DEUTSCHE BANK´S CHIEF CASTS LONG SHADOW IN EUROPE / THE NEW YORK TIMES ( A MUST READ )

June 11, 2011

Deutsche Bank’s Chief Casts Long Shadow in Europe

By JACK EWING and LIZ ALDERMAN

FRANKFURT


LATE one night in September 2008, as the financial world trembled, Josef Ackermann received an urgent call from Berlin.


On the line was Angela Merkel, the German chancellor. She needed his help — now.


A big German bank was about to collapse, much the way Lehman Brothers had only days before. It was 12:45 a.m. and shaky financial markets were about to open across Asia. Fear was in the air.


Mrs. Merkel asked whether Mr. Ackermann, the head of Deutsche Bank, could help rescue the failing lender.




He could, and he did. Within minutes, he persuaded German bankers to pledge 8.5 billion euros for a bailout.


Mr. Ackermann, 63, emerged from the panic of 2008 as the most powerful banker in Europe and, depending on whom you ask, possibly the most dangerous one, too. As the chief executive of Europe’s largest bank and a symbol of German financial might, he is at the center of more concentric circles of power than any other banker on the Continent.


From this seat at the nexus of money and politics, Mr. Ackermann, for better or worse, is helping to shape Europe’s economic and financial future. He regularly advises politicians and policy makers on the most pressing economic issues of the day: the smoldering debt crises in Greece; the widening gulf between the economically strong nations of Europe, like Germany, and weaker ones like Ireland and Portugal; and the future of Europe’s economic and monetary union and that grand venture’s most manifest expression, the euro.


But it is no secret where Mr. Ackermann’s financial allegiances lie: with the banks. For instance, he has insisted that providing some sort of debt relief for Greece would be a huge mistake. Such a move — a restructuring, in banking parlance — would involve writing down Greece’s debt, which is now more than 140 percent of its gross domestic product, deferring payments and cutting interest rates.


What would be so bad about that? European banks, including German ones like Deutsche Bank, hold many billions of euros in Greek government bonds, and the banks would lose big if those debts were restructured. For the moment, Europe’s solution for Greece is, essentially, Mr. Ackermann’s: more bailout money and more austerity — an approach that some economists say only buys time without offering any hope of recovery.


Mr. Ackermann, like many of his counterparts in the United States, has also argued against tighter regulation of the post-crisis financial industry. His visibility as an industry advocate stems in part from his chairmanship of the Institute of International Finance, an association of the world’s biggest banks, including American ones like Goldman Sachs, Morgan Stanley and Citigroup. The group has released studies contending, among other things, that compelling banks to reduce their use of leverage — a move that would almost certainly reduce banks’ profits — would cause a credit crunch. That’s ridiculous, some economists counter.


“Most of the arguments made by the bankers and the I.I.F. in particular are just fallacious,” says Martin Hellwig, an economist and a director of the Bonn branch of the Max Planck Institute.


Even some of Mr. Ackermann’s peers in banking are uncomfortable with his positions. One senior European banking executive said he thought Mr. Ackermann’s zealous defense of banking interests failed to take public opinion into account. Like many ordinary Americans, many Europeans say they are paying the price for the excesses of bankers.


“As an industry, we have a reputational problem and we need to be aware of it and manage it properly,” says this banker, who did not want to be quoted by name for fear of damaging his relationship with Mr. Ackermann.


THE twin towers of Deutsche Bank punctuate the skyline in this city of bankers. They stand as a monument to a bank that was founded in Berlin in 1870 to ease trade with overseas markets, and it is now among the largest banks in the world. Deutsche Bank operates in more than 70 countries and in virtually every corner of finance.


The man who runs this giant has neither the star quality of Jamie Dimon, the head of JPMorgan Chase, nor the polarizing power of Lloyd C. Blankfein, the head of Goldman Sachs. But in Germany, Josef Ackermann is a household name. And although admired by many, he has also become a lightning rod for public hostility toward banks. His name springs to mind for protesters when they look for a banker to demonize.


So it might come as a surprise that in person, Mr. Ackermann comes across as soft-spoken and almost a bit shy. That’s all the more startling because he rose to the top of Deutsche Bank in 2002 after overseeing its investment bank, which isn’t known for shrinking violets.


In an interview late last month high in Deutsche Bank’s headquarters, surrounded by a few examples of the bank’s collection of modern art, Mr. Ackermann portrayed himself as a man who enjoys the simple pleasures. During his rare moments of leisure time, he likes to hike in the Alps in Switzerland, his native country, or browse in bookstores on Fifth Avenue in Manhattan. His bank has a large operation on Wall Street — indeed, it helped inflate the American mortgage bubble — and he keeps an apartment near Central Park.


Mr. Ackermann plays down his relationship with Mrs. Merkel, who has recently taken pains not to appear too close to him. Her office did not respond to requests for comment.


“We have a cordial and professional relationship,” Mr. Ackermann says. “But since the financial crisis, the relationship between banks and governments became more challenging.”


The relationship may not be as warm as it once was, but Mrs. Merkel, a pivotal player in European politics and economics, still calls on Mr. Ackermann. Since the European debt crisis unfolded in spring 2010, the two have been in direct