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Deutsche Bank

The past few years have been very dark ones for this historic banking institution.  Now it seems like it is teetering on the verge of failure and is a source of global consternation with many fearing a “worse-than-Lehman” situation where DB fails and destroys the global financial market.  DB is indeed a weakened organization, but its downturn should not come as much of a surprise.

In 1997 President Bill Clinton and his Treasury Secretary Robert Rubin together undid the Glass-Steagall Act that was implemented by Congress in the wake of the banking run that preceded the Great Depression.  This act was put in place to separate those institutions that managed insured deposits (commercial banks) from any financial activities that were deemed to be too risky.  These activities included securities trading - bonds and stocks, corporate equity investing, and others.  By the late 1990’s non-bank “investment banks” like Morgan Stanley, Goldman Sachs and Lehman Brothers seemed to be literally minting money and taking away much of the financing business utilizing the securitization process for lending, which proved far more efficient than the banks’ portfolio lending model, and far safer for society inasmuch as loans were not being funded by taxpayer insured deposits.  Commercial banks, seeing their business shrinking into irrelevance could not stand it any longer and mobilized their substantial lobbying effort to undo the barrier to entry for them to enter the party.  They got in, and brought with them the clunky bank business model and the taxpayer-insured deposits too.

Congress and the Clinton Administration should have known better than to allow this to occur.  By then, Japan’s financial market and economy were a basket case and their banks were owned controlling interests in many, if not most of their major industrial companies.  The Japanese experiment with massive, too-big-to-fail banks that had a broad investment mandate was already an obvious failure.  For those with a slightly longer memory, the Savings & Loan Crisis of the late 1980’s was another fine example of the dangers of the type of banking deregulation that Clinton/Rubin were advocating.  But history was either ignored or poorly understood.

Quite simply, putting taxpayer-insured deposits at risk, and in the hands of managers who are motivated to max out earnings and related bonuses is a formula for disaster.  The current Wells Fargo fiasco is another example of this.  Separating finance into two types of organizations – those that handle insured deposits and take little risk and those that do not and can do pretty much as they wish - as was the case before the undoing of Glass-Steagall, is a far more intelligent design.

In the course of my 34 year career the banking industry has changed so much that it is virtually unrecognizable.  There has been a consolidation of banking into the hands of a few global mega-sized commercial banks, like Deutsche Bank, and a destruction of the investment banking industry who, without the benefit of cheap insured deposits could not compete with commercial banks.   This evolution is not healthy in any way.  The massive banking organizations cannot be managed properly given their immense heft, let alone supervised properly by regulators.  There is no obvious benefit to their heft including no economies of scale to speak of, and their immense size precludes them from responding efficiently to the needs of smaller and local clients.  The fact that there are fewer banks restricts creativity and access to credit.  By consolidating banking into the hands of a few giants, regulatory edict rather than the market’s needs govern how bank capital is directed, which is antithetical to the benefits of a free market.  It is in fact ironic that the free market is more often blamed for banking crises and problems rather than the herd-mentality investing style that results from regulatory edict .

The demise of Deutsche Bank is but a symptom of the demise of our banking system, having been converted from one that was designed to serve society’s best interests into one that preys upon society to take out as much as possible in gains, without too much regard for risks given that the downside is “guaranteed” by the government (read: taxpayers).  This asymmetrical situation is at the root of all banking problems, including that of Deutsche Bank.

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