Banking on Global Markets: Conclusion

WW2 and the subsequent division of Germany into two parts saw the beginning of a new era. Dollar replaced Pound as the world's reserve currency, the Cold War began and Bretton Woods system cam into being. West Germany was right at the frontier of the Cold War. Formation of NATO, fear of Communism and the 1957 Treaty of Rome let to stronger cohesion in the Western powers. Overall, the German economy in particular and Western economy in general did pretty well. Despite the protectionist and nationalist passion carried over by the previous era, the period after WW2 saw denationalization of finance. This was a direct result of free-convertibility of currencies and the ease with which money could move from one country to the other. If anything, the advent of information technology made the process faster and more difficult to control.

Under the able leadership of Abs, the Deutsche Bank managed to go through this turbulent period rather effectively. It was able to avoid American pressure to break itself and hold on to its structure of a "one-stop" bank. This brings out a very fundamental difference in American and German attitude towards finance in general and banking in particular. While Americans hated seeing too much power being concentrated in the hands of any one institution, Germans encouraged such institutions as symbols of stability and national pride. The specialized US Investment Banks, though, gave Deutsche Bank some serious competition and were more effective due to their focused agenda. Duetsche bank found it a little hard to adapt from a banking based on relations to a banking based on commoditized services and transaction carried over impersonal capital markets. As far as from 1870, boom and bust cycles have been a hallmark of capitalistic systems. Cartelization and groups of interest were especially strong in the German business to counter the effects of such cycles and deal with the effects of destructive competition. It seems the influence of this thinking lasted well after WW2. A strong nationalistic influence also made it a little difficult for Deutsche bank to adapt rapidly to other cultures. Lack of enough good management talent and shoddy acquisitions continued to haunt the bank as far as 1990. The two world wars, the division of Germany and subsequent reunification had a cumulative effect of not only hurting the bank's bottom line but also making it a bit cautious about international investments. Nevertheless, by 2000 with its acquisition of the Banker's Trust the bank had displayed some significant improvements, becoming a world leader in the business of global currencies, commodities trading and credit derivatives trading. Additionally, it is very clear that the American operations had a very strong influence on the bank in terms of revenues, management and getting a stronger footprint in investment banking.

Concluding, the story of Deutsche Bank is indeed the story of evolution of finance. The book gives a good insight into the working of the financial world besides bringing out the importance of political factors and international co-operation for the profitability of a business. The way Deutsche Bank grappled with changing international scenarios, different cultures and lack of management talent is particularly instructive for any company or individual who wishes to operate internationally. Finally, the way the Bank has survived in face of seemingly impossible obstacles is inspiring. A good book overall.

Banking on Global Markets: Story Till WW2

From 1870 to 1914 financial institutions operated on the basis of trust, relationships, family ties and politics. In a fairly globalized world, where the British reigned supreme and ensured European supremacy, exchange rates were fairly stable and cross-border finance relatively less risky and easier to implement. London was the primary banking centre while US and Germany were growing at a prodigious rate, and German technical know-how was already gaining respect and recognition. In this atmosphere, Deutsche Bank led the German effort to invest in the US and other parts of the world. After reading the first part of the book, I feel that in the US operations bad management and over-reliance on only few key people(Siemens, Villard and Adams) were the bank's Achilles heel. Notably, Villard played a roguish role, but managed to thrive due to his charisma and contacts. The bank ended up investing in companies that either took too long to give a reliable (or any) return on the deployed capital. Deutsche Bank found itself frantically trying to manage defaults by American companies and being stuck with investments it did not want. The biggest fiasco were investment in some railroad companies and in an upcoming coking facility. Only the investment in Edison General Electric (later General Electric), though not completely free of problems, turned out to be relatively good. Essentially, the bank found itself playing second fiddle to Morgan and Speyer in the American financial arena. Nevertheless, it seems it managed to turn out a respectable, if not excellent, profit.

WW1 saw finance and economics being made secondary to nationalism. As a direct result of the war protectionism and many socialistic values took deeper roots in many societies across the globe, perhaps with the hope of making a more just society. Nazism, fascism and communism found their roots as a result of economic problems, racism and aggressive nationalism. The period also saw the emergence of US as the world's richest nation, transforming itself from a debtor to a creditor nation, essentially fuelled by its managerial revolution and profits from war. Its strong influence shaped banking regulations with retail banking, investment banking and management consultancy coming out as three distinct fields. Germany, from advising the US to have better financial policies, found itself on getting lectures from Americans about the same; a remarkable reversal of roles in the span of few years. It also found its concept of universal banking directly at odds with its American counter-parts.

Between the two world wars, Deutsche Bank increasingly found itself between a sharp rock and a very hard place. From managing the default of American companies it found itself managing the anger of US investors over default of German companies. Its role in the Nazi government brought it a great deal of notoriety. The wars also saw it loosing many assets to "legalized theft" or Government confiscation. Two wars, strong nationalistic policies by Government around the globe, a hostile dictator at home and effort to help its clients retrieve the assets lost to confiscation took a toll on its profits and performance. It continued with its reliance on relations and a few key people to get things done. Overall, I feel that even though Deutsche Bank's performance was below par in this era due to a host of difficulties and adverse situations, there are quite a few lessons that one can learn by reading this text. It nicely brings out the various pitfalls of an overly centralized management, problems inherent to operating in a different cultural environment, the pros and cons of over-reliance on contacts for business, problems with a leader who can get things done but cannot mentor and the possible effects of unforeseen circumstances, natural disasters and wars on a corporation.

