Gambled away in the financial crisis - The Deutsche Bank story | DW Documentary

It is the summer of 2007. The first iPhone goes on sale. A train strike has paralyzed Germany. Stuttgart is national soccer champion. The most powerful politicians in the world meet in the Baltic. There is a growing

financial

crisis

in the United States. And the Rolling Stones are on tour. In July they organize an exclusive concert in Barcelona for 200 investment

bank

ers from Deutsche Bank and their clients. He was right in front of the stage... He could have grabbed Mick Jagger's foot. And then he said, 'The good thing is that the money we get for this comes from your bonuses!' Big applause.

At the same time, there is growing certainty on the New York Stock Exchange: that a major

financial

collapse is imminent. So I felt pretty pumped up watching the Rolling Stones, and I went to bed that night feeling like we were potentially about to explode. It is a mega event that takes place on the edge of an abyss. The Stones' exclusive performance reportedly cost more than $4 million. On the 32nd floor of Deutsche Bank, Josef Ackermann was then CEO. His goal of becoming the world's largest

bank

had left him dependent on the world of investment banking. And that's why he had turned a blind eye to such escapades...

Did you know about this concert? I don't think so, no... well, maybe I knew there was a concert, but I wasn't involved! They might as well have played the concert under a huge banner that said, "This is the best." This was kind of... emblematic of the mild insanity of the banking industry. This opulence is now ancient hi

story

and Josef Ackermann also vacated his position at Deutsche Bank a long time ago. But his time as CEO still shapes the institution today. In the years following the Stones fiasco, the financial institution's once-reputable name was dragged through the mud.

His reputation has still not recovered to this day. This is Französische Straße in the Mitte district of Berlin... The birthplace of Deutsche Bank. It was founded in 1870 in a simple building that no longer exists. The founders, led by private banker Adelbert Delbrück, wanted their safes to offer their clients security for their deposits. But in their first ten years, they focused on conquering global markets and providing loans for the pre-export financing market. I would definitely say that they were strongly motivated by the goal of founding a strong German bank and also making Germany economically strong internationally.

It was not just business, but patriotism that also played a role. However, the export market collapsed with the start of World War I in 1914. The still fledgling Deutsche Bank faced ruin. Foreign branches had to be closed one after another. They developed several strategies to compensate. One was to grow its customer base within Germany. Another was that Deutsche Bank became heavily involved in financing the war economy during the First World War. 1929 saw the next existential

crisis

. Black Tuesday. Devastating stock market losses on Wall Street triggered a global economic crisis that heralded mass unemployment and social conflicts around the world.

The impacts of the Great Depression also reached Deutsche Bank's new headquarters in Berlin. The darkest chapter in Deutsche Bank's hi

story

came at Auschwitz in 1943. This time, the banking institute was financing not only the war economy but also the Holocaust: the systematic murder of Jews and other minorities. The bank's branch in Katowice guaranteed loans to Topf and Sons, the company that manufactured the incinerators for the Auschwitz crematoriums. From 1937, Hermann Josef Abs was director of Deutsche Bank. Abs himself said after 1945 that he did not want to be among those who said they knew nothing. He indirectly admitted that he was well aware of the crimes committed by the Nazis.

In 1954 the country was recovering. West Germany won the soccer world cup. The German economic miracle had begun, but so had the Cold War. The Soviet Union launched Sputnik, the first satellite, into space. Deutsche Bank was finally reformed in 1957. This time in Frankfurt, not Berlin. The Allies disbanded it after the war. And despite his role in the Third Reich, Hermann Josef Abs was once again president. Hermann Josef Abs was a convicted war criminal. But after the war they needed Deutsche Bank... There was hunger, there was nothing to eat, there was no heating, half the country was in ruins.

