Late to the parting: Deutsche Bank shrinks

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Hello and welcome to the Intelligence on Economist Radio. I'm your host Jason Palmer. Every weekday we provide a fresh perspective on the events shaping your world. It might seem that Texas and California are radically different, but they've got more in common than you think. Given the power of individual states, they can be thought of as independent political and social laboratories, each with hints of what America's future may look like. And plenty of animals are known to use tools to adjust them to choose the right one for the job. But a bit of monkey archaeology shows that our distant primate cousins have been honing their tools and techniques for millennia. First up, though.

It'S been a dramatic few days for Deutsche Bank.

Patrick Lane is our banking editor.

Germany's biggest bank has been in trouble for years. But the chief executive, Christian Saving, has decided to bite the bullet to recognize reality. On Sunday, he announced that a fifth of the payroll would be cut. That's 18,000 jobs. That costs would be cut by a quarter. That's 6 billion euros a year. The jobs have already started to go. Equity traders have already been told to clear their desks. So already, Mr. Savings Plans are being put into effect.

Many of the beleaguered bank's problems affect other European lenders. Overall, the continent's banks are less healthy and less profitable than their American competitors. Now Deutsche bank has finally woken up to the post financial crisis world and it's unveiled a drastic overhaul.

Christian Saving, the chief executive, calls it the most radical restructuring of Deutsche bank in decades. And that's absolutely right. Hitherto, Deutsche has failed to shake off the idea that it could remain a global investment bank, competing across the board with Wall Street's giants, which it used to do before the financial crisis. But he's decided to get out of equity trading, that's buying and selling shares on behalf of hedge funds. Other institutional investors decided to get out of that altogether. And the job cuts seen immediately, it seems, are largely in that area. In big financial centers like London, New York, Tokyo. And he scaled back other areas of investment banking and decided to focus much more on what Deutsche bank was founded to do originally almost 150 years ago in 1870, which is to serve big companies and to look after their needs in managing their cash, in managing their foreign exchange needs. So making sure they've got the foreign currencies they want, hedging their interest rate exposure, all that sort of thing, which sounds quite dull, but is actually quite a good solid business. And a lot of banks have done quite well in that area in the past few years.

So what was wrong? Why wasn't the investment bank part of Deutsche, the cash cow it was hoped to be?

Well, the problem was that for years it was. That's the point. So in, I suppose, the mid-80s, late-80s, Deutsche started to move away from that solid business of being the house bank for German industry was okay, but wasn't particularly profitable, never was into to exploiting the opportunities that the deregulation of global finance were then opening up in London and in New York. So investment bankers were hired, joined the company, they took over other investment banks and they really did go toe to toe with Wall street banks in London, in New York, elsewhere. And Beutshire did really, really well, as did everybody else, until they didn't anymore, which was, as Everybody Now Knows, 2007, 2008. And in common with a lot of other institutions, it certainly felt that if only it held firm, if it held its nerve, then eventually the world would go back to the way it had been and that if it was the last man standing or the last bank standing, then profits would return. But of course, the world, as we now know, had changed completely and Deutsche was slow to adjust to the new reality. America got its house in order a lot, lot sooner than Europe. Deutsche was slow even by European standards. Arguably, you could say it took until 2015 to realize that the world had changed.

And so the changes that they've planned now, do you think that's too little, too late? Is it ambitious enough? Is it achievable?

