Interview with Munich Re CEO 'There Were Definitely Excesses'

In a SPIEGEL interview, Nikolaus von Bomhard, the 52-year-old chairman and CEO of reinsurance giant Munich Re, discusses the global controversy over banker bonuses and the true roots of the current financial crisis.

SPIEGEL: Mr. von Bomhard, your company is the largest reinsurer in the world. This means that you earn money primarily by insuring insurers, for instance in the event of a natural disaster. Right?

Bomhard: You could put it that way, yes. But with our ERGO Group, we are also a major direct insurer.

SPIEGEL: These days many managers are acting as if the economic crisis were a force of nature that has struck the world. Could they have purchased insurance from you for this?

Bomhard: Not so directly. The staggering dimensions of this crisis were in fact surprising for everyone, but it was -- in contrast to an earthquake -- created by people.

SPIEGEL: Greedy people.

Bomhard: People, in any case, whose actions are far more difficult to calculate than something like the probability of a tsunami in a certain region.

SPIEGEL: Calculating probabilities of all kinds is what you do for a living.

Bomhard: We reach our limits with such complex situations. But it was clear that something was brewing. It was merely a question of when the storm would hit. We insurers are generally more skeptical than bankers.

SPIEGEL: It's now already possible to list plenty of errors that led to the crisis: On a number of occasions the securities commissions failed along with the rating agencies as a controlling mechanism. It was primarily the hunger for bonuses that tempted many bankers to focus solely on driving up short-term profits.

Bomhard: When I set up a bonus system, I intend for my employees to orient themselves precisely according to these incentives. So we have to consider whether we should criticize only the managers or also the supervisory boards and investors who have created such payment systems.

SPIEGEL: Objection! Boards of directors often simply want more money, so they talk their supervisors into supporting such ideas. What's more, since many members of supervisory boards are former executives, they treat each other nicely -- and as a result the bonuses have literally exploded over the past few years.

Bomhard: This has happened and it happens, yes. The members of top boards often overlap, more in the past than today. That's not always healthy. But the investors play an important role themselves via the supervisory boards. And don't forget: The most excessive salaries were not -- at least in Europe -- earned in executive board rooms ...

SPIEGEL: ... but rather?

Bomhard: ... in the units below them. Take the investment banks! In a good year traders there could earn €40 to €50 million ($51 to $64 million). In bad years they could bring their banks billions in losses. This distribution of risks and opportunities was extremely asymmetrical and will longer be acceptable in the future.

SPIEGEL: No more than the fact that investment bankers at Germany's Dresdner Bank now want to sue for €400 million in bonus payments, although the same managers have speculated the bank to the brink of ruin?

Bomhard: First of all, this is also a legal question. Presumably there were contracts that promised these payments. You can't just declare these contracts null and void.

SPIEGEL: As if we could ignore the moral aspects, particularly since the state now has to bail out Commerzbank, which now belongs to Dresdner Bank!

Bomhard: We cannot do that, and I don't want to, either. I just want to illustrate how complex the issue is. It also becomes increasingly complex as you work your way down through the hierarchies of bonus recipients. Foreign exchange trading, for example, went outstandingly well for many banks last year. Have these traders forfeited their right to bonuses because the banks have, on the whole, suffered heavy losses? Difficult, isn't it? It's easier when the board of directors says right from the start: There will be absolutely no bonuses for 2008!

SPIEGEL: Investment bankers will then just sign up with someone else because they're mercenaries.

Bomhard: That's often true. In the final analysis, it's also a question of a particular profession and the company's self-image. We at Munich Re have very little labor turnover. We take a long-term approach.

SPIEGEL: Then surely you must understand why the general public is up in arms over managers who couldn't get enough.

Bomhard: I think the uproar is totally legitimate. But although it may sound terribly boring for journalists, politicians and the general public: You have to carefully consider things. If we do away with performance incentives, it will also have consequences.

SPIEGEL: The high bonuses are now being questioned in many countries -- in the United States as well as in Great Britain and Switzerland.