They needed leaders who knew how to do business, who had connections and could get things done. And Abs must have been reappointed to his position at the discretion of the allies. A cattle drive in Sarganserland, Switzerland. While Hermann Josef Abs hoped to restore Deutsche Bank's reputation in the late 1950s, his future successor was growing up in the Swiss mountains. Josef Ackermann was the first of three children of the country doctor Karl Ackermann and his wife Margrith. He loved sports and music and, no matter what Ackermann did, he wanted to win. Sack races included. He was born ambitious.

I think his father was a person who demanded it. After his military service, Ackermann studied business in the Swiss city of Saint Gallen, after briefly considering following his father's footsteps into medicine. After graduating, he turned down an offer for a future in academia. Instead, in 1977 he pursued a career in banking at Credit Suisse in Zurich. Back then, most banking operations were done manually over the counter. Bankers kept accounts, exchanged currencies, granted loans and traded stocks. It wasn't anything spectacular, but the bankers made money doing it. Lending was the banks' biggest business at the time. Banks lent money to small and large clients, collecting interest (or trading stocks and currencies) in exchange for a commission.

Year after year, Ackermann rose through the ranks at Credit Suisse. He was about to take over leadership of the entire bank when, out of nowhere, everything fell apart. In 1996, he suddenly walked. He left the bank. His departure came after a power struggle that he had basically lost. That same year, Ackermann had a new opportunity: in Frankfurt. In its twin towers, Deutsche Bank sought to fundamentally renew its business model and ultimately become a global player. Deutsche Bank CEO Hilmar Kopper brought Ackermann on board. Kopper was then faced with a considerable problem. Disgraced German real estate magnate Jürgen Schneider had been extradited from the United States.

He was a former client and things were threatening to get very embarrassing for Deutsche Bank. Schneider was a brilliant con man. He bought old properties and restored buildings without taking into account the costs. His last project is unforgettable (it was on the site of a department store in Frankfurt's Zeil district) and falsely inflated his value. All this within sight of the Deutsche Bank towers. Then, when they could no longer deny what was happening, Deutsche Bank turned off the tap. But it was too late. And you had all these contractors waiting to get paid. When Schneider initially fled to the US, Kopper downplayed the damage to Deutsche Bank.

This is not a lot of money! We estimate that for the three projects we are talking about, the three involving Deutsche Bank, they are clearly below 50 million marks. We're talking peanuts here. Misery! Kopper made it look like 50 million German marks, 25 and a half million euros today, were bargaining chips... A huge display of arrogance on the part of the banker. Especially considering the financial consequences for the construction companies involved. So when this clever Swiss banker appeared in the form of Josef Ackermann, it suited Hilmar Kopper to polish his battered image. It was certainly a new world for me.

But I soon felt at home and realized that not everything that glitters at Deutsche Bank is gold. I saw that I could contribute something, a way of doing things better in Switzerland. At that time – and despite the “peanuts” incident – ​​Deutsche Bank shares remained stable and were trading at around 28 euros. But for the ambitious Ackermann this was not enough. He wanted more. As this television advertisement shows, Deutsche Bank still highly valued its relationships with private clients... It wanted to show that it was serious, reliable and trustworthy... But at the end of the 1980s a new era began at the center London financier. . “Investment banking” was the buzzword at the time, marking a sea change in the industry.

The decision to join the big global players was, of course, something very different from the original concept of Deutsche Bank, when it was founded 150 years earlier. That was the end of the traditional in-house bank principle, under which a company had a close relationship with a bank and obtained its loans there. Investment banking involves trading commodities, currencies and bonds, using the bank's own money (or that of clients). The large sums that traders juggle mean that even the smallest currency fluctuation can lead to massive profits or losses. Risk is the name of the game. In 1996, Josef Ackermann, a new member of the board of directors, took charge of the investment banking sector at Deutsche Bank.

