Deutsche Bank CEO Under Fire The World According to Josef Ackermann

The CEO of Deutsche Bank Josef Ackermann is justifiably proud of the fact that his bank has so far been able to weather the financial crisis better than many of its competitors. But he still hasn't won any sympathy points. Perhaps his self-image is to blame.

German Chancellor Angela Merkel had invited an illustrious group of guests to the Chancellery to honor a man from the business world whom she especially admires: Josef Ackermann, the CEO of Deutsche Bank.

Today, it would be more accurate to use the past tense -- to say that Ackermann was a man she once admired.

Deutsche Bank CEO Josef Ackermann is Germany's favorite bogeyman. Some of that is his own fault, but not all.

Deutsche Bank CEO Josef Ackermann is Germany's favorite bogeyman. Some of that is his own fault, but not all.

Foto: AFP

At the time, in February of this year, the chancellor's relationship with her favorite banker was still in good shape. The dinner in Berlin was Merkel's way of thanking Ackermann for having invited her to his 60th birthday celebration, which she was unable to attend due to scheduling conflicts.

Nowadays, the news is that Merkel was apparently irritated over the awarding of the North Rhine-Westphalia Future Prize to Ackermann. Deutsche Bank, in the mean time, has announced that its CEO will not accept the prize.

In February, at the post-birthday party at the Chancellery, the dinner discussion revolved around Heinrich von Pierer, the former CEO of Siemens, a man who was once greatly admired in Berlin and had since lost his good reputation in a flurry of corruption charges.

Not Dependent on Government Assistance

Today Ackermann is the bogeyman in Berlin, across all political party lines. The reason for his fall from grace can be summed up in a single sentence: "I would be ashamed if we were to accept government money in this crisis."

Those were Ackermann's words last Thursday, when he spoke at Deutsche Bank's annual meeting of senior executives. This time, because of the crisis, it was taking place via videoconference. Ackermann's address was a pep talk, says one of his employees. It was meant to convey a sense of pride that Deutsche Bank had fared better in the crisis than most of its competitors and that, unlike the others, it was not dependent on government assistance to survive.

But that very same sentence, which SPIEGEL made public last week, was not well received in Berlin. Merkel's cabinet referred to Ackermann's remark as "extremely questionable," as "completely incomprehensible and unacceptable" and as "offensive," Thomas Steg, the deputy spokesman for the German government, reported. The government cannot comprehend why Ackermann has so clearly distanced himself from the €500 billion ($635 billion) bank bailout package -- a plan which he himself helped to put together. His comment seems to have stigmatized those who accept the aid, thereby jeopardizing the entire program. That, at least, was the way the politicians interpreted the banker's words.

Officials at the bank's headquarters in Frankfurt were perplexed by the reaction, noting that Deutsche Bank has every right to state that it does not need the assistance. They add that Ackermann has publicly stressed the importance of the program, and has emphasized that no one should reject necessary assistance out of a false sense of prestige.

In short, two worlds are colliding, worlds that are both unable and unwilling to see eye to eye.

On the one hand, there are the politicians, irked for years by the know-it-all, and better paid, captains of industry and finance, who have looked down on politicians and now, in their hour of self-inflicted need, are suddenly calling for the state to bail them out. The German government was forced to rush through a €500 billion ($635 billion) bailout package that uses taxpayer money to rescue the banks, while at the same time being faced with the fact that there is no money left for education.

No Bonus this Year

On the other hand, there is Ackermann, for Germans the epitome of a banker. Ackermann is a man who earned €14 million ($18 million) last year and now says that he will do without a portion of his bonus this year to set an example.

The politicians consider it outrageous that bonuses are even being paid at a time when the government is spending billions in taxpayer money to bail out the banks. Ackermann's decision to forego some of his bonus was "purely for show," says Peter Struck, floor leader for the center-left Social Democrats (SPD).

Close advisors to Ackermann say that he was surprised and disappointed by this reaction. Ackermann himself has refused to comment publicly. The man who, as the NRW Future Prize jury wrote in explaining its decision to honor Ackermann, "has faced harsh criticism with admirable directness and openness," is remaining tight-lipped.

Once again, Ackermann sees himself unfairly targeted for criticism. There is no overlap between his public image and his self-image.

For Germans, the Swiss banker, with his winning smile, has become the prototype of the cold-hearted capitalist, and the name Ackermann synonymous with the arrogance of power. In a recent SPIEGEL poll, only 5 percent of respondents said that Ackermann feels committed to promoting social welfare and the good of the country, while 87 percent said that he acts purely in the interest of his bank and its stockholders.

Ackermann, on the other hand, sees himself not only as the man who brought Deutsche Bank back into the global big leagues, thereby strengthening the German economy, but also as a manager who is committed to national interests and the welfare of Frankfurt as a financial center. He is also a person who, despite his millions, lives a relatively modest life and donates a large share of his income to charity.

Ackermann and the Germans have had trouble seeing eye to eye from the start. The banker says what he thinks, undisguised and undiplomatically. He considers his approach to be authentic. But what he lacks is the ability to recognize how his words sound to people who do not spend much of their lives jetting back and forth between Frankfurt, London and New York.

"Germany is the only country where those who are successful and create value are put on trial for their troubles." That was one of Ackermann's authentic sentences, uttered in January 2004 at the beginning of the infamous Mannesmann trial, brought to look into alleged irregularities in the 2000 Vodafone takeover of Mannesmann. That quote, along with a photograph of Ackermann flashing a victory sign on the first day of the trial, has haunted him to this day.

Feted in the Press

Ackermann could not -- and cannot, to this day -- understand why he faced charges for having approved millions in bonuses to executives when he served on the supervisory board of the Mannesman Group after it was taken over by Vodafone. Such golden parachutes were common practice the world over, he said in his defense.

The suit was eventually dropped in exchange for a financial settlement. After that, the relationship between the Germans and their most important banker seemed to improve. Ackermann became increasingly down-to-earth, suddenly appearing at numerous events around the country and even agreeing to be interviewed twice by talk show host Maybrit Illner. When he announced, on his 60th birthday on Feb. 7 of this year, the bank's 2007 record earnings of €6.5 billion ($8.25 billion), he was feted in the business press.

But the financial crisis caught up even to Ackermann over time. Bit by bit, Deutsche Bank was forced to write down billions in bad loans, although its losses were not as severe as those of many of its competitors. Nevertheless, as recently as March Ackermann insisted that there was no systemic crisis. And at a bank meeting only a few weeks ago, he announced the "beginning of the end of the crisis."

"I saw most things correctly," Ackermann says today. "I did not expect, however, that Lehman would be allowed to go under. That was not foreseeable, and it changed everything."

According to Ackermann, he was the one who pointed out in February, referring to the real estate crisis in the United States, that concerted action by governments and central banks would become necessary. He also says that he called for a coordinated worldwide solution and the rethinking of some accounting rules early on -- and that he was sharply criticized in public for his views.

By the time of the Lehman bankruptcy, it was clear to everyone, bankers and politicians alike, that the crisis was indeed a fundamental one, and that the entire system was threatening to implode.

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."

The first financial institution in Germany to be hit by the crisis was the mortgage bank Hypo Real Estate (HRE), which ran into liquidity problems because of the risky lending practices of its Irish subsidiary, Depfa Bank, and had to be rescued with help from the government in Berlin.

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.

Cabinet Approval

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.

Design Flaw

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.

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