Bomhard: And with very good reason. I very often hear from bankers the argument that they only pay bonuses because the competition does so as well. I think that with another business philosophy and corporate culture you can also pay people differently. If I offer exorbitant sums as a reward ...

SPIEGEL: ... I want mercenaries ...

Bomhard: ... and that's usually what I get. And of course large, short-term bonuses basically accelerated the crisis.

SPIEGEL: US President Barack Obama would like to place a ceiling of $500,000 on such payments -- at least for companies that receive government financial aid. Other governments sympathize with this. Do you as well?

Bomhard: I can certainly see the merit of such plans, where the state comes on board as a shareholder or a major creditor. It has every right then to demand limitations. I'm also certain that appeals and criticism will be effective in their own right. The pendulum will now swing back in the other direction. There were definitely excesses. These are now being corrected.

SPIEGEL: Many bankers lack understanding, sensibility -- or let's call it a sense of decency.

Bomhard: It is regrettable, but also part of human nature, that assuming high-ranking positions involves a certain amount of distancing from normal life. Down-to-earthness brings credibility. The current crisis is an opportunity to mend a few fences and bring people closer together.

SPIEGEL: How's that possible?

Bomhard: By doing a much better job of explaining what we do. Large segments of the financial industry, for example, are completely intransparent for many people. This creates uncertainty, then mistrust and, in the end, causes social groups to drift far apart. This represents a great threat to our society.

SPIEGEL: How do you personally ensure your own brand of down-to-earthness?

Bomhard: I'm definitely helped by the low-key culture in my own company. I hardly live any differently than I did 25 years ago, continue to reside in a rental apartment and enjoy riding my old bicycle to the office.

SPIEGEL: And how has your own board of directors solved the bonus problem?

Bomhard: The remuneration structure of our managers is based on short, medium and long-term objectives that take into account as much as possible the assumed risk. But we also don't intend to abandon bonuses as an incentive. Incidentally, I don't really see these as lying at the root of the financial crisis.

SPIEGEL: Rather?

Bomhard: There are two deep-seated basic problems here. One of these is the often insufficient quality of risk management, in other words, the way risks and returns are handled. The other is the as yet rare willingness of many top managers not to take part in everything that happens to promise quick profits. It's about a very personal responsibility. When the music is playing extremely loud, you sometimes need the courage to say: "No, I won't dance to that tune."

SPIEGEL: Many bankers must have occasionally laughed at people like you because you abstained from the "returns dance".

Bomhard: Well, many observers certainly didn't see us as the big experts when we refrained from certain business deals.

SPIEGEL: Analysts and investors tended to see you as bores.

Bomhard: To a certain degree, yes. I certainly wouldn't maintain that we have been cleverer than others -- only more stubborn. We had to take a lot of criticism. But higher returns also simply entail higher risks.

'The Current Crisis Will not Be the Last'

SPIEGEL: Munich Re is still making, despite a significant decline in returns, billions in profits ...

Bomhard: ... also because we conservatively invest the money of our clients and shareholders. Our capital investments have a volume of roughly €180 billion. This means that movements as small as one part per thousand have considerable consequences. As I see it, the main motto in our business is: Know your risks!

SPIEGEL: From small shareholders to the head of Citibank, nobody really wanted to know anymore what they were buying or trading.

Bomhard: That's exactly how I see it -- this problem concerned not only managers but also nearly all market players. Unfortunately, the Germans don't have a very profound knowledge of financial issues. This means that the products should actually be rather straightforward -- which they aren't. Many Germans have purchased large numbers of certificates that I personally hardly understand. That's why I've never bought them. So now I have to ask myself: Why did Germans across the country place billions in such investments?

SPIEGEL: Because the bankers talked them into buying the stuff …

Bomhard: ... and both sides apparently had an excessive appetite for returns and, at the same time, ignored the risks.

SPIEGEL: But you could also argue that the belief that all eventualities could be calculated created a false sense of security.