Joe Ackermann really believed in investment banking, he really believed that it was a sensible way to turn Deutsche Bank into a universal bank, covering all clients around the world. So there is a lot of pressure on the investment bank to make money. And if you made money, there was pressure to make more money and the next year, more money. Investment bank employees came up with increasingly complex financial products. The only thing that counted was profit, which dictated the amount of your bonuses. To make profits, you had to take risks. Taking risks is the lifeblood of these people.

And the idea of ​​turning down potential money-making opportunities because they're too risky... it's just not in your DNA. The culture on Wall Street was definitely shaped by this male-dominated business. It was about "My bonus is bigger than yours." They lived in their own world. They pursued the kind of lifestyle they might not otherwise have been able to afford, especially in America. Investment bankers live in a world of their own. It's a money-making machine that outsiders have no chance of fully understanding. Including the boss. It's impossible... even if you're the boss. Thousands of products are being developed.

Even if you were to pass each one of them, you would have to examine them in detail. I do not think that's possible! Unlike his boss, Mr. Ackerman, this man, Edson Mitchell, was a man who understood investment banking inside and out. Deutsche Bank had poached him from the competition and, with it, his best employees. Edson Mitchell was the bank's so-called Rainmaker. "Rainmaker" is the term for an employee who earns incredible sums of money. So Ackermann knew immediately that his position depended on Edson Mitchell's position and Edson Mitchell's role. Edson Mitchell became, in many ways, Joe Ackermann's worst nightmare because here was this American, he was so bold and brazen.

They thought the future was in sales and trading and investment banking... and there was this very cowboy global business that the Americans perfected and the Europeans really needed to rush to catch up. Edson Mitchell, who traveled by plane between London and New York on the Concord, cheered up his friends in their shirt sleeves, with exorbitant bonuses and wild parties. Greed seemed to be his recipe for success. London and the Grosvenor House ballroom. On December 21, 2000, Deutsche Bank's investment bankers celebrated Christmas with their best clients. Mitchell takes the stage, with the Mission Impossible theme blaring, and declares that this year will be even better than last.

In a way, his message is: “We are conquering the world!” Among the guests were several escorts. One of the things they would do is hire young women to serve as waitresses and flirt a little with customers. So, they had a system where they would wear a pin on their little black dress with a blue ribbon that meant: I'm personal, I'm sitting duck. That's part of it too...entertaining customers and treating them well. Some things probably go too far. But imposing restrictions would have violated investment culture. What kind of culture is that? What kind of people need to be kept in line by offering these types of events?

He shows how deep the bank had sunk. The day after the big party, Edson Mitchell was due to return to his home in Rangeley, Maine, for the Christmas holidays. But the private jet he boarded in Boston never arrived. He crashed into a mountain on his way down. The pilot and his passenger Edson Mitchell died immediately. I went to almost all the memorials and gave speeches. It was a significant loss for the bank. And, of course, people wondered who would be his successor. When Mitchell dies, there is a power vacuum andsimply helplessness as a result of the cultural change he had introduced.

Ackermann appointed Anshu Jain to succeed Mitchell. The people who worked in Edson's world didn't really trust Anshu. And it would be problematic to put him in that position. I said it directly to Joe Ackermann. Was it a big mistake by Joe Ackermann? I would say yes. High risk tolerance that in the end did not benefit Deutsche Bank. From 2001, Anshu Jain was at the helm. He had a reputation for not being especially careful... something Kvalheim feared. Ultimately, the previously respected Deutsche Bank would lose its reputation under his leadership. In 2002, the euro became the official currency of the EU.

Michael Schumacher won his fifth championship title. Gerhard Schröder won another term as German chancellor, in coalition with the Greens. And German media mogul Leo Kirch filed for bankruptcy. A few years earlier, Hilmar Kopper – Mr. “peanuts” – had been replaced by Rolf-E. Breuer. When Breuer questioned the solvency of his client Leo Kirch during a television interview, everything turned into a fiasco. An in-house bank is intended to protect its customers. Saying right in the middle of a deal that you won't get any more money... you can't do that. That crucified the businessman Leo Kirch. After that, he was done.

