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hi I'm Josh Brown welcome to live from the compound I'm here with as usual my partner Michael Banach and we've got David Henrich today David has written a book that everyone is talking about you've probably seen him elsewhere dark towers this is it there's so much in here there's so much to get into I won't spend a lot of time but this is the true story of what's happening and what has happened that Deutsche Bank stick around it's bananas [Music] all right David first of all thanks for coming you're a 17-year business journalists written books you've been covering finance for a long time for Wall Street Journal when you have an idea to do a book like this like is everyone they're cool with it well I just started the New York Times when I came up with this book idea and they were yeah they were cool with it but not super happy I was kind of grudging coolness because they knew is gonna take a lot of my time and how long have you been at the Times I've been with the Times for two and a half years now okay and how long were you at Dow Jones I was at Dow Jones in the journal for fifteen years so that whole time you were like somewhat aware of Deutsche Bank kind of on the fringes of acceptable banking yeah I mean I really started paying a lot of attention to the bank about ten years ago when I moved to London for the journal and this is right after the financial crisis and it was the kind of the onset of the European crisis and Deutsche Bank was just this huge kind of thing hanging over everyone at no one knew if it was strong or weak and people were kind of terrified of it and that's a great recipe for a journalist looking to dig into something visa they've got an illustrious history all the way back to financing the construction of Auschwitz they lent money to countries like Iran and Syria recently they helped Russians along their money there are sexual harassment allegations they bought a mortgage lender just before the crisis wrote that down all in on derivatives the LIBOR crisis or scandal what she wrote about in spider Network and helped us companies to avoid paying taxes just to name like a few other than that though yeah pretty good yeah we're not going into the market manipulation the bribery the tax and all that so reading this book it's obviously deutsches but in the news you've been covering them for years but it's sort of been in the background like I haven't really read all the stories that stuff but this was just truly eye-opening and when you read books like this about Enron after the collapse it's always after the collapse this company is still very much alive like how is that possible well I'm not sure I agree with very much alive this is a company that it's been around for a hundred and fifty years as recently as a decade ago it was kind of a toast of Wall Street still having survived the financial crisis a lot better than most of its peers its stock is now I haven't looked today but as of yesterday it was I mean and it's rebounded a bunch in the past few months even with that it's down ninety-three percent from its peak so this is a company that is just a mass destruction of shareholder value over a relatively short period but it does still exist though you know seven it was the biggest bank in the world yeah it was the biggest bank in the world in a huge market cap which I don't know if the top of my head but that and that was the peak does the German government have anything to do with it well the German government has either they haven't actually rescued the bank but everyone knows they would rescue the Bank of push comes to shove and so there's a huge they don't control any aspect of it it's just like the subtext is like German he's not gonna let Deutsche go under yeah I mean this is the even the bank's name speaks to have synonymous it is with German capitalism and theirs and I think you talk about too big to fail and moral hazard Deutsche Bank opponent er child yeah especially in Europe and even more so in German but so it was contained to Europe like for the first I don't know 90 years wherever it was and then you wrote a chapter about like the great migration from Wall Street to London right and so they in look and the thing about like just purely serving clients and doing this kind plain-vanilla lending is that is not that lucrative and so in the late eighties early nineties all these big Wall Street firms were starting the process of converting from partnerships into publicly traded companies they had super high shareholder returns and so investors were not that interested in investing in plain vanilla banks like Deutsche Bank that very low returns and so Deutsche Bank needed to find a way very quickly to get a lot more profitable and the best way to do that especially at the time was to get big to Wall Street and sales and trade him and in particular to get big in derivatives and so that's what they did they hired a guy named Edson Mitchell who's a derivative salesman at Merrill Lynch and he went on I think probably the greatest hiring spree in Wall Street history and he with a couple billion dollars provided by Deutsche Bank hired thousands and thousands of people most of them from Merrill Lynch but from all over the street really so I think we know that everything is driven by incentives all over the world not just finance so Ackerman who became the CEO yeah said the current quarter is the most important quarter were ever going to have and they were targeting these ridiculously