Credit Crunch Fallout Germans Fear Meltdown of Financial System
Germany and other industrialized nations are desperately trying to brace themselves against the threat of a collapse of the global financial system. The crisis has now taken its toll on the German economy, where the weak dollar is putting jobs in jeopardy and the credit crunch is paralyzing many businesses.
A trader reacts in front of the DAX board at the Frankfurt stock exchange.
But the ordinary working day has been in disarray in recent weeks at the Bundesbank headquarters building, a gray, concrete box in Frankfurt's Ginnheim neighborhood, where the crisis on international financial markets has many employees working late, even on weekends.
Bernanke told Weber about his organization's failed attempt that Sunday to orchestrate a last-minute bailout for the battered investment bank Bear Stearns. The venerable New York-based company, Bernanke argued, was simply too big to be allowed to go under, and the consequences of such a failure would be incalculable.
Customers wait in a queue outside a branch of Northern Rock, the British mortage lender, in London in September.
For some time, there has been a tacit agreement among central bankers and the financial ministers of key economies not to allow any bank large enough to jeopardize the system to go under -- no matter what the cost. But, on Sunday, the question arose whether this agreement should be formalized and made public. The central bankers decided against the idea, reasoning that it would practically be an invitation to speculators and large hedge funds to take advantage of this government guarantee.
Everyone involved knows how explosive the agreement is. It essentially means that while the profits of banks are privatized, society bears the cost of their losses. In a world in which the rich are getting richer and the poor poorer, that is political dynamite.
Nevertheless, central bankers are running out of options. They are anxious to avert the nightmare scenario of a financial crisis like the one that rocked Germany in 1931, when the failure of a major Berlin bank prompted a massive run on other banks by a nervous public, which plunged those banks into insolvency. For decades, a repetition of that disaster had seemed unthinkable. But ever since former Fed Chairman Alan Greenspan dubbed the current financial crisis the worst since the end of World War II, old certainties have no longer applied.
A Fair Price to Pay?
Graphic: ECB cash injections since 2000
How does one explain to honest taxpayers that they should pony up their hard-earned money for a bank like Bear Stearns, whose long-standing CEO forked out $28 million (18 million) for a 600-square-meter (6,500 square-foot) duplex apartment on New York's Central Park shortly before the collapse of his company? Or that UBS, the crisis-ridden, major Swiss bank, fired three of its senior executives for poor performance only to turn around and pay them roughly 60 million Swiss francs (38 million/$59.2 million) in golden parachutes?
The central banks and governments of the major industrialized nations are still dodging the answers to these questions. They see themselves in the role of an emergency room doctor, whose job is to provide acute treatment. Like a dangerous virus, the crisis in the US real estate market has infected large parts of the worldwide financial system. After being burned by scores of bad loans, the banks have become deeply distrustful of each other. They have gambled away their most important asset: trust.
Federal Reserve Chairman Ben Bernanke.
The American economy is presumably already in a recession, which affects the rest of the world. Experts also predict noticeably less growth and fewer new jobs for Germany. If the economic situation worsens, the state could face tax losses in the billions. This could force Berlin's ruling grand coalition of Social Democrats and Christian Democrats to shelve its plan to consolidate public budgets.
In this situation, even the most zealous disciples of the free market are calling for more government intervention. "I no longer have faith in the ability of the markets to heal themselves," Deutsche Bank CEO Josef Ackermann confessed in a speech delivered last Monday in Frankfurt. Ackermann said that the American example shows that governments and central banks must now play a stronger role.
Even his counterpart at Commerzbank, Klaus-Peter Müller, agreed, saying that the current situation has the potential to develop into "the biggest financial crisis in postwar history" as long as "the markets are allowed to continue operating unchecked." According to Müller, "It would make sense to permit the banks -- retroactively to Jan. 1 -- to account for securities differently by eliminating the daily revaluation requirement." He argues that this would stop the downward spiral on the banks' financial statements.
Deutsche Bank CEO Josef Ackermann and German Chancellor Angela Merkel.
Germany's state-owned banks, which have been especially careless in recent years about investing in American securities backed by subprime loans, are considered greatly at risk. One of them, Bayerische Landesbank, is currently considering writing off 1 billion ($1.54 billion) -- or possibly even more -- in bad debt. In the first two months of 2008 alone, the Bavarian bank's troubled securities portfolio has lost 1 billion in value, and it has fallen even further since. "There could be another billion in losses on top of that," says one banker.
At another state-owned bank, Dusseldorf-based WestLB, 5 billion ($7.7 billions) in government bailout funds are apparently not enough. The bank is already losing its next billion.
"The numbers are completely irrelevant," says a senior executive at one state-owned bank, "but it is clear that before a bank goes under, the central bank will push a red button and provide as much money as is needed."
This blatant display of nonchalance irritates Commerzbank CEO Müller, who is also the president of the Association of German Banks. "We must achieve greater transparency," says Müller. "It doesn't help when some banks hide behind outdated accounting regulations. All facts must be on the table and current."
- Part 1: Germans Fear Meltdown of Financial System
- Part 2: Hitting Big Business Where It Hurts