160 --> 0:18:32.320 the UK and the regulators in Germany, how did Deutsche 0:18:32.320 --> 0:18:38.879 Bank manage two skirt regulations, to skirt risk management, to 0:18:39.359 --> 0:18:43.360 hide losses, to do all these things that bad banks 0:18:43.400 --> 0:18:46.359 have a tendency to do for years and years and 0:18:46.440 --> 0:18:50.040 years that this went on for almost two decades, didn't it. Yeah, 0:18:50.040 --> 0:18:53.199 And you would think, given the number of regulators that 0:18:53.200 --> 0:18:55.120 were supposed to be overseeing the bank, you would think 0:18:55.280 --> 0:18:58.399 that it would have been very hard for them to 0:18:58.520 --> 0:19:01.320 do that. And the reality be as the exact opposite, 0:19:01.760 --> 0:19:05.320 which is that there was a patchwork of weak regulators 0:19:05.359 --> 0:19:10.520 all over the globe, and the bank very deathly played 0:19:10.520 --> 0:19:13.000 those regulators off each other. So the result was that 0:19:13.160 --> 0:19:17.520 almost no one was actually doing substantive kind of hard 0:19:17.600 --> 0:19:20.879 nosed oversight of them, and often which is the German 0:19:20.880 --> 0:19:26.920 bank regulator was it wasn't is notorious for essentially playing 0:19:27.080 --> 0:19:31.800 defense on behalf of hometown companies, and so Boten would 0:19:31.920 --> 0:19:35.600 essentially demand that any regulatory inquiries that came from the 0:19:35.680 --> 0:19:39.000 US or the UK had to be routed through this 0:19:39.320 --> 0:19:43.320 labyrinth of German bureaucracy and and in some cases to 0:19:43.440 --> 0:19:47.600 prevent the bank from complying with regulatory requests from outside 0:19:47.600 --> 0:19:50.919 of Germany. And the FED, for its part, which was 0:19:51.000 --> 0:19:54.679 really supposed to be aggressively overseeing a large swath of 0:19:54.680 --> 0:19:58.040 the banks US business, and the FED knew that there 0:19:58.040 --> 0:20:01.439 were really serious problems gone on. Weather it was uh, 0:20:01.560 --> 0:20:04.639 you know, weak defenses against money laundering or did the 0:20:05.520 --> 0:20:09.639 quality integrity of the financial data the bank was producing. 0:20:09.760 --> 0:20:12.440 And over and over again the FET voice these concerns 0:20:12.480 --> 0:20:15.679 to bank starting around two dozen two, and over and 0:20:15.720 --> 0:20:18.680 over again, the bank did nothing to actually address the 0:20:18.760 --> 0:20:21.040 sects concerns, and on a number of occasions the FETE 0:20:21.080 --> 0:20:24.480 came in and punished the bank. That these were punishments. 0:20:24.480 --> 0:20:27.760 That were to describe them as light touch would be 0:20:28.200 --> 0:20:31.439 really like abould be exaggerating it. It's you know, they 0:20:31.480 --> 0:20:34.239 were not even imposing any monetary penalties, they were not 0:20:34.720 --> 0:20:39.560 publicly admonishing any executives. They were just very weak written orders. 0:20:39.840 --> 0:20:44.000 And the bank and executives I talked to said explicitly 0:20:44.119 --> 0:20:46.720 that the fact of the matters, they knew that the 0:20:47.000 --> 0:20:50.840 consequences from misbehaving were not really that severe, and so 0:20:51.000 --> 0:20:55.240 in the benefits to misbehaving in some cases were very attractive, 0:20:55.280 --> 0:20:58.320 and they could make a lot of money providing services 0:20:58.359 --> 0:21:02.320 like money laundering or or you know, money transfer services 0:21:02.359 --> 0:21:06.160 to countries that were under U S sanctions, And it's 0:21:06.200 --> 0:21:09.520 a pretty easy decision for them. Quite fascinating. So let's 0:21:09.600 --> 0:21:13.720 talk a little bit about Russia and Deutsche Bank and 0:21:13.840 --> 0:21:17.720 Trump and I have to start with the question, how 0:21:17.840 --> 0:21:21.320 is it that Deutsche Bank was the only bank in 0:21:21.359 --> 0:21:26.159 the world that actually would lend money to Donald Trump? 0:21:26.240 --> 0:21:29.720 What's the background there? Well, the background is that banks, 0:21:29.840 --> 0:21:33.840 as a general rule don't like lending money to people 0:21:34.119 --> 0:21:37.399 or institutions that have a tendency of defaulting on their loans. 