high returns on equity and so do you think that that was like the the the center point for all of what came afterwards yeah I think Ackerman's decision in around 2002 2003 to be basically said the return on equity of the bank needs to go up six-fold so I think was like at four percent and he wanted it at 25 percent within 2 or 3 years and they got there and they got there but I think looking back on that that is maybe the single worst decision in the history of the banking industry certainly the history of that's a reckless tone and it's it's extreme short-termism it's reckless it provides us perverse incentives to make money right now with little or no regard to what happens even three years down the line much less a decade down the line it leaves and in this case led to radical under investment and neglect for some of the core things that a bank that technology for example they just did not invest in compliance they did not invest in any sort of internal monitoring system to look at fraud or suspicious activity they it was just complete it takes a while before that blows up yeah it does and in the moment it looks great and they they achieved the 25 percent return on equity then that kept going up from there they were getting and look the media and industry in general completely missed the boat and they were getting these banker of the Year awards best bank in Europe the New York Times at one point called Joe Ackerman like the greatest banker of his generation or something to that effect and it was it was a love fest because they were doing really really well at serving what they regarded as their sole constituents that not so different though from Lehman who was on the cover of Barron's yep being celebrated a month before a year before it ultimately filed for bankruptcy like it's not wildly different so where does Deutsche Bank go further than just that culture of we only care about this quarter like when does it spiral into what it's become now well I mean first of all I think that comparing Deutsche Bank to Lehman Brothers is that's pretty apt and that's pretty bad right I mean Lehman is like hella bad largest bankruptcy in history yeah exactly and that is the textbook definition of finance gone wrong and I think Deutsche Bank also fits that bill with the difference being the Deutsche Bank miraculously survived and I think that they I think that became the key turning point is that in 2009 2010 they actually had a relatively good crisis because they had made some very it what turned out to be smart bets anticipating that collapse of the housing market they're also playing all sorts of accounting games that I sort of panicked first yeah they panic first they had a huge fire sale of assets that they rightly recognized for about to become even more toxic than they were and they made a bit of the prop traders made a huge short bet on against the US housing worse so Littman was in the big short he was in this book so prop Fred who plays him in the movie Ryan Gosling well it's Ryan Gosling if the Ryan Gosling characters based on yeah yeah so the prop trading went for five percent of profits to seventeen percent yeah their leverage ratios like 50 to one yep what's Berkshire of like I don't know a not that like for sure so yeah so this was I mean even the other banks by the way and the this is an era where leverage ratios which are like a pretty pure test of the riskiness in the financial system were exploding but even the rest of Wall Street was in like the 20 to 1 range may 31 range which by historical standards is off the charts don't you back was double that in terms of like where this was coming from an oversight and regulation and internal compliance what what systems and checks and balances do they have in place very few and to me it's like I think it's actually not that hard to understand how internally you've got this a short-term pressure and incentive set up to just succeed in by one in one metric only which is returned to shareholders in the short-term so it's not bad surprising that they're not investing in like cost centers like compliance or tech what to me is a little more surprising and I guess upsetting from a policy standpoint is that the regulators were just completely missing in action and I think that partly reflected this attitude among regulators that you don't want to say anything too critical and too public about the banks because that could destabilize them I think part of it is the anticipation of getting jobs in the industry and in particular at Deutsche Bank which was making huge paydays to former regulators who went and joined them and that's so I think the incentives for regulators also were there's little upside to speaking out publicly against a big bank like Deutsche Bank and there's plenty of downside you could sacrifice your own life let's the International nature of the company play a role in that it's almost like regulatory arbitrage yeah that's exactly seen by Europe European authorities in some respects but then US regulators in the security side it's like who has the final say on what's going on yeah that's in Deutsche Bank played that perfectly' I mean they were there for all its ineptitude and recklessness was extremely savvy at some stuff in regulatory arbitrage is a perfect example of that not only were they played and so in the US for example you've got the SEC you've got the Fed at you've new york regular supervision yeah it goes on and on well but even just for Deutsche Bank it was the Fed SEC in New York and