Jonathan from Arlington Virginia asks,

The Fed signals of an imminent rate cut made me eager to consider how I can take advantage of reduced rates through additional real estate purchases and other business acquisitions. Then, the announcement from Deutsche Bank that 18,000 employees will be let go stunned me. The two seem eerily (albeit tangentially) connected – I can’t ignore the timing. Should one be bullish toward leveraging  cheap debt to buy sensible assets with the real possibility of another financial crisis around the corner? Pursuing these acquisitions now can seize access to capital that likely won’t be available in tighter times, but the risk of holding such highly leveraged assets is intimidating.

Jonathan, this is a great question. My reading of the situation is a little different. I’m not saying that Deutsche Bank is the only major bank that is struggling, but the company had ambitions to compete in the world of investment banking along with Goldman Sachs and JP Morgan Chase. They made substantial investments to grow those operations to compete with the Wall Street heavyweights. This is an area of the business that earns a lot of its money on the basis of corporate financings, bond issuance, brokering mergers and acquisitions, and initial public offerings. The trading desk for stocks, bonds, commodities, and currencies is also included in this business unit. The number of large corporate transactions have reduced significantly in recent years, even though the bond market remains highly active in terms of new offerings. This division turned a profit last year, but had lost money every other year since 2014. Most of the volume of the trading desks is increasingly being done by computer with no human intervention. You simply don’t need as many people to execute the trades as you once did. While the volume of trades is up, this is a misleading statistic. The number of computer trades is up, while those initiated by paying clients is down. 

The bank hasn’t disclosed where all of the 18,000 layoffs will occur. But they have said that their brokerage and investment banking business will be among the heaviest hit areas. The company has about 9,275 employees in North America, most of them in the NewYork area, and about 800 in Cary North Carolina. 

About 150 software developers in the Cary North Carolina office have already received their layoff notices. Investment banking is not at all like general business banking or personal banking. Investment banking relies upon large commissions. I’ve seen these negotiated down to 1.5% in some cases. This too has an impact on profits at the investment banks.

The cuts are not limited to Deutsche Bank. Goldman Sachs, Citi Group, BMO, and in fact most of the European banks have announced substantial headcount cuts at their trading desks. Citigroup has announced a cut of 10% of their equity trading desk, and large numbers at their bond trading desk. 

There is no question that the business of banking is changing across the board. The number of reasons for me to physically enter a bank branch continues to decline. I can now perform the majority of transactions from a web client or an app on my phone. I can now even make deposits using the camera on my cell phone which is integrated with the bank app. The one thing that kept me going to visit the branch every month will eventually disappear entirely. Banks across the country are reducing headcount and closing lower volume branches. 

Borrowing money is not just about interest rates. A number of lenders have become more conservative in terms of underwriting rules and have tightened their lending criteria, even if money is cheap. They too are worried about making investments late in the business cycle. Continue to take advantage of the low interest rate environment and secure debt under the best terms, for as long as you can.