Deutsche Bank CEO Under Fire The World According to Josef Ackermann
Part 2: A Hedge Fund with a Bank Business Attached
In last week's videoconference, Ackermann told his bank's top executives that allowing Lehman to fail was a colossal mistake on the part of the US government. This led to an explosion of mistrust, Ackermann said, which now threatened the entire financial system, as well as the global economy. The atmosphere in the industry, according to Ackermann, had gone from a "mood of caution to a mood of fear to, after Lehman, a mood of sheer panic."
Ackermann's victory sign at the beginning of the Mannesmann trial in 2004 was not well received.
At the first the government refused to contribute to the HRE bailout. Ackermann, after late-night telephone conversations with Merkel and Finance Minister Peer Steinbrück, eventually forged an agreement. HRE has strongly denied rumors that Ackermann had called for it to be nationalized.
However, sources in Frankfurt say that Ackermann insisted the crisis could no longer be brought under control without a government protective shield. When the government finally opted for such a package, the talks with Ackermann resumed. But he was not involved in the details of developing the 500 billion program.
By that time, Ackermann was already in Washington, where he was attending the annual meeting of the International Monetary Fund (IMF) and World Bank. He left a concert by Chinese pianist Lang Lang on Sunday evening after only half an hour to fly back to Germany, where he wanted to discuss the bailout program with Merkel one last time before it went to the cabinet for approval.
A week later, after the program had been quickly approved by both houses of the German parliament, the Bundestag and Bundesrat, and signed into law by German President Horst Köhler, Ackermann was back in the United States. It was a Monday, the word was out in Berlin of his rejection of government assistance, and the government fired back.
Ackermann feels comfortable in the United States and he owns a condominium in New York. A year ago, he was even mentioned as a candidate for the CEO job at the world's largest bank at the time, Citibank, which was already in great difficulty because of the financial crisis.
Meanwhile, Citibank's parent, Citigroup, has received money from the government under a mandatory program, like all major US banks. The British opted for a different solution, introducing a rule that requires banks to achieve a core capital ratio of 9 percent -- with government investment, if necessary.
The German government, for its part, chose a completely voluntary solution. The government has made funds available to banks urgently in need of cash, but the banks are not required to accept the emergency funding. The capital is tied to strict conditions, including a 500,000 ($635,000) cap on annual executive pay and the cancellation of dividends and bonuses.
Perhaps it is because of these conditions that, in Germany, only the public-sector banks known as Landesbanken have so far shown interest in the government rescue funds. Even within the banking sector, many feel that the bailout program's biggest design flaw is the completely voluntary nature of participation in it.
Experts in the government are also not entirely pleased with the outcome of the bailout program. They conjecture that some institutions are hesitant to accept government aid out of a fear of possible retaliation by the markets. If these attitudes do not change in one or two weeks, Steinbrück plans to summon bank CEOs to Berlin to convince them to jointly accept the government funds.
But why should Deutsche Bank ask for taxpayer money? Its core capital ratio of 10 percent puts it in a far better position than its competitors. Even under the British rules, Deutsche Bank would not be required to welcome the government into its affairs. By comparison Commerzbank, another large German bank, achieves a core capital ratio of 7.4 percent.
If Deutsche Bank were in fact dependent on bailout funds, Ackermann's only option would be to resign. His reputation as a banker would be ruined, and the government's requirements would force Deutsche Bank to revise its business model. The top investment bankers would leave the bank, refusing to work for 500,000 ($635,000), even in times of crisis.
And yet Deutsche Bank is indirectly dependent on the government money. If the government did not make the billions in taxpayer money available to the banks, the entire financial system would falter. Deutsche Bank would no longer exist in its current form, which, of course, would eliminate executive bonuses.
A Life of its Own
Ackermann has every reason to be proud of the fact that his bank has survived the crisis so far. It will likely show a profit this year and could even capture additional market share from its ailing competition. Nevertheless, a little less pride and a little more humility and remorse would suit Deutsche Bank and its CEO well. They should not forget that taxpayers worldwide are being asked to pony up trillions of dollars and euros to save a system from collapse, a system that Ackermann and his investment bankers helped boost.
The American subprime mortgages were merely the trigger of a crisis with far deeper causes. For years, the financial sector developed at an increasingly fast pace, continually expanding until it had distanced itself from the real economy and taken on a life of its own.
This form of economy was built on debt and cheap money, and it was fueled by the hunt for higher and higher returns. The enormous risks of these transactions were distributed with the help of new financial products. This supposedly minimized the risk, but in fact it was merely being covered up. Taxpayers are now being asked to foot the bill.
Deutsche Bank was one of the biggest players in this global casino. It is one of the world's key derivatives traders. Its balance sheet total, 2 trillion ($2.54 trillion), is more than 60 times its equity capital. This is a ratio that today, as balance sheets are being scrutinized with a more sober eye, is seen as extremely unhealthy.
For years Deutsche Bank's profits have climbed, not just achieving but exceeding the 25 percent equity ratio Ackermann had specified. Normal banking transactions are not sufficiently profitable to produce such returns in the long term.
A Banking Business Attached
Deutsche Bank did everything conceivable to make money. It sold its customers, like small-business lender IKB, highly risky financial products. It speculated on a decline in the US index for subprime mortgages and allegedly earned $1 billion (1.27 billion) in the process (which it has neither confirmed nor denied). Critics describe Deutsche Bank as a giant hedge fund with a banking business attached.
Powerful investment bankers in London are the driving force behind these deals. Chief among them is Anshu Jain, an Indian who was responsible for a large share of profits in the past, and who received the biggest bonuses, far more than his boss in Germany. If there is anyone who embodies hard-core, Anglo-American financial capitalism, it is Jain.
Ackermann never stood in Jain's way, and even during the crisis he did not question the old business model, with its high returns. "We are relatively strong today, precisely because we made such large profits," he says.
Ackermann is convinced that the system is intact. However, there have been excesses that must how be eliminated. Bonuses should not be based on profits for a single year, but for several years, transactions must be supported with more equity capital and bank supervision, monitoring and transparency must be improved. "The system has always renewed itself and corrected excesses, and that is what is happening now," says Ackermann.
The corrections could also cause significant turbulence at Deutsche Bank. For this reason, there are many in the bank that hope Ackermann, contrary to his current intentions, will extend his contract when it expires in 2010.
In his world Ackermann, the bogeyman of citizens and politicians, is a hero. But only in his world.
- Part 1: The World According to Josef Ackermann
- Part 2: A Hedge Fund with a Bank Business Attached