On July 30, 2007, the financial crisis came to Germany with a loud bang: The IKB Deutsche Industriebank, a little-known bank that specializes in financial services for Mittelstand firms, shook the country out of its summer indolence when it announced it was badly affected by the US subprime mortgage crisis. It was the first of many German banks that teetered on the verge of collapse over the next years. Jörg Asmussen orchestrated the bank bailout at the German finance ministry. Today, as an investment banker at Lazard, he advises European financial service providers and governments.
Handelsblatt: Mr. Asmussen, you were at the forefront of the fight against the financial crisis. How did you live through those days?
Jörg Asmussen: If you truly asking me about how I felt, I have to say in all honesty: tired, very tired. Especially in the first phase, we had our hands full trying to cope with the operational aspects of crisis situations at banks like IKB and later SachsenLB.
How do you explain that hardly anyone predicted such a serious crisis? After all, there were very few warning voices.
There are several reasons. I believe that all people, whether they are bankers, politicians or journalists, have a tendency towards herd mentality. Since the mid-1990s, it was more or less the consensus that deregulation of the financial markets was a good thing. In addition, we underestimated the interconnectedness of the financial system and the resulting risks of contagion. Suddenly risks from a subsegment of the US real estate market, the so-called subprime loans, were turning up at German state-owned banks. And, finally, we underestimated the correlation between markets. When things are headed sharply downward, it doesn’t matter how diversified you are, because all markets are moving in the same direction.
“We are in a very critical phase, because there are political forces that are questioning the value of multilateral cooperation and global rules.”
You personally supported deregulation of the financial markets at the time.
Yes. I have to admit that I too was part of the herd at the time, at least for a while. But you learn your lessons from that. Everyone who experienced that period of time has recognized that we need globally binding rules for the financial industry. This is why many who were around at the time have such allergic reactions to calls to dial back regulation. We can always talk about things like the bureaucratic cost of, for example, the extensive reporting requirements for smaller banks. But we should not touch the core of the regulation: the significantly tougher requirements for capital and liquidity.
The G20 countries agreed on the principles of these basic rules at their summit in Pittsburgh in 2009. Now that consensus appears to be in jeopardy.
Because of the results on financial market regulation achieved there, I still consider the G20 meeting in Pittsburgh to be the most successful summit held by this group of nations. The principles for the global financial system were finalized there. Now we are in a very critical phase, because there are political forces that are questioning the value of multilateral cooperation and global rules. They are fundamentally wrong on both counts.
Do you fear a deregulation race to the bottom?
Yes. There is the risk that key players in the global financial system, like the United States and Great Britain, will try to create more relaxed rules for themselves, albeit for very different reasons.
Who bears the most responsibility for the crisis? The bankers?
There are individual lapses in every sector. What distinguished the financial sector were the incentive systems, which seduced people to take excessively high risks. In the end, most bankers were just acting in conformity with everyone else when it came to the incentives. This is why compensation systems had to be thoroughly reformed, which is what happened.
Does that mean that we can hardly blame managers like former Deutsche Bank CEO Josef Ackermann, because they made the right decisions according to the incentives in place at the time?
I prefer not to talk about specific individuals. But if you are the CEO of a large bank, you are of course responsible for which compensation systems are installed and what kind of a corporate culture you exemplify and accept.
Mr. Asmussen, thank you for the interview.
Michael Maisch is the deputy chief of Handelsblatt’s finance desk and based in Frankfurt, Germany’s financial capital. Daniel Schäfer is head of Handelsblatt’s finance pages and based in Frankfurt. To reach the authors: firstname.lastname@example.org, email@example.com.