Banking on Global Markets: Inside a Black-Box

I have started reading "Banking on Global Markets: Deutsche Bank and the United States, 1870 to the Present" by Christopher Kobrak. To say the least, the book is really fascinating because I think it may demystify the working of powerful banks to some extent. Till now I was reading more about relatively idealistic management literature and theories, where ability, self-awareness and vision are the defining factors. This book, however, brings out the aristocracy of pull rather beautifully. I don't know how much of it has changed over the years, but from about 1870 to well into 1914 (till the point that I have read) banking was the domain of a few rich and powerful banking dynasties like Rockfellar, Morgan, Speyer et al. Business was done more on trust and personal bonds rather than anything else. Level-4 leaders or abject self-promoters were the only other people who could hope for success in these transactions. The writer mentions that the Banking Dynasties operated somewhat like European Royal Aristocracies. And they had a frighteningly strong hold on businesses and economics, something that I reckon continues till date.

A detailed, thoroughly researched and well-written history of Deutsche Bank wrt US also serves as an interesting read for anybody who hopes to do business in a cross-cultural environment with unpredictable laws. In many respects, by the time 1900s started, US was pretty much at the juncture where China is today (and US is where UK was then!). There are a few uncanny similarities: the banks find a rapidly growing economy too hot to ignore but do not know how to best deal with the unpredictable regulatory environment. I am really positive about this book and I hope it will provide some wonderful insights into the inner workings of the best financial institutions of the world.

Built to Last: Conclusion

Just finished reading "Built to Last" and I must say I am not very impressed. The book seems to be a research "inspired" by a well-packaged mix of works of Peter Drucker, Tom Peters and Robert H. Waterman. Further, many a times it starts sounding more like a self-help book than a business book for a serious reader. For somebody who has no previous business knowledge, this book may seem pretty good, but for anybody who already has a reasonable grounding in management theory this book is simply not good enough. Even its findings are mired in too many generalities to be of any significant use except perhaps as morale boosters. In fact, I feel that to the uninitiated it may cause more harm!

Nevertheless, the actual data and examples about some great companies is invaluable. They can serve as good examples in management group discussions or lectures on management theory. They can also help a management student to create a more practical and concrete picture of theories propounded by Peter Drucker. The book may also prove useful to quickly recap some useful management basics that can possibly work in certain situations.

Concluding, even though history has much to teach, to exclusively use historic data for decision making may not help. I still believe that nothing can replace a good leader and active thinking.

Built to Last: Thinking Growth

Reading more of "Built to Last", the writer identifies two major ways towards growth: audacious goals and continuous, incremental learning. As self-evident it may seem, these goals are indeed difficult to put in practice. Further, to sustain the effort and mental discipline for this, the goals need to be backed by a strong cultural identity. Here, the book is pretty similar to "In Search of Excellence". In fact, I feel that it simply takes the ideas presented by Waterman and Peters to their logical next step, exploring the cultural aspect more thoroughly and expanding upon the idea of "sticking to the knitting". Overall, it has helped me to strengthen my understanding about building a successful organization. Nevertheless, I do have my doubts on one point- that a company does not need a successful product to start with. I agree with the examples of HP, P&G, 3M and Sony; great companies that did not start their lives with successful products. Experimentation enabled them to stumble on good products and then move ahead. Hence, I understand that a super product/idea is not a pre-requisite for a great company. In financial terms, however, the amount of capital this can eat up and the difficulties it may present to sustain a start-up are a bit jarring. For every Sony that makes it through these turbulence, there will be a 1000 who won't. Starting with a good product can provide the entrepreneur the necessary cover to launch his company, provided he does not get too much stuck up with the first product. Overall, I think it would make the whole process less painful.

The book also plays down the importance of MBAs, sometimes actively disparaging them. I am sure it has good reasons to do that. Nevertheless, to judge a degree by few of its people is unfair. To judge all lawyers by example of ambulance chasers would not present a very pretty picture. Similarly, an MBA can prove to be a potent catalyst depending upon the experience, orientation and calibre of an individual. It can help a person to take a more comprehensive view of a business and develop a broader outlook. Nothing can replace a Level-5 mentor, provided one has the inclination to learn. All the same, an MBA can have its own utility and accelerate the process of learning. Even for entrepreneurs, it can help to make the journey to independence smoother.

The book is written brilliantly, but it is still a research. It is definitely not a brand new idea and builds upon previous works in similar direction. The real world examples provide wealth of useful data. The interpretations of the data is reasonably good, and would prove to be more useful if read in conjunction with the history of one of the mentioned visionary companies and in knowledge of earlier works in management theory.