Well, it's certainly too late or it's not a moment too soon. Whether it's too little, we can't really tell. If you look at what it's doing, focusing on serving corporate clients, scaling back the investment bank, continuing with German retail banking and asset management, where it's pretty well regarded, that all makes perfect sense. Whether it's going to be too little, it could well be in two senses. One is that it expects to make a return on equity of 8% by 2022. In other words, if you look at the money that shareholders have put into the company and you divide its annual profit by shareholders funds, it expects to make 8% a year. Now most bank shareholders expect at least 8%. I mean ideally 10. Deutsche has gotten nowhere near that for years. I mean since 2010, 2011. So on the one hand it's quite ambitious to get 8%. On the other hand, shareholders, they've suffered enough, they may want more. This is why Deutsch's shares are worth about 30% or less, maybe a quarter of what they ought to be according to the company's accounts. So they're trading at a big discount. So yes, that looks ambitious. Is it going to be enough? So that's one issue. Another is that if you look at Deutsche's ratio of costs to revenues, that's hitherto been at about 90%, which is staggeringly high. And that's partly because it's been carrying a lot of expensive, unprofitable investment bankers. It expects to get that down to 70% by 2022, which sounds quite impressive. Real top notch banks, they're getting to 50% and below. So it looks ambitious. Is it ambitious enough? Don't know. The next problem is that although it looks ambitious, it may still be pretty hard to achieve. And this is why in Europe, banking is a really hard business to make money. And I know people think that bankers are very well off and the top bankers, there's no question that they are and that banking must be by definition a money making business. Actually in European banking it's really quite difficult. So at the moment, two fifths of European banks are making less money than their cost of equity. In other words, the minimum that shareholders expect. And the reasons for that are that interest rates in Europe are very low. Growth in Europe is pretty slow. Those things are likely to remain true for the next few years. So that means that for Deutsche, even to achieve the ambitions it set itself is going to be hard. On top of that, its own domestic banking market is especially difficult. It's a really very, very competitive market if you're an American bank. The fundamentals of the economy and of the banking system are such that it's a much more profitable business.

But what does this story about what Deutsche has had to do tell us about the rest of the industry? Is this a sign of cuts to come elsewhere among European banks?

I don't think so. I mean, certainly not to the same extent. I mean all European banks have these difficulties of low profitability and a very difficult macroeconomic environment and low interest rate. That's universally true. It's also true that European banks are not as efficient as they should be, that more of them could cut costs, more of them could invest more in it. There are other European banks which have had some of the legal difficulties that Deutsche has had. One thing that we haven't mentioned is that Deutsche, as well as not being particularly profitable, has run into a problem with regulators, with courts, with all sorts. And those problems keep coming and probably keep being highlighted because of Deutsche's other difficulties. So all European banks have had those difficulties, but Deutsche, it's almost been in a different league.

So in light of all of that, has Deutsche just been unlucky here?

No, it's had some bad luck. But it's taken a decade since the crisis to get to this stage. It's been far too slow to react. It hasn't been particularly well run. It's had two or three goes at this. We don't yet know whether this is going to be enough. It could be. This may be the start of a turnaround, but it's taken an awfully long time to get to this stage.

Thanks very much for your time, Patrick.

My pleasure, Jason.

On first glance, power in America appears to be centralized in Washington, home to the White House and Congress. But many of the most influential political choices are being made elsewhere in the country, in the two most powerful states of the union, California and Texas.

They're the most populous states. One in five Americans lives in either California and Texas.

Alexandra Sewich Bass is the Economist's Senior correspondent for Politics, Technology and Society. She's been looking into why Texas and California are so central to America's present and future.

About a third of the new jobs that were produced in America in the last 20 years were in California and Texas. And by GDP, they would rank the fifth and 10th largest countries in the world. They have been very important for the country's economic growth.

And how does that translate into political influence?

This gives them considerable clout in helping shape policies on a national level, determine the results of national elections, and swaying economic policy in the U.S. but these two states have two very different models and visions for the future of America. California is the land of progressive hippies, the tech community, liberal values. Texas, on the other hand, has been conservative for decades.

How can that influence be asserted, though? A state like Texas only makes state level decisions, right? So how can it cause problems for the government in Washington?

Texas sued Obama many times over more liberal policies. And now California is doing something very similar in the Trump Administration, it's the leading state of resistance. So it has pushed forward on some policies while the rest of the country has stepped back. And I spoke to Gavin Newsom, the governor of California, and he told me about how they're approaching climate change.

