PA extract:
'German investment banks' weaknesses were exposed only after the 1990s boom ended, says Max Sembach, analyst at PA Consulting Group in Frankfurt. "When the stock markets went on a downturn, the weakness of the German banks became painfully clear: [they had] high cost structures in high cost locations in a business where they were third or fourth rate." '
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It was all Deutsche Bank's fault or so the theory goes, at least. When Deutsche bought Morgan Grenfell, the London merchant bank, 15 years ago, it signalled a way forward for German banks tired of humdrum opportunities at home and dazzled by the promise of a star-spangled international investment banking profile.
Local rivals such as Dresdner and Commerzbank and even some of Germany's state-owned Landesbanken, notably WestLB, all caught the bug.
Within six years, Dresdner had acquired Kleinwort Benson. By 2000, it had also bought Wasserstein Perella. Commerzbank and WestLB took the organic route, pumping billions of euros into setting up similarly ambitious investment banking operations anchored in London, New York and around the world.
For most, the past few years have seen those dreams turn into nightmares.
Deutsche is the exception, having gone from strength to strength, particularly in its fixed-income business. Although its equities franchise has been eroded over the past year or so, and is undeniably weak relative to rivals', a fix is promised by Anshu Jain, the fixed-income boss who has recently taken additional control of equities.
Overall, Deutsche is an acknowledged "bulge bracket" investment bank, with a top 10 league table position. Copycat compatriots, though, have been left behind. First to crumble was DrKW. The bank had prospered, like most, in the late 1990s but when Deutsche proposed buying Dresdner in 2000 it triggered a disaster. Late in the day it emerged that Deutsche's investment bankers, weary from having to integrate Bankers Trust, the US investment bank acquired in 1998, had drawn up plans to "torch" DrKW. The news scuppered the whole takeover and internal and external confidence in DrKW suffered badly.
Under the ownership since 2001 of insurance group Allianz, DrKW has been holding its own, gradually building up a decent portfolio of corporate finance mandates and recording eight straight quarters of new-business profit.
But even now DrKW is like a man in chains. Its capital allocation has been capped at €2.4bn by Allianz and the insurer has set further constraints on how that capital can be employed.
There is virtually no proprietary trading, for example, and only limited risk-taking capacity.
The fate of Commerzbank Securities, the investment banking operation set up by colourful banker Mehmet Dalman in 1997, has been more miserable still.
Within a month of Mr Dalman leaving to set up his own fund management business at the end of September, Commerzbank had announced a mass scaling back of its investment banking operations. A total of 900 jobs are going, including 490 from the investment bank in London, New York, Tokyo and Frankfurt.
It had been a costly six years. Although Mr Dalman claims to have generated profits of €600m over the period, the volatility in results was extreme. In 2002 there were losses of €348m after a misguided derivatives bet. This year, after a first-half profit of €73m, it plunged to a €303m loss in the three months to September.
Then there is WestLB, perhaps the starkest example of pride in an international presence running away with itself. The bank made its name in London largely thanks to one banker, Robin Saunders, whose principal finance unit hit the headlines with cheap funding deals for everything from Formula One motor racing to Wembley football stadium. In the end, it was a humbler financing package - that of television rental business Boxclever - that was WestLB's undoing - contributing to a €1.7bn loss in 2002 and drawing attention to a long list of other deals where the bank's profile seemed to take precedence over business sense. WestLB has since wound down its principal finance operations, sold its UK investment banking subsidiary Panmure and retreated to Germany.
On the face of it, DrKW, Commerzbank and WestLB suffered from different ailments. But analysts are in little doubt that the root cause of their problems was the same. "All these banks expanded abroad for one simple economic reason, " says Marc Rubinstein, analyst at CSFB in London. "Their retail and corporate business back home was so unprofitable." Analysts draw parallels with Japanese banks a decade earlier, which suffered equally unhappy results.
German investment banks' weaknesses were exposed only after the 1990s boom ended, says Max Sembach, analyst at PA Consulting Group in Frankfurt. "When the stock markets went on a downturn, the weakness of the German banks became painfully clear: [they had] high cost structures in high cost locations in a business where they were third or fourth rate."
Like other mid-sized operators such as ABN Amro, BNP Paribas and Julius Baer, they have also been squeezed out of certain areas of business by the scale of merged competitors in the US. "Since the 1990s, investment banking has become a lot more capital intensive and the bar has been raised in terms of scale," says Mr Rubinstein.
Others believe the Gerrman banks' use of Anglo-American style investment bank managers prevented them stopping the rot faster, "Frankfurt bosses have not grown up in a capital market culture so they put Anglo Saxons in charge of their investment banking operations," says Dieter Hein, analyst at Fairesearch. "The trouble is it was not necessarily possible to control them properly."
To compund matters, the focus on international investment banking distracted the German banks from their core busines of retail and corporate business at home, leaving little profitability to offset recent problems. Deustche has been big enough to defend itself but those that followed its investment banking lead have made some expensive mistakes.