Bomhard: True. There was this tendency to approach certain financial market issues with increasingly complex mathematical models. That's a valid and important method to start off with. But we shouldn't place blind trust in these models and dispense with plain common sense …

SPIEGEL: ... as we saw at the beginning of the new millennium when many people briefly believed that every online dog food mail order company must be worth billions and eventually the Internet bubble burst.

Bomhard: At the time, as today, success fed on itself. Everyone wanted high returns. No one wanted to be the one who bales out too early. And in both cases plain common sense would have said: This cannot go on like this indefinitely.

SPIEGEL: Greed consumed itself in the end.

Bomhard: There was this belief that it was possible to use increasingly smaller amounts of equity to earn increasingly higher returns. There is nothing wrong with reflecting on ways to make capital work more efficiently. But you always have to ask yourself: Is what we are doing sustainable?

SPIEGEL: Sustainability is not part of the business model of many bankers.

Bomhard: That's the point. After-tax yields of over 20 percent are not only hardly sustainable, they are also, in my opinion, simply not possible on an open market if the risks are made transparent.

SPIEGEL: That's how capitalism works. Someone offers 10 percent, then someone else comes along and demands 15.

Bomhard: I generally see competition as necessary. Without it, there's a lack of drive for innovation and progress. The price to pay for this is that time and again we have excesses. The current crisis will also not be the last. But you also have to set limits on this competition and create a framework. In the insurance business this is done primarily via supervisory regulations, but it also needs to be anchored in the minds of managers themselves …

SPIEGEL: ... which takes us to your second point -- a lack of responsibility.

Bomhard: All managers should form their own opinions, independent of others or even certain trends on the market. They must be prepared to occasionally swim against the current. Sometimes I'm surprised how much the strategies of different companies resemble each other.

SPIEGEL: Normally, responsibility would also entail liability. But there's a hitch here. Bankers maneuver their institutes into a crisis and then simply leave.

Bomhard: These asymmetries are always dangerous. At Munich Re top managers are liable with at least part of their income when they make a manager liability insurance claim.

SPIEGEL: Now that you mention it, do you insure or reinsure investment bankers?

Bomhard: At least not directly through institutions that are listed on the stock exchange in the US.

SPIEGEL: Because their business is too risky for you?

Bomhard: Let's put it this way: We didn't believe that we could calculate the right price for these risks. And don't forget: A loss with these kinds of coverages could amount to enormous claims worth millions.

SPIEGEL: You say that plain common sense was at times replaced by mathematical models. Perhaps personal responsibility was superseded in the same way by bonus greed. Is it really possible to separate business and morals?

Bomhard: I don't want to play the moralist here. It's certainly not as if better people work at Munich Re. But I'm convinced that every company has to work on the basis of ethical principles, both inside and outside the firm.

SPIEGEL: These are normally printed on environmentally-friendly paper in every business report.

Bomhard: Sure, but where are they really practiced? When investors demand higher returns, for example, they can obtain these at a high risk. These returns are not sustainable, however, as we've painfully had to experience. But does management inform them of this when they make their investment?

SPIEGEL: Even you are driven by the stock market.

Bomhard: I don't see myself that way. Yes, I have to act in the interests of our shareholders, who -- on an individual level -- never want the same thing and, even if they did, would never want it at the same time. My job is to explain what's possible and what's not. And if it's possible, what risks and returns this involves. This is where transparency counts.

SPIEGEL: Not returns?

Bomhard: I can always conjure up short-term returns. Let's say we focused solely on the earthquake-related reinsurance business. It's very rare -- perhaps once a century -- that truly heavy losses are incurred which would rather easily eat up the profits of many loss-free years. I could hope that during my term of office this type of severe disaster would not occur. Would that produce high returns? Yes. Would it be transparent in view of the risk? Would it be proper and sustainable? No.

SPIEGEL: Mr. von Bomhard, we thank you for this interview.

Interview conducted by Christoph Pauly and Thomas Tuma. Translated from the German by Paul Cohen.
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