Financial Crisis

Fallout from the Joe Show

Josef Ackermann
Facepalm on the financial crisis. Source: DPA

Ten years ago, the financial crisis of the century hit Germany when a small, conservative bank named IKB collapsed in July 2007. It was the first step on the fall of the house of cards.

We can blame individuals, such as Deutsche Bank’s former chief executive Josef Ackermann, for their role in the collapse of the financial system. Mr. Ackermann oversaw a new ruthless – and occasionally illegal – hunt for profit that drove Deutsche Bank far from its home market as it took ever greater risks.

But with hindsight, it wasn’t only arrogant bankers who created that era’s toxic system. It was also the combined naivety and failings of elites from politicians and investors to regulators and journalists. When government, business and media elites called for a deregulation of the economy and the financial system, there were few voices of caution. We didn’t want to question the consensus, swimming against the tide means exclusion and it’s human nature to want to be part of the mainstream.

Compared to its six global competitors, Deutsche Bank is the only one with less equity than in 2002, the year that Mr. Ackermann took over.

With the benefit of hindsight, we should have been more skeptical, especially because we had already been burned in the past. When Mr. Ackermann took the helm at Germany’s largest bank in 2002, the dotcom bubble had just burst, created by a combination of short-term thinking, greed and arrogance.

It was in these ashes that Mr. Ackermann and other senior bank executives started to create the next hubris, of global finance capitalism. Conservative money lenders transformed into highly indebted constructs where small groups of traders bet borrowed money on short-term deals, first and foremost for personal gain.

Deutsche Bank was one of the most aggressive players in this global game of finance Monopoly. Led by the then-head of trading, Anshu Jain, and with Mr. Ackermann’s blessing, a horde of investment bankers made big money and rewarded themselves with bonuses in the billions from the profits. Mr. Jain alone is said to have earned hundreds of millions of euros over the years.

But those bankers were aided and abetted by German business journalists, who celebrated Deutsche Bank as it turned away from small-town Germany. We, like the bankers themselves, were thrilled by the allure of investment banking in New York and London, we wanted to be modern, international, just like Mr. Ackerman.

We overlooked the fact that risky bad loans were bundled in ever more complex and obscure securities, converting it instead into the new dogma that global risks were spread, that the financial system had become more stable and dynamic. As journalists, we stayed on the surface, too few of us bothered to look beyond the facade.

Investment banks are not shady and useless as such. But Mr. Ackermann and Mr. Jain inflated Deutsche Bank into an oversized trading firm that often invested on its own account, and against its clients. The tabloid newspapers slammed Mr. Ackermann for cutting jobs while targeting 25 percent profits but business journalists celebrated him for the very same reason.

But the problem was not Mr. Ackermann’s goals but the way he wanted to achieve them. In 2006, one year before the financial meltdown, he and his team were praised as heroes. They had achieved a return on equity of 28 percent and net results of €6 billion. But this deal was made at the expense of the bank’s future. Hardly anyone questioned the risks, tricks and dangerously thin capital cushion it took for the bank to force profits up. At one point, the ratio of outside capital to equity in trading stood at 1:40 – a terribly risky debt lever.

Many bankers knew exactly what they were doing. In mid 2007, shortly after IKB fell, whispers of a depression made the rounds among top executives and some dared the anxious question “what have we done?”

And yet neither the media nor senior bankers like Mr. Ackermann seemed to have learned anything in the immediate aftermath of the financial tsunami. The German press lauded the CEO in 2009: “In the darkest moments of investment banking he foresaw that it wouldn’t be long before he could make money again in the capital market,” weekly newspaper Die Zeit wrote in late 2009.

Now, though, it is widely known that Mr. Ackermann’s legacy was toxic; its long-term consequences devastating. If we compare Deutsche Bank with six of its rivals – UBS, Barclays, BNP Paribas and Santander of Europe and US banks Goldman Sachs and JP Morgan – Deutsche Bank is the only one with less equity than in 2002, the year that Mr. Ackermann took over. Today, only the German market leader and Barclays report net results which are lower than those of 14 years ago. But at least British rival Barclays made a profit of €2.5 billion, while Deutsche Bank booked a loss in the billions. Back in 2002, Deutsche was worth almost as much as industrial conglomerate Siemens or carmaker Daimler; today, it is no longer in the same league. In the listing of the world’s most valuable banks, the institute has fallen from rank 22 to rank 70 over the past 14 years. Cleaning up the mess of the Ackermann era will keep the bank busy for years to come.

Nobody wanted to see this, at Deutsche or any other banks. Part of the problem may be a lack of transparency but we should notice if banks take ever greater risks, if they are over-leveraged, if they repackage loans into ever more complex products or refinance long-term investments in the short term.

After the crisis, legions of politicians, central bankers and regulators imposed tougher rules to make the financial system safer. But the trouble is, these can only protect us from another crisis if it looks exactly like the last one.

The best shield against another bout of global madness is common sense, taking a step back and reflecting on the basic rules of doing business. That includes straightforward insights like: don’t buy products you don’t understand. High returns always come with high risks. Greed isn’t a virtue. Form your own opinion, and always be critical.

 

Daniel Schäfer is head of Handelsblatt’s finance pages and is based in Frankfurt. To contact the author: dschaefer@handelsblatt.com

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