Christian Sewing was having lunch with the Federal Reserve's top banking supervisor when Deutsche Bank's headquarters were raided. Photo / Getty Images
When a dozen police vans pulled up in front of Deutsche Bank's twin towers on a grey and chilly Frankfurt morning last November, Christian Sewing knew he was running out of time.
As camera crews broadcast the spectacular raid by more than 100 officers, the chief executive kept up appearances, lunching with the Federal Reserve's top banking supervisor, Randal Quarles, in an exclusive corporate dining area at Deutsche's headquarters.
Elsewhere in the bank's premises, armed police, prosecutors and tax inspectors scoured filing cabinets and computers — including those in the CEO's office — looking for evidence of alleged money laundering.
The traumatic day symbolised the end of an era for Deutsche, once the world's biggest bank by assets. By then, Mr Sewing already knew he was heading towards another dire set of quarterly earnings.
Added to the raid, this emboldened him to call time on a two-decade attempt to conquer Wall Street.
Shares in Germany's largest lender were trading near 149-year lows, down almost 90 per cent from their 2007 peak. Funding costs were soaring, its credit rating had deteriorated to near-junk levels and revenues were in freefall.
A senior manager remembers December and January as "months of horror". The bank's strategy, described as "wait and hope" by one strategic adviser, relied heavily on the ever-more-remote prospects of interest rate rises and a return of market volatility.
Mr Sewing swiftly realised that something much more radical was needed — and sooner than he had initially planned.
"The raids and the downward spiral Deutsche found itself in afterwards were the real catalyst," said one member of the supervisory board. Another director said: "It wasn't just a minor heart attack."
The Financial Times has spoken to more than two dozen people involved, to chart the origins of the most dramatic investment banking retreat since the fall of Lehman Brothers. It will cut 18,000 staff and shunt €288bn of assets into a "bad bank" to be gradually offloaded.
A week before Christmas 2018, Mr Sewing summoned half-a-dozen of his closest confidants to a morning meeting. In a conference room overlooking the city's historic opera building he outlined a project code-named Cairo, his vision for axing vast lossmaking swaths of Deutsche's investment bank.
In a confusing twist, parts of the project were later dubbed "Dublin", a decision that left people in some meetings unsure what they were actually discussing.
Mr Sewing, a 49-year-old risk manager who joined Deutsche 30 years ago as an apprentice, had first sketched a draft for the dramatic retrenchment when positioning himself to replace John Cryan in early 2018.
Written over a two-week holiday, and drawing partly on ideas that were frequently discussed but never agreed upon or executed during Mr Cryan's reign, he outlined an overhaul that would return the lender to its roots in European corporate banking.
From Mr Sewing's perspective, Deutsche had frittered away this heritage during the past two decades as mercenary traders obsessed with the next year's bonuses took control.
First, buccaneering traders Edson Mitchell and Anshu Jain were poached from Merrill Lynch in 1995. Four years later, Deutsche acquired second-tier Wall Street group Bankers Trust for $10bn.
"For the past 20 years, Deutsche has been ruled by investment bankers in London and New York," said one adviser. "Saying 'enough of it, the party is over!' required a lot of courage."
The initial plan agreed with chairman Paul Achleitner had been to ride out 2018 — on track to be profitable after three lossmaking years — and then see how the crucial first quarter of 2019 panned out before deciding how deeply to cut.
However, as a fresh crisis engulfed Deutsche over the winter, it forced their hands.
The Sweden question
In late January, Mr Sewing received a phone call that almost derailed Cairo. On the line was the chief executive of "Sweden" — Deutsche's code name for Commerzbank.
Martin Zielke, his counterpart at Commerzbank, suggested they revisit a merger between the two, with the backing of finance minister Olaf Scholz. The state is Commerzbank's biggest shareholder.
Unable to turn the government down — having just revealed deepening losses at the investment bank — Mr Sewing diverted his troops to evaluate the deal. It took three months for Deutsche to conclude it could not afford to attempt such a complex merger while trying to fix its investment bank.
"The Commerzbank saga was one big distraction," said one person involved. Another called it "utter madness".
One repercussion of the failed merger talks was that Mr Achleitner — who had himself championed the Commerzbank deal in private meetings earlier in January — was weakened. The former chairman of Goldman Sachs in Germany had also consistently defended Deutsche's global investment banking ambitions.