Of Banks and Crisis

Reading about Obama and his socialist cronies baying for blood of the banks got me thinking once again about the recent financial crisis.

Government tells banks to lend to people who are not credit-worthy. Banks are not sure, so Government decides to guarantee such loans. After all the American dream means at a least an owned house for every individual. No matter if he is a worthless bum. By virtue of being a human being and an American citizen he deserves the loan. Nevertheless, the risky loans demand high interest rates. If Government wants to gamble the money that it has earned so painstakingly from tax-payers, who are banks to interfere? Besides, getting interest rate reserved for junk bond while holding Government backed AAA+ investment was too good to let go I guess. However, like the proverbial mosquito who drinks so much blood that it is unable to fly, reality caught up with the banks and the Government. Of course the Government cannot be wrong, especially as it thinks about people. Didn't it help its citizens to go on a debt-fuelled consumer frenzy by keeping interest rates artificially low? My, it really cares for its people. Especially the tax-payers and savers. So, banks were the devils who created this spectre of mortgage based securities that threatened to swallow the world. But were they the only ones to blame? I guess not.

My question is simple: why should banks lend money to any worthless idiot because the Government wishes it so? And if they are forced to, why cry foul if they manage to take advantage of it? That is what you get when two looters play chess with each other. Might is right, so the Governments escape blame in name of helping people. But let no one delude themselves into thinking that banks could have pulled this one off all alone. I don't think that banks should suffer the price of socialist dreams because I do not believe in socialism. People who expected banks to self-immolate to satisfy their mediocre vote-banks got a well-deserved shock. And, by all means, the people who allowed and accepted such a system in name of social justice have only themselves to blame. It is a world governed by the laws of cause and effect, and everything we do or don't do has consequences. The banks simply turned a cannibalistic system against itself, but they did not invent it.

Built to Last: Underestimating Leadership

I have started reading 'Built to Last: Successful Habits of Visionary Companies' by Jim Collins and Jerry Porras. As the title suggests, the book aims to analyse the habits of visionary companies for the benefit of entrepreneurs, managers, CEOs and other business building professionals. In this, its research methodology is pretty similar to "In Search of Excellence". It differs, however, by the fact that it tries to bring out the successful habits by comparing the visionary companies with good but not visionary companies in the similar sector. I think the book may have some useful insights just because it uses some practical examples and data to assert its beliefs. Nevertheless, I would take what it says with a big pinch of salt.

One of the first assertions that I have read in this book is that one does not need a leader to make a sustainable great company as great companies last much beyond their leadership. Instead, a company that is value-based, can clearly articulate its purpose of existence, find a profitable denominator and implement its philosophy consistently across the board will succeed. Moreover, the author believes that anybody can become a leader.

I find the entire assertion true and childish in equal measure. What the author says is true theoretically, without a doubt. It is akin to a preacher telling us that we all are potentially divine and there is a saint within all of us. It may be a good management policy (or the politically right thing to increase book sales figures) to tell everybody how good and equal they are. But lets face it: human beings are neither same nor equal. Our physical strength, knowledge, capabilities, experience, motivations, morals, beliefs, wisdom and ambition differ. Our faces, finger prints and bodies differ too. Potentially and theoretically everybody can be equal. And theoretically Communism can be the most humane system of governance. We, however, do not live in an ideal world. Hence, the concept of equality is absurd as one can compare only apples with apples. You could, for example, say that one lawyer is better than the other lawyer in the field of intellectual property rights, but to assert that a top lawyer is better, equal or worse than a top athlete is simply stupid unless we can define a common, intelligent and universally acceptable denominator for comparison. Human beings due to their essentially uniqueness are difficult to compare in absolute terms. So, calling them equal is an easy and the wrong way out. In practical terms, everybody is not equal and everybody cannot be a good leader.

Moreover, good leadership is the result of wisdom gained over years and cannot be possibly taught in a three-day workshop. Practical corporate experience or an MBA can possibly help to develop it, but even that is not guaranteed. To cultivate leadership one needs courage, maturity, experience, strong beliefs, patience and the ability to rally people. There is no short-cut to leadership or to grow a company without a leader. He is always the starting point, whose mind and strength will ultimately shape the organization and its future.

I may also add that even Jim Collins was forced to recognize the need for a Level-5 leadership in his other book, Good to Great. The truth remains that only such a leader can create leaders and engineer a self-sustaining process that can carry a company far. A Level-5 leader is indispensable for building a visionary company, as is evident from all the examples given in both the books. Such leaders, like true Level-5 leaders, may shun publicity and die unknown. Nevertheless it does not eliminate the need or importance of such leaders because only such leaders are capable of building a visionary company and can also turn-around a normal company into a great one. Moreover, to assert that anybody can become such a leader is no different from saying that anybody can be Mr. Universe. The hard work, mental discipline and perseverance necessary for it are not laid out clearly enough, to the extent that the need of good leadership has been significantly played down. Without a gardener who sows the seeds properly and takes care of the sapling, chances of having a giant, fruit-bearing tree are downright difficult, if not impossible.