then you've got in London you had the Bank of England you had the financial conduct authority and then most importantly in Germany you had what's the regulator known as boffin which is was in pure defense mode trying to circle the wagons around his home town bank and Deutsche Bank's became very expert at when they would get a request for information or a subpoena from say I don't know say the SEC or the Justice Department in the u.s. they would insist that that had to be routed through boffin and so it would just and all requests for information we're kind of being being diverted into this labyrinth of German bureaucracy this blew my mind you you reference this that the technology systems the computer systems between Moscow and London and New York did not communicate with each other yeah and that it's hard to overstate the craziness of that and literally if you want if they want to look up exposure to a certain type of interest rate derivative in a certain market or a certain time period there was just they could get it from Moscow or they could get it for London or they could get for the u.s. or Germany but they couldn't get a net overall exposure not deliberate they built silos takign out of each other's business I mean I think no I don't think it's deliberate I think it was just sloppiness and them being cheap and not doing integrating technology systems especially by the point when they've got a that literally like a thousand different technology systems trying to interact solving that is a huge multi-billion dollar project that just there's no easy way to do it you have to start over and that's who wants to be the executive a few rungs down from Joe Ackerman or Anshu Jain saying guys in this quarter we're gonna take a big charge because we're gonna solve our technology problems no one had was that a job yeah you lose your job and in an acronym space and he was not shy about publicly blaming people for failures and that that's you not only lose your job do you lose your reputation so there was this was a this is a dark book there was a lot of I mean there's some accidental deaths yeah there was some suicides and then there was obviously the whistleblower that you spent a lot of time with you talk about how that process all worked well it's been really strange and very intense actually and I bill Brooke Smith who is a senior risk executive at deutsche bank over many years he's one of the guys who had brought over from Merrill Lynch to deutsche bank in the mid 90s committed suicide in london in early 2014 and shortly after his death I got to know his son who got access to his father's he bill brosman had been using as a Yahoo and Gmail accounts oddly for a lot of his work has done well is that done I don't know yeah right that struck me as very strange but he also is partly because he was on this oversight board that wasn't part of this full-time job anyway his son Val who had no experience in finance and it's like a you know he's a skilled rock and roll musician got access to these files and had no idea what any of them meant until I over a period of six years and Val learned a lot on his own but I also caught he cold called you know I cold called him right after his dad died because I had heard these rumors there loved rumors swirling about the circumstance of his father's death and my colleagues and I at The Wall Street Journal in London had that's what you do as generalist sometimes it sucks and my I got I was the one who we gotta split up his family until I got Val and it was very easy a track fell down and he's he had this big active social media presence and so I was like yeah let's talk no I mean it was it was a long slow rather difficult courtship I mean I really I believe contact him nine days after his dad's death that's tough yeah I mean look it's my job it's obviously a horrible situation like that I can't even imagine for him and his family and the last thing he wants a bunch of journalists swarming and some of my colleagues had like rightly but it sucks had like visited the house where they live and so there is they were Val I think actually to his credit told me that if I would call off the rest of my colleagues and leave his family alone he would talk to me and that was a deal we were happy to make because we're not trying to bother people until Val slowly and Val's a complicated guy who was during that period in and out of rehab and during that period I started to get to know him just over the phone and over email and by that summer so six months give or take after his dad's death he started sharing with me some of the more interesting files that his his father had had on in his computer so we can't not talk about the Trump stuff in terms of like lack of oversight at the bank itself this was this blew my mind that he had defaulted several times with the investment bank whether it was the casinos the Chicago project but then he was able to get a 40 million dollar loan of proof on the Private Wealth side yeah I mean in the debt from one side of the bank that he could pay off with a loan from the other not only dead but defaulted dead so he either was paying Paul but like they had the same dad right and this dude anywhere else right now of course not and that's this to me like put asi e the ideology of Trump or love him in a validation I don't want to be such a row and what is this is so instructive than showing the dysfunction and just brazen recklessness inside this bank that they they didn't look trumpet by that point had defaulted on a