Leo Kirch sued Breuer and Deutsche Bank in a legal battle that lasted years. After his death in 2011, his heirs received around one billion euros. Betraying Leo Kirch's client was very expensive for Deutsche Bank. Nine Eleven hit Deutsche Bank hard. Its offices in Manhattan were severely damaged when the Twin Towers collapsed and had to be demolished. But every catastrophe offers the possibility of a new beginning... and Deutsche Bank moved to Wall Street. At the annual meeting in May 2002, Josef Ackermann finally rose to the top...and became the first non-German to head the institution. Ranked internationally, Deutsche Bank's balance sheets place it in fifth place.

For Ackermann, it's not high enough. Ackermann wanted to be the best on Wall Street. Deutsche Bank shares would be listed on the New York Stock Exchange a few months later. Ackermann wouldn't let anything stop him... Just like the sack race back then. During the 1990s and early 2000s, Deutsche Bank effectively earned very little or nothing. And I said that if we want to play a global role, then we have to be as profitable as our rivals. Our capital returns at the time were relatively small, coming from also fairly small capital reserves... pre-tax, 25%. Looking back, it seems almost crazy: 25% is a lot of capital.

At the time, it didn't seem scandalous. Because many banks were earning similar types of profitability. When Josef Ackermann took control in 2002, the share price was 59 euros. It had more than doubled in value since 1996. But could this continue? By early 2004, Ackermann already seemed to be on the brink. He faced trial following the acquisition of German telecommunications giant Mannesmann by British mobile phone company Vodaphone. Ackermann was part of the supervisory board that approved a bonus worth millions for its then chairman, Klaus Esser. Was this a breach of trust? The image of Ackermann making the victory sign before the trial remains etched in many memories.

The president or executives of Germany's largest bank would be expected to keep things under control. That's why they get a lot of money. They get paid well so things like this don't happen... so when something like this happens, you wonder, was it all intentional? Kopper – misery, Breue – Kirch and Ackermann – victory. This series of missteps by Deutsche Bank presidents or executives was peculiar. The lawsuit against Ackermann was finally settled with a payment of 3.2 million euros. Under the court's terms, Ackermann did not admit guilt and was allowed to remain a director of Deutsche Bank. But now he was under pressure.

He knew he had to comply. London, and Deutsche Bank's money-making machines were running at full speed. Anshu Jain was using the promise of bonuses to push his workers to make money, a lot more money. The bonus system has various structural, psychological and economic consequences and conditions, which I consider extraordinarily harmful. It causes greed to set in and the hunger for more and more money becomes insatiable. If you botched a transaction and lost money, there was no big disincentive except the possibility of losing your job. But the next bank would be there waiting to buy from you.

It is a very important thing from a psychological point of view: to be able to recognize when greed or striving for profit has become too much. That's what Ackermann says today. But it seems that back then he had little interest in preventing legal and ethical boundaries from being pushed ever further. Internal emails later showed that several traders were manipulating interest rates and engaging in illegal dealings. Here writes an employee in London: "I think it's simple." This is a fraud!’ Here we have a Deutsche Bank manager claiming that this is a fraud. And then Deutsche Bank intervenes.

No one asked if we should get involved in an illegal business. What they say is: this is illegal, but how big is the risk of getting caught? Deutsche Bank subsequently ended up paying fines of $2.5 billion for manipulating interest rates and violating US sanctions between 2003 and 2005. It's the mid-2000s and Deutsche Bank is throwing a Christmas party at a nightclub in Milan. Once again, it's time for investment bankers to go crazy. That didn't bother me! And the customers appreciated it, I might add. Anshu Jain knows that he has to keep his team on his side...for example, by paying the go-go dancers out of the company coffers.

