Interview with Deutsche Bank CEO Ackermann 'There Would Be No Banking Industry Without Risks'
Deutsche Bank CEO Josef Ackermann, 61, spoke with SPIEGEL about new regulations for global financial markets, who should be blamed for the global financial meltdown, and what the banks have actually learned from the crisis.
SPIEGEL: Mr. Ackermann, you are part of a system that has brought the global economy to the brink of ruin. Have you ever thought about your own culpability?
Josef Ackermann: I have thought about the causes of the crisis and what we can learn from this for the future. It is not so much a matter of how each individual behaves as a matter of having the right regulations.
SPIEGEL: You, personally, have done nothing wrong?
Ackermann: I have certainly made some errors in judgment. I assumed, as most people did, that every market player only takes as many risks as he himself can absorb, and thus the system itself is stable. This has proven to be erroneous. And we have to learn from this and draw the necessary conclusions.
SPIEGEL: You have always said in the past that there was no systemic danger. You have no reason for self-doubt?
Ackermann: If you are not omniscient and cannot precisely predict the future, you don't necessarily have to be plagued by self-doubt. Obviously, our collective knowledge was not deep enough. As I said, I didn't think that individual banks had accumulated risks -- in some cases off the balance sheets -- of such a magnitude as has occurred.
Ackermann: Much of what is called junk bonds today was not necessarily bad. During the crisis, demand dropped precipitously, also for many essentially good products, with a corresponding decline in prices. If you have to sell your Picasso collection, but there are no or hardly any buyers, even the most beautiful painting is not worth much anymore. But does that make it junk?
SPIEGEL: The banks probably had more junk than Picassos in their collection.
Ackermann: Given the dimensions of the global financial markets, there were only relatively few cases where the substance of the products themselves was not good. But these products have dragged down many others.
SPIEGEL: Why did the banks ignore all the warnings, such as the growing real estate crisis in the US?
Ackermann: It is very difficult to recognize bubbles in advance. At what point do rising prices constitute a bubble? If you sell off too quickly, you lose earnings and may soon no longer be in business. If you react too late, you suffer large losses. There would be no banking industry without risks, which is why it is so important, especially during boom periods, to maintain risk discipline -- or risk ethics. This is what we have done at Deutsche Bank. We, therefore, suffered no losses that threatened our capital basis, or even our existence.
SPIEGEL: Nevertheless, Deutsche Bank only survived because the entire system was stabilized with taxpayers' money.
Ackermann: We are grateful for the rapid and decisive intervention of the countries and central banks in the financial crisis. If it had come to a meltdown, for example, of Hypo Real Estate, this of course would have been devastating for us, too. But we also have to differentiate between those who have independently secured their existence, and those who could no longer do so. And I would like to point out that, in the final analysis, by issuing these bailouts the government acted in the interests of taxpayers and the entire economy.
SPIEGEL: Alexander Dibelius, who heads the German branch of investment bank Goldman Sachs, is calling for collective humility from his and your profession. You don't seem prepared to take that step.
Ackermann: It was already over two years ago that I said on television that we, Deutsche Bank, and I, personally, have made mistakes. In addition, at a very early stage, I pointed out systemic difficulties and called for a systemic solution. Deutsche Bank has also consistently put a substantial amount of energy into the necessary bank rescue packages. We have no reason to collectively wear sackcloth and ashes, particularly as most bank employees, especially in Germany, have absolutely nothing to do with the development of the financial crisis. But of course there are sub-sectors where we have to change the ground rules that have governed our actions in order to avoid repeating such a crisis.
SPIEGEL: If there are only a few ground rules, how you act as an individual boils down to a question of morality.
Ackermann: Who says that there are few ground rules? Banking is the most strictly regulated industry in the economy. There were only a few sub-sectors -- primarily in US real estate financing -- with not enough ground rules. That is also where the problems arose that then spread to the entire system. It was also politically desirable for as many US citizens as possible to purchase their own homes. But the bottom line is not the quantity but rather the quality of the ground rules. It is up to governments to establish good ground rules -- rules that give sufficient leeway to the positive aspects of competition, yet eliminate negative aspects as much as possible, and above all prevent competition from becoming disastrous. Each individual and each company has to comply with these rules. Appealing to the sense of morality of each individual or each company does not produce a solution in a competitive society.
SPIEGEL: US President Barack Obama also assigns blame to the banks and the financial system. In the end, the problem was a culture in which people earned vast amounts of money by gambling with the entire economy.
Ackermann: That is a skewed view. Flawed incentive systems were certainly partly to blame for causing the crisis. But other factors such as global economic imbalances, an excessively lax monetary policy in the US, and expensive lending were far more important.
SPIEGEL: Bank incentive systems that are beyond belief for many people, including the American president, also exist at Deutsche Bank. You also continue to pay astronomical bonuses to your investment bankers.
Ackermann: At Deutsche Bank we don't pay bonuses based on mere revenues, but naturally also take into account the costs entailed. We also pay a large proportion of our bonuses in shares, which cannot be immediately converted into cash. When our share price declines, the bonuses also lose value. This allows us to link the bonuses to the company's long-term performance. As a result of the crisis, we will also introduce a penalty system. It is thus also possible to lose your bonuses in the future. We strongly feel that performance should be rewarded. Bonuses are necessary to recruit and retain top talent.
SPIEGEL: But you don't put a ceiling on bonuses. Bonus payments of 20-30 million or more are something that people are not willing to accept these days, particularly after such a crisis. Don't such exorbitant incentives fuel a culture of greed and excess that always leads to extremes?
