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12/24/2009

Josef Ackermann can't let it happen. The CEO of Deutsche Bank, Germany's largest, says what he thinks and refuses to back down from a fight -- or from a faux pax.

"In the '90s, the pendulum swung toward economic freedom," Ackermann said last Friday. But today it's swinging back into the other extreme, "toward interventionist policies." If the reforms go too far, he says, the price to be paid will be a drop in growth.

It sounded like a direct response to none other than Barack Obama. During a recent appearance on the CBS show "60 Minutes," Obama aired out his frustrations with bankers. The same banks "who benefitted from taxpayer assistance … are fighting tooth and nail with their lobbyists up on Wall Street or up on Capitol Hill fighting against financial regulatory reform," Obama said. He added: "I did not run for office to be helping out a bunch of … fat cat bankers on Wall Street."

German Chancellor Angela Merkel sees things much the same way. And she's miffed at bankers, too. Merkel recently said in public that some of these bankers were even "shooting (their) mouths off a bit."

Ackermann returned the favor with barbed praise. Merkel had praised British Prime Minister Gordon Brown's plan to slap a special tax on banker bonuses as an "attractive idea," though she did note that the same sort of tax would be out of the question in Germany because of constitutional restrictions. Ackermann found this answer "intelligent," since not having such a tax would strengthen the position of Frankfurt as a financial hub over that of its competitor London.

Leading politicians from industrialized countries and leading banks don't want to and can't see eye-to-eye on this issue. Ever since governments were forced to rescue the financial sector from collapse with billions in taxpayer money, relations between the two sides have been poisoned. And the bankers just want to proceed just as they were before being rescued.

'You Guys Caused the Problem'

In the CBS interview, Obama angrily addressed the bankers, saying: "You guys are drawing down $10 (million), $20 million bonuses after America went through the worst economic year that it's gone through in decades, and you guys caused the problem."

It is the high salaries, in particular, that draw the rage of politicians and citizens alike. And they have precipitated a global debate about how a stop can be put to the way bankers operate. How can they be forced to assume fewer risks? And how the people that caused the crisis be forced to bear more of its costs?

Still, all of the efforts that politicians have made to regulate the financial markets at the international level haven't borne much fruit. Now, Great Britain, of all places, is surging ahead with a special tax of 50 percent. And there's no doubt that it has something to do with the fact that Prime Minister Gordon Brown might be ushered out of office by elections scheduled for early next year. Soon after Brown's announcement, French President Nicolas Sarkozy got on the bandwagon and annnounced that his country would follow the British example.

This push for reform is just as contested as all the other proposals. These include a tax on transactions (which Merkel favors) and a kind of obligatory insurance on risky deals. If they ever really got past the drawing board, these kinds of instruments could transform the entire financial industry.

A Civil War of Words

The banks' business models would surely change -- and that would transform the institutes themselves. And that's exactly what the investment bankers are afraid of. As they see it, it would mean the collapse of their entire world.

And that's what guarantees that this battle will be hard-fought. For days now, London's financial district has been the scene of a type of civil war of words. The government -- with the support of both the serious left-wing media and the tabloid press -- are defending the push to punish bankers with taxes, while the bankers themselves and a number of conservative newspapers are prophesizing the downfall of London as the world's financial capital.

For example, the brokerage house Tullett Prebon has already announced that it will allow employees wishing to transfer to branches in other countries to do so. Angela Knight, the head of the British Bankers' Association, has called this the "hardest hit" against members, and the Confederation of British Industry (CBI), the United Kingdom's top business lobbying association, is warning of an "exodus of talent."

"London is on a knife edge," Bob Wigley, the former chairman of Merrill Lynch Europe, Middle East and Africa, recently told the Sunday Times in describing what he saw as the dangers associated with Brown's policies. "More companies and more people are considering leaving than at any time I have known." That's just the thing to scare Boris Johnson, London's conservative mayor. As he told the BBC, the super tax would primarily mean that the city would be "super-penalized."

For its part, the British government isn't letting itself be cowed by all this bluster. British Financial Services Secretary Paul Myners is crystal clear about his stance: "We make no apology for the tough action we've taken to end a culture of risk-taking and excessive rewards that damaged our banking system." And Vincent Cable, the treasury spokesman for the Liberal Democrats, has accused some bankers of holding the country hostage.

In what is a rather rare occurance, the press is even coming to the support of the government. "If only the exodus of bankers threatened by the CBI had taken place 10 years ago," scoffed the Web site for the Guardian. "Maybe Switzerland would now be picking up the 'talent' bill."

Despite the popular support given to Brown's proposal, it might not have such a huge effect. The special tax will only last until April, and it will also probably only bring in around €600 million ($855 million).

In any case, in accordance with the decision reached at the G-20 summit in Pittsburgh in September, bonuses will soon primarily be paid out in the form of stocks -- and those can't be sold for five years. And if the deals that these bonuses were based on flop within those five years, the company can demand its bonus payments back.

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• Part 1: Europe Explores Ways to Keep Banks in Check
• Part 2: A Death Knell for Investment Bankers?