We have stepped in where the federal government stepped away on the international scene on climate change. Not just from policy paradigm, but also from an investment, a mindshare, fully functioning cap and trade program, 100% renewable goals, a venture capital construct that is investing in that.

Why else do these state level policies and initiatives and attitudes matter?

Part of the reason they matter is because they're running very different experiments with California being one of the most progressive states. It's feels that government has a strong role in the lives of citizens. So it is a high tax state and offers a much larger social safety net. Texas is one of a handful of states in America that does not have a state income tax and it does not have any interest in offering an extensive social safety net for citizens. The states are actually fairly similar when it comes to demographics and both share what will look like the country's demographics in a few decades. So Hispanics are 40% of the two states populations, about double the national average. So how these states have handled demographic change, their attitudes toward immigration are useful litmus tests for the future of America.

So how have the two states dealt with the immigration problems that they're both presented with today?

The two states are showing very different positions on immigration, with California being the most pro immigrant state in the country, Texas taking a more Trump like stance. And why this is interesting is because both states used to have the opposite position in the 1990s and even in the 2000s. So Texas used to have a very moderate stance on immigration, even among Republicans. And that's part of why the Hispanic population was broadly supportive of Republicans in the state. In California in the 1990s, it was ground zero for anti immigrant sentiment in America. And there was a campaign called Save Ourselves State under the Republican Governor Pete Wilson to target undocumented immigrants. And that is partly why California veered to the left. Some Hispanics turned on the Republican Party. And so it's a very interesting moment in Texas right now to try and understand how the broader debate about immigration and the current Texan leadership's stance on immigration is going to change the politics of the state.

So these two states have more or less traded places in terms of how they think about immigration. How else are they different?

Texas is one of the most affordable states in the nation, and California has a crisis of Affordability. In the last decade, we've seen a million more Americans leave California than arrive. A quarter of them are going to Texas. That's a painful truth for the governor of California.

Mr. Newsom, I'm not naive. We're the richest and the poorest state. And the poverty rates are driven by one thing, cost of housing. Affordability is our issue, the issue that defines so many other issues. And unless we get serious about housing production, to me, if there's one risk factor in this state, it's that we're losing a generation. We're losing the middle class. I don't want to read about people in U Haul trucks going to Tennessee. I sure as heck don't want to hear about anymore. Austin, Texas.

Some people might be leaving California, but on balance, people still want to come and live and work there, right?

Absolutely. California still attracts the top international talent, so it still has positive population growth because international immigrants are coming in and there's natural population growth as well. It's by no means a mass exodus. And indeed, California is still the hub of innovation in America. People choose to go there especially to work in the technology industry. But California does face this issue of a division of fortunes between the Bay Area, which is thriving, and the rest of California that's seen many manufacturing jobs and other industries that have lower margins leave the state because the cost of doing business is so high.

Okay, so California has its problems, but surely Texas does too.

It does. Its model of low tax means that it's not necessarily investing in its citizens. It has underfunded education, both elementary and high schools, and the university system, which is not nearly as impressive as California's higher education system. And it does not take care of its citizens in a meaningful way. It did not expand Obamacare, for example, so it has the highest uninsured population in the country when it comes to health insurance and really no social safety net. And so I think that the leaders of Texas are going to have to think hard about what it is that a government owes its citizens and how to ensure that its citizens can make it prosperous going forward.

Do you have a kind of prescription for what California could borrow from Texas's way forward and vice versa. Or do you think that one of the two of them represents what the future of America really looks like in their more or less current state?

Right now, both states think that they have the right recipe for the future of America, and neither state is particularly interested in learning from the other. I would like to call for a merging of the two states. Approaches where you see the best of California mixed in with the best of Texas. Texifornia, if you will. So merging California's investment and willingness to embrace the future with Texas's free market spirit and support of business would be an interesting recipe for success that hopefully other states are willing to try.