Ackermann: I am a staunch supporter of the market economy and thus opposed to fixing prices. The same holds true for bonuses. In a market economy, prices have a controlling function. They indicate scarcity, and thus ensure the efficient use of resources. However, in order to be successful over the long term, we of course also need social and political acceptance. This is lost when there is a feeling among the population that a select few are getting rich on the backs of society. This prompted me very early on -- also in my capacity as the chairman of the international banking association, the Institute of International Finance (IIF) -- to advocate reasonable bonus systems and point to the sensitivity that is especially advisable in these times. Nonetheless, we need global and consistent regulations for bonus payments. When a country acts in isolation, it may appear more equitable in the eyes of many, but it makes everyone poorer in the end.
SPIEGEL: Many banks are again paying bonuses worth millions, as if nothing had happened.
Ackermann: Over the past few months we lost a number of good people who have been enticed away with high guaranteed bonuses. But I don't want to complain. There was a time when Deutsche Bank structured its investment banking to headhunt seasoned veterans from competitors. And today we are also not about to let anyone get the better of us. Banking is a people's business. If you want to rank among the best, you have to have the best. And to do this you have to pay what the market demands.
SPIEGEL: Bonus excesses are just one example, albeit a highly popular one, of disastrous trends that are responsible for the crisis. Don't we need a fundamentally different financial system?
Ackermann: We don't need a fundamentally different one, but rather a better financial system that allows for healthy growth in the world economy, and is also more stable than what we have had up till now. It's a question of optimization.
SPIEGEL: What should this stable financial system look like?
Ackermann: We definitely agree that the ground rules have to be adapted to prevent such a crisis from ever occurring again. But this doesn't mean that securitized products, financial innovations or even the investment banking sector will totally disappear, as some people think.
SPIEGEL: In Pittsburgh the heads of state and government attending the G-20 summit have mapped the outlines of a new set of rules for banks. What will change for Deutsche Bank?
Ackermann: In the future, banks will have higher equity requirements. In principle, this is also the right approach. But lawmakers must carefully weigh up how far they want to take this and how quickly they want to demand this capital injection. If they go too far, it will have significant consequences for the economy because it will limit the banks' scope for lending and financing. It all has a price.
SPIEGEL: We all pay a high price for the failings of the financial markets. It is very understandable when, for instance, German Chancellor Angela Merkel says that she doesn't want to be blackmailed ever again by the banks.
Ackermann: I fully understand that governments don't want to rescue the banks once again with tax money. We have to achieve a situation in the future where banks can disappear from the market without threatening to affect the entire economy.
SPIEGEL: Securitizations are said to be one of the main causes of the financial crisis. Loans were converted into securities, and transferred off the balance sheet into special-purpose entities so that no one could recognize what risks the bank had assumed. How should these products be regulated?
Ackermann: In the future, banks will have to retain a proportion of these securitizations on their own balance sheets. If we ourselves have to taste what we cook, it can only make things better. Another positive move is to increasingly trade derivatives via exchange-like entities to reduce the mutual dependencies of banks on each other.
SPIEGEL: Analysts have already calculated that the higher capital requirements mean that your goal of 25 percent return on investment is no longer attainable.
Ackermann: This question can only be answered when the new capital requirements are known. The 25 percent return on investment -- pre-tax, mind you -- is not an objective in and of itself, but rather the standard for the best in the world. That's where we belong. Unfortunately, this figure has become a political issue in Germany. Nevertheless, the manufacturing industry in this country has achieved much higher returns for many years. Of course with higher rates of equity, it will become more difficult to achieve the 25-percent objective. But this is balanced out by other factors that make it easier for us, for example, the fact that the number of our competitors has declined thanks to the crisis, making for improved margins. In addition, there is considerable growth potential in emerging nations. In any case, we currently have no reason to drop our profit objective.
SPIEGEL: Another demand from Pittsburgh is that from now on every bank will have to show how it can be liquidated. Have you already made such a last will and testament for Deutsche Bank?
Ackermann: No. Just like the future equity requirements, we also have to wait for the details here. Such a will would certainly have significant consequences for the structure of banks.
SPIEGEL: That's the idea. The structure of the banks should be changed so that they are less susceptible to crises.
Ackermann: Nevertheless, it is necessary to examine the prosperity effects of such a measure. When a global bank is divided into individual subsidiaries, each with their own net assets, it is of course easier to wind up. By contrast, an integrated bank cannot be so easily split apart. But an integrated bank offers operational benefits and advantages for the economy. If it is true that a global financial system increases our prosperity -- and I am convinced of this -- then a stronger emphasis on national fragmentation will put the brakes on prosperity. Now that we are in the crisis, many people only see the risks and costs of the global financial system. But they are forgetting its enormous contribution to enhancing our prosperity over the past few decades.
SPIEGEL: Nonetheless, the current system had to be saved from collapse by the state.
Ackermann: I would be the last person to deny that the interventions by governments were necessary. And it goes without saying that I never want to experience something like this again. But the question is: How far will the pendulum now swing in the other direction? We have to optimize the upcoming reform initiatives so we achieve a more stable system, but, at the same time, avoid exorbitant economic costs for society. This is only possible if banks and legislators pursue an intensive dialogue with each other.
SPIEGEL: The past few months have shown that the financial markets are an unstable system, which cannot stabilize itself and requires outside help. It's simply not possible to listen solely to the market.
Ackermann: When disruptions take on systemic proportions, then a systemic response by governments and central banks is necessary. Without such a response, the market would have eventually regained its equilibrium, yet the losses in prosperity would have been significantly greater.
- Part 1: 'There Would Be No Banking Industry Without Risks'
- Part 2: 'The Interventions of Governments and Central Banks Have Clearly Helped Us'