0:21:38.040 --> 0:21:41.919 And that is a pretty good description. Knows exactly what 0:21:42.000 --> 0:21:46.120 Donald Trump was in the late nines, and he had 0:21:46.119 --> 0:21:51.080 repeatedly defaulted or his companies had repeatedly defaulted on their debts. 0:21:51.200 --> 0:21:55.880 And as a result of that, mainstream financial instantiations were very, 0:21:56.000 --> 0:21:59.040 very wary about doing any any business with them because 0:21:59.200 --> 0:22:02.800 it wasn't Deutsche Bank considered a mainstream financial entity. How 0:22:02.880 --> 0:22:07.320 different were they from JP Morgan or Best Starts? Well, 0:22:07.400 --> 0:22:09.399 in the US, they were very different. And this was 0:22:09.440 --> 0:22:13.400 the period where Deutsche Bank was trying to really establish 0:22:13.440 --> 0:22:15.399 a name for itself and make inroads in the U S. 0:22:15.440 --> 0:22:17.760 It was more or less a nonentity at the time, 0:22:18.320 --> 0:22:21.320 and so the bank set out to try and build 0:22:21.359 --> 0:22:26.160 a business, in particular business of commercial mortgage BacT security, 0:22:26.240 --> 0:22:29.400 so basically making big real estate loans and then packaging 0:22:29.440 --> 0:22:32.760 those into bonds. And you know the key the first 0:22:32.840 --> 0:22:35.640 key step to that is finding commercial real estate clients 0:22:35.680 --> 0:22:39.679 to lend to. And they it was very hard for 0:22:39.720 --> 0:22:43.680 them to establish profitable relationships with the kinds of big 0:22:43.760 --> 0:22:46.640 names in commercial real estate, as they were already banked 0:22:46.720 --> 0:22:50.840 by much bigger banks, by JP Morgan or Bear or City, 0:22:51.040 --> 0:22:53.439 and so they had to go kind of fishing for 0:22:53.480 --> 0:22:57.240 the scraps. And it just so happened that Trump at 0:22:57.240 --> 0:22:59.719 the time was in need of money himself, and so 0:23:00.200 --> 0:23:01.800 they paired up. And it's kind of a match made 0:23:01.800 --> 0:23:03.639 in heaven to do with this bank that's desperate for 0:23:03.680 --> 0:23:06.440 clients in the US and you have this businessman who's 0:23:06.520 --> 0:23:10.520 desperate for a bank. And so starting in, the bank 0:23:10.720 --> 0:23:14.000 made several hundred million dollars of loans Trump in a 0:23:14.119 --> 0:23:16.399 very short period of time, and every basically off to 0:23:16.440 --> 0:23:20.800 the races from there. What's fascinating is Trump had a 0:23:20.840 --> 0:23:24.600 relationship with Deutsche Bank and then he stiffed them on 0:23:24.720 --> 0:23:29.239 a loan and came back to that same division and 0:23:29.359 --> 0:23:34.159 was soundly rejected, but somehow managed to talk a different 0:23:34.200 --> 0:23:37.640 division into making a new loan to him. Could could 0:23:37.680 --> 0:23:42.639 you So essentially one division paid off the loan to 0:23:42.760 --> 0:23:45.480 a separate division. Could you explain that, yeah, and this 0:23:45.560 --> 0:23:48.280 is actually not the first time that has happened at Deutschment. 0:23:48.320 --> 0:23:50.760 There are at least two other occasions where the bank, 0:23:51.119 --> 0:23:53.080 one part of the bank made a loan or is 0:23:53.160 --> 0:23:56.399 he's debt for Trump and he defaulted and he was 0:23:56.480 --> 0:23:58.320 off limits for that division, and then comes back to 0:23:58.320 --> 0:24:00.439 another division of the bank and find a way to 0:24:00.440 --> 0:24:02.960 do business with them. The most famous example of this 0:24:03.280 --> 0:24:07.280 is in two thousand eight, he defaulted on uh Dave 0:24:07.480 --> 0:24:11.240 loan to finance the Chicago skyscraper, and there's all sorts 0:24:11.240 --> 0:24:14.000 of litigation where Trump suites the bank, and eventually they 0:24:14.000 --> 0:24:16.800 reached a settlement that says Trump has to repay a 0:24:16.840 --> 0:24:19.600 certain portion of that loan in a couple of years. 0:24:19.760 --> 0:24:22.320 And so that brings you to two thousand eleven or 0:24:22.359 --> 0:24:26.439 so and Trump reaching Trump through Jared Kushner, his son 0:24:26.480 --> 0:24:29.960