Alexandra, thank you very much for joining us.

Thanks for having me, Jason.

It's long been known that animals other than humans, from apes to otters to birds, use tools. But scientists have recently discovered evidence of this tool use changing over time.

Monkeys have been using stone tools for 3,000 years at least.

Peter Silk writes about science for the Economist. He's been looking into how capuchin monkeys in particular have used tools.

What's interesting about this research is that it shows that it's been going on a lot longer than we've been paying attention to animals.

Now, it's not news that animals use tools. We know that they do.

Yeah, plenty of different species do. There's kind of a growing menagerie of examples. Mammals, birds, fish, even insects have been demonstrated to use tools. A couple of other monkey species have been demonstrated using primitive tools. I mean, it is a rock bashing behavior that we're looking at here. It's still significant and it still demonstrates that we didn't have monopoly on tool use as humans.

So when you say that they use tools and that that use has changed over time, what do you mean, what are they doing here?

Basically, what these capuchins do, they get a hammer and an anvil, they use a cobble quartzite stone as a hammer stone. They use loose cobbles or tree limbs as an anvil, and they get a husk of a nut or of a fruit that they want to eat, and they place that on the anvil and they carefully break that husk open with several strikes of the stone. It's actually more complex than it sounds at first listen, because what they want to do is not damage the soft kernel of the nut while making sure that they're getting all of the outer layers off.

But at the end of the day, this is all still just bashing rocks on rocks. I mean, does that count as tool use?

Well, you know, when you put it that way. But it actually takes them eight years to learn the juvenile monkeys how to do this. So obviously there's more to it than it first meets the eye. They are very careful in selecting the rock first of all that they use. It has to be a specific size and shape. And they have a very specific technique as well to break the nut open or the fruit if you see the young monkeys doing this, what they'll do is they'll bring the rock down and the nut will fly off because they're hitting it wrong. So actually it's quite sophisticated what they're doing.

So how do you even study this kind of change over time if what's being made here is smashed nuts that are then eaten?

I guess first of all, you have to select a good site. So researchers took a couple of trips out to the Brazilian Amazon to this site where a group of capuchin monkeys eats cashew nuts. Basically, the researchers dug down and then carbon dating the charcoal that is buried at a similar depth in the soil. They could tell when these things were buried, so how long ago, and then match that up to the likely behaviors of the monkeys at those time periods.

So what did they find? What do they see in these different levels?

Well, what they found was that the stone selection changed over a period of time, and so did the anvil selection. And from that they deduced everything else. What foods the monkeys were eating. As time went on around the beginning of ancient Greek civilization, these researchers called phase four from 3,000 years ago. The hammerstones from this period are light and have many impact marks, which indicated to them that they were eating smaller seeds than the cashew nuts they currently eat. Now. Phase three was kind of a transitional period. And phase two, when we see them using bigger and heavier hammerstones, many larger anvils, which suggested that they were eating a larger food source than the cashews pots, possibly the Brazilian cherry or jatoba fruit. And that was from about 250 years ago. That brings us up to phase one, which is from only 30 years ago. We see cashew residue on the stones that are buried, and that matches with what we can observe the monkeys doing there now, which is a very exclusive cashew diet.

So as the preferred food source changes over time, the way the tools themselves and the way that they're used is evidently changing.

Yeah, and especially the selection of those tools and the way that they match them up.

And so what should we take from that? I mean, if we kind of knew that animals did use tools before, and, you know, basically the more you look, the more sophisticated behavior you find. What significance is it that this goes so far back in time?

So I guess what's interesting about this study is that it has parallels with how we do human archaeology. Most of what we know about our humanoid ancestors is based on actually stone tools that we found and the way that they change across archaeological periods.

Peter, thank you very much for your time.

Thank you, Jason.

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