huge junk bond offering that Deutsche Bank it underwritten it he had they then lent him six hundred and forty million dollars to build a a skyscraper in Chicago he then defaulted on that and that's in 2008 and then two or three years later they're back a different arm of the bank wing of the bank is back to provide him a bunch of money to repay the money he still owed on the defaulted ship out alone and to go by the Doral Golf Resort in Florida and the bank's argument and I mean I've talked to a lot of people who were involved in that decision to make these loans at that point there's a huge fight within the bank and the investment banking side which had been burned repeatedly by Trump is like you can't do this we've been this is humiliating for us and the private banking division successfully argued that not only were these loans safe that they were now preparing to make but that the the reason the investment banking side was opposed to it was just purely sour grapes and they hated they hate us they're envious of our success and they're trying to undermine us and that appeal worked and it to me again it's just it really I've never seen such a clear illustration of organizational breakdown and just the the perils of having these internal fiefdom that are literally at war with each other so not your job to answer this question but it's Deutsche Bank it'll be around in ten years who I don't know if you had asked me that six months ago what is it what is the financial condition of the which Bank right now it's improving very slowly they there is still the bank is still what's like the debt what's the debt level of top of your head like I don't know there's a way bigger than the equity still ya know there I mean they're well banks in general are highly levered institutions deutsche bank his way over levered so there may it's coming down but to me the biggest in again this comes back to some of the reporting I did last year for the book in downer Florida I went and talked a bunch of the compliance staff and this isn't this doesn't speak directly to the financial issues but it is relevant because talk to the people in the compliance division down to Jacksonville Florida and I talk to pride 20 of them give or take who would either currently worth there recently we had worked there and every single one of them literally was like we don't know why we're working here the bank we don't trust what the bank is telling us to do what they're setting us up to fail and you know that is a serious issue for a bank that's operating in a highly regulated market like the United States and it really increases the odds there's gonna be another huge scandal of some sort somewhere down the road and if that happens it would not surprise me if the Fed or the United States government kicks Deutsche Bank out of the US and that could be that I want to ask you you know it's funny if they ceased operations today it wouldn't matter there's nothing they do uniquely that other banks aren't already doing better than they are probably at less cost probably at less risk well why does like why does that even have to be here oh look the argument they would make which I I think is somewhat self-serving but not entirely is that there is an important role for big European banks to exist all over the world to serve big European companies that are looking to do business around the world that's there are probably a bunch of small or mid-sized German companies that need financing in the United States or need to do dollars HSP say there's like there are big yeah that's true but I think the German argument would be that it's for anicon it it's the largest economy in Europe and there's a huge sector of mid-sized German companies that increasingly rely on have a globalized supply chain to globalize global customer bases and it's helpful to have a trimmer make that being said you're right like if you bank cease to exist tomorrow there's another big there's Commerce Bank in Germany which also could fill some of that void and surely if there was a demand for the services that Deutsche Bank provides other players would come in and provide that I'm guessing they don't get kicked out under Trump administration and maybe in term two of a Trump I'm guessing that doesn't happen many times it's hard to imagine the Trump administration doing something very bad to Deutsche Bank right okay well listen the book is the book is crazy like I can't believe how many things have gone on that people don't even realize and I think there's a lot of takeaways for investors for people that keep money at banks so I think it's really great what's your next uh what's your next topic that you're you're keen to raise a ruckus over when this is again I don't have any idea I'm trying to dislike everybody to children's book why don't you calm down a little bit yeah that's right here.we advice thank you alright David thank you so much we're gonna link to your book where people can buy it on Amazon where do you want people to read your stuff like you have a you have a permalink to your column at The Times or just a name you can find me all right and you promised you weren't followed here I can I make no promises actually hey what do you think of David's book if you haven't read it yet this is like a thriller but it's it's a true story you should totally read it go ahead and leave us a comment what are your thoughts keep it apolitical go ahead and subscribe to the channel if you have not already and we will be back with you soon I hope [Music]