This time they don't have the little blue ribbons on their outfits. In 2006, Deutsche Bank was a fixture on Wall Street. Profits were increasing. But a storm was brewing... and it all had to do with the subprime mortgage market. Their analysts alerted Josef Ackermann, warning that a gigantic drop was likely. But what could Ackermann do? Deutsche Bank was heavily involved in dubious dealings in the US mortgage market. Houses were put up for sale everywhere. Many banks had taken big risks with their mortgage loans. Now they had to get rid of those bad assets as quickly as possible.

Many people simply did not want to believe it. I was even criticized within the bank, or I felt resistance, because I said that what is happening is not good. We got rid of the risk and sold it. You had Anshu Jain's team who were trapped there. They thought everything would be fine. Then there were people who said it couldn't work... They said, what you're doing is alchemy. Trying to turn lead into gold... It's Barcelona, ​​July 2007. The crisis is approaching and everyone knows it... But Anshu Jain's investment bankers are living it up in an exclusive concert the Rolling Stones, giving the impression that everything remains the same. .

The key is to be able to estimate the risks well enough that you can keep dancing while the music plays, but notice when the musicians are getting tired, so to speak, and then get off the dance floor early, just in time. The Dusseldorf-based IKB Deutsche Industriebank left the dance floor too late. He was one of the clients of Deutsche Bank in New York. At the end of July 2007, two weeks after the Stones concert in Barcelona, ​​the financial services company was on the brink of bankruptcy. The IKB executive had mistaken Ackermann's advantage for gold. Deutsche Bank helped create these products in the US, which contained bad loans, packaged them so that you didn't know exactly what they contained, and then sold them.

Yes, but we did not force it on anyone: we sold them these products because they asked for them. Dusseldorf's dumb money... IKB was one of the last players in that market that had no idea what storm was coming. The former chief economist of Deutsche Bank under Josef Ackermann (and his right-hand man) has a harsh verdict on the IKB deal. Legally speaking, he would say it was IKB's problem. Morally and ethically they should have been repressed sooner. But they didn't do it because these products had a good profit margin. A series of rescue measures were necessary to prevent IKB from going bankrupt.

In the end, private banks paid 1.5 billion euros and savings banks about 370 million. Most of it, however, was covered by the German national investment bank, KfW: it covered more than seven billion euros. KfW itself needed enormous amounts of tax money to survive. Although I don't like to say it as a market economist: state support was the only way! Ingrid Matthäus-Maier, the then president of KfW, criticizes the fact that Ackermann's Deutsche Bank had to be bailed out by taxpayers. Ackermann had to mitigate the risks that he had largely caused himself, by selling to IKB these products, these bad assets, transferring the costs to KfW, the national investment bank... that shows what motivated Ackermann and basically how he lacked of scruples.

Had Josef Ackermann

gambled

and lost everything? After the IKB crisis, Josef Ackermann returned, like every summer, to Switzerland and a town in Ticino. Meanwhile, the creaking of the international financial system was becoming increasingly difficult to ignore. Ackermann knew that he had to face the public. Deutsche Bank's reputation was in tatters. Ackermann went on a popular television show to express his remorse. And he insisted on showing up alone. When things go wrong, it's fair to say a mistake has been made, and Deutsche Bank also made mistakes in this crisis. You have to admit it, try to correct them and learn from them.

Years later, Deutsche Bank would be forced to account in the United States for these same “mistakes.” To avoid criminal proceedings, Deutsche Bank reached a $7.2 billion settlement in 2017. Furthermore, in 2013 it already had to pay $1.9 billion in compensation to two US state mortgage lenders. In total, Deutsche Bank disbursed 9.1 billion dollars. It was the largest penalty paid during the Ackermann era, but it would not be the last. Just a few months later, the Wall Street crash. On September 15, 2008, investment bank Lehmann Brothers filed for bankruptcy in the wake of the subprime mortgage crisis in the United States. A domino effect threatened to trigger the same fate in other banks.

