Staff will soon be needed for Deutsche Bank’s new ‘bad bank’. I, for one, won’t be ringing up the HR department looking for a role in this dispiriting affair.
Although DB has been cryptic in public about what the bad bank will be used for, it is clear, reading between the lines, that primarily it will hold the assets of great chunks of the investment bank that are now judged to be surplus to requirements.
Clusters of entire books will be ring-fenced and ported over to the new unit where their P&L will sit while the deals within them are sold off or run down.
But, while this happens, the risks that those books contain won’t disappear. The bank is still on the hook. Someone will need to monitor and manage the risks; others will need to sell the deals to external buyers.
Someone? But who?
The easiest solution is to pick some of the staff from the businesses that are being closed down. These guys know the deals. They know the systems the deals are booked on. They don’t need to take gardening leave. So, while their shell-shocked colleagues are being ‘downsized’ left, right and centre, a subset of the doomed teams will endure in non-core purgatory.
Believe me, it’s not fun.
Although investment bankers are a pretty hard-nosed crew, they are (mostly) humans and they will likely feel a tinge of survivor guilt. Then there is the psychic dissonance of mixed motivations: cleaning things up quickly appeals to the competitive go-getter spirit in most bankers; on the other hand, the longer the clean-up takes, the longer the paychecks will roll in. How hard should you try?
But the real problem is that you are tending a corpse. It’s not as if most bankers are seen out of the door in the morning by their spouses warbling Brunnhilde’s cry of ‘Zu neuen Taten, teure Helde’, but ‘new deeds’ are what keep most of the them buzzing.
New businesses, new products, new clients, new staff, new challenges: above all the excitement of new deals. But in non-core, there are no new deals – just the formaldehyde smell of the old ones. It’s a funeral, not a Christening.
And for long-dated derivative trades the parents of the deal are often long gone. You look at the ‘booked by’ initials in the risk management system; you try to figure out who they refer to; you realise, with a sinking heart, that they refer to someone who is: a) doing some shiny job at Morgan Stanley; b) at a bitcoin start up; or c) worst of all - retired. You curse them and move on.
What’s more the profits on the deal have gone with them. They were taken upfront and paid in bonuses and now sit – in material form, as it were – in the Bulthaup kitchen of the (now) Morgan Stanley MD’s ski chalet in G’staad.
That shouldn’t matter, since derivative deals these days are accompanied by a comforting flotilla of financial reserves that are supposed to cushion the blow of exiting them: there are bid/offer reserves, non-observability reserves, credit reserves, and on and on.
Time and again though, when you close out deals, the reserves are not enough. The reason is simple: the counterparty who takes over the deal also needs to take reserves and – crucially - wants to make some profit too (since the kitchen in their MD’s ski lodge is looking a little tatty).
It’s painful to take a punishment beating from counterparties every day of your working life, especially if, short years ago, you had the whip hand. They say if you don’t know who the sucker is in the market - it’s you. The problem in non-core is that you know it all too well.
Last, while the bulk of trades can be closed, albeit painfully, with relatively little fuss, there are always deals that cling on like stubborn stains. Maybe they have some kind of peculiar legal wrinkle buried unnoticed in the documentation. Maybe they are in some odd jurisdiction. Either way, whatever the complication, you have to spend hour after hour with lawyers.
Don’t get me wrong: some of my best friends are lawyers and the ones I have worked with have been uniformly competent, charming and diligent. It’s just … well, they are lawyers. They think differently from sales and trading people. At work, in their company, time seems to slow to a crawl like in some strange relativistic journey through the cosmos.
The only upside to the whole process is that you can learn a fair bit – it’s small recompense in my view.
Anyway, that’s why I won’t be looking to spend my time in DB’s ‘bad bank’; my profound sympathies go out to those who will have to.
Kevin Rodgers started his career as a trader in 1990 with Merrill Lynch in London before joining another American bank, Bankers Trust. From there he went on to work as a managing director of Deutsche Bank for 15 years, latterly as global head of foreign exchange. His book, “Why Aren’t They Shouting?: A Banker’s Tale of Change, Computers and Perpetual Crisis” was published by Penguin Random House in July 2016.
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