But Mr Achleitner "finally accepted that his reputation was going to be ruined if he didn't do something," said one top -10 shareholder, adding that if the new strategy does not work, "he will be out".
When the Commerzbank talks collapsed on April 25, Cairo was still an outline with only the "guard rails" in place, one senior executive said.
The biggest decision was what to do about the bank's subscale equities division, which analysts and insiders estimated was losing $600m a year. Executives initially toyed with keeping the European operations and closing only those in the US and Asia.
"In equities you have to be all-in or nothing," said one executive involved. "The biggest problem with shutting down a business partially is you end up with stranded costs . . . Unless you shut down systems wholesale, you end up crippling yourself."
Ultimately, they decided to close the entire global operation and shrink the trading balance sheet by 40 per cent, reversing years of unchecked expansion.
For months it had been a foregone conclusion that Garth Ritchie, the 51-year-old investment banking chief and career equities trader, would leave the bank. Thus Christiana Riley, the investment bank's 41-year-old finance director, represented the division in the war cabinet.
The other issue was how to form a new "bad bank" to segregate the unwanted equities business and tens of billions more in unprofitable, long-dated "dead wood" derivatives that were absorbing big chunks of capital.
Even for those in the inner circle, the full magnitude of the operation was slow to sink in. "I only fully realised how big this was after several weeks, when we discussed the actual numbers on job cuts, revenue losses and asset reductions for the first time," said one insider.
Deutsche was desperate to avoid another capital raising, having already asked investors for €30bn during the previous decade.
"[Christian's] view was that a capital raise was a lazy way to do this," said a person familiar with the strategy debates. "He kept saying, 'We have €54bn of tangible equity, why can't I just use my own money?'"
But this required deeper cuts than his predecessors dared, and concessions from regulators. Would supervisors accept a temporary drop in balance sheet strength?
Eventually, the answers from regulators were positive. In interviews with the Financial Times, senior regulatory officials praised Mr Sewing's ability to get things done, which was crucial in persuading the European Central Bank, Germany's BaFin and the Bundesbank to be more sympathetic.
"We needed the buy-in of the regulators," said a person close to the chairman, arguing that this was why the bank waited so long. "Imagine the reaction 15 months ago, when many could not even spell 'Sewing'."
One missing link fell into place barely two weeks ahead of the announcement, when a change in arcane accounting rules became law, allowing Deutsche to digest higher restructuring charges and still pay interest on loss-absorbing AT1 bonds.
Missing a payment would have led to a revolt among debt investors and difficult questions about the bank's solvency, triggering "the collapse of the whole edifice," one former executive said.
Another milestone was the annual shareholder meeting on May 23. In Frankfurt's windowless Festhalle, angry shareholders munched wiener sausages and potato salad and directed a volley of criticism at managers for nine and a half hours.
Mr Sewing hinted at "tough cutbacks" but was short on detail, seemingly sticking to Deutsche's tendency of offering vague rhetoric instead of decisive action.
But immediately after the meeting he acted, assigning more than 100 employees to a bottom-up analysis of every aspect of the investment bank.
Still, very few people knew the full picture. In mid-June, the FT reported that the bank was considering moving more than €50bn of risk-weighted assets into a bad bank, prompting a jump in the shares over the following weeks.
The wider supervisory board was still very much in the dark. "You guys know more than we do," one member told the FT at the time.
This only changed on Sunday July 7. The supervisory board convened in a Frankfurt luxury hotel, and was run through Cairo in full, now rebranded "Compete to win".
At 4:29pm, a brief regulatory statement, lacking core details such as job cuts and new executives, was released.
Then, for more than half an hour, nothing happened. Just as Deutsche's press office prepared to press the button on two more detailed press releases, the bank's notoriously unreliable IT played up: for some reason, computers froze.
In a panic, with all the phones ringing, the press team tried frantically to reboot computers and personally send releases to journalists.
On Monday morning, investors initially seemed impressed, but Deutsche's shares gave up early gains to close the day down 5 per cent. They have since recovered but remain below the level before the announcement — hardly a ringing endorsement.
"It would have been nice if the markets had applauded," admits one supervisory board member. "But Deutsche remains a 'show-me' case."
© The Financial Times Limited 2019
The council has also been served with judicial review proceedings.