The global financial system was on the brink of collapse. On stock exchanges around the world, traders desperately tried to salvage what they could. For Deutsche Bank it wasn't that bad, we were relatively well prepared for a collapse like that. In the German Chancellery there was one crisis meeting after another. The government's priority was to prevent German savers from panicking... or chaos would ensue. We are telling savers that their deposits are safe. And the German government guarantees it. The German government feared another Black Tuesday, like that of 1929, when so many people lost their savings and then their jobs.

There are some parallels. Of course, there were enormous risks that the banks were taking that they did not expect to have to guarantee. Before 1931 it was mainly the credit boom and in the 2000s it was mainly the international financial market. In October 2008, the International Monetary Fund met in Washington as frantic efforts to prevent the global financial system from collapsing continued everywhere. Josef Ackermann was now considered an international firefighter, even though his bank was among the arsonists. At the same time, another fiasco was unfolding for Deutsche Bank. A real estate developer had defaulted on a construction loan worth millions of dollars in...where else? – The gambler's paradise in Las Vegas.

Today the Cosmopolitan hotel is a complex of superlatives: it has more than 3,000 rooms, more than 5,000 employees, hundreds of slot machines. But in the midst of the 2008 financial crisis, Deutsche Bank inherited the half-built project when its developer declared bankruptcy. It was a construction site! For ten years it would have been known as the work of Deutsche Bank! And the banks are responsible for how these projects look. It was mainly about reputation. So they said: we will not rule this out. We will finish building it. And sell it. And if we have to pay off debts, then we will do so, but only when the financial crisis has passed its peak and we have money again.

Then people will barely notice! As it turned out, a costly mistake for Deutsche Bank. During that period, Ackermann was a regular guest of the German cabinet. The government was planning a state rescue package for German banks. Ackermann responded to the move with a statement saying that he would be embarrassed if Deutsche Bank was amongthose who would need a government bailout. Many saw this as a new sign of victory for Ackermann, this time verbally. The chancellor didn't like it. Through his spokeswoman, he called Ackermann's statement "incomprehensible and unacceptable." He shouldn't have said that. But I think he meant that, as captain of the ship, at least he didn't run aground, and if he had, he would have been embarrassed to go straight to the state.

It's not just about state money, but about state influence. Remuneration would have been monitored and limited to a maximum of around 500,000. And for Deutsche Bank's investment bank that would have been bad... we would have lost a lot of employees. The bank's shares had plummeted from an all-time high of 88 euros in April 2007 to just 16 euros in January 2009. I think it is quite clear that after 2007/2008, especially with the regulatory changes that followed, the Deutsche Bank should probably have altered its business model but it didn't. But Anshu Jain and his London group did not want to change their model.

On the contrary, driven by arrogance and greed, they became increasingly immersed in shadier practices. Already in June 2008, Ackermann had had an angry phone call with Anshu Jain in Frankfurt. Ackermann complained about the "cultural deficits" of investment bankers and said he would no longer tolerate them. Those were the conclusions of a subsequent banking supervision investigation. But – he also discovered – no action was taken. I always said that – I think since 2006 – no business is worth damaging the bank's reputation. And that was absolutely clear from above on the bench. However, not everyone followed that rule. London's annual windfall was a decisive part of Deutsche Bank's profits.

Josef Ackermann depended on his “golden goose”, Anshu Jain. And in 2009, Jain had even been promoted to the board of directors of Deutsche Bank. It's New Year's Eve 2010. And in Las Vegas, Deutsche Bank threw a mega-party to commemorate the opening of the Cosmopolitan. The Bank went all out and shelled out $12 million for an event featuring Jay-Z and Beyoncé. When a buyer was found in late 2014, the hotel was suffering losses of $1 billion. How high were the losses? I can't say exactly... but it was certainly more than a billion. In the end the financial losses reached almost two billion dollars.

At the end of 2010, Deutsche Bank's name was tarnished. The world of global finance was now mocking Joe Ackermann as the man who took too many risks, and not just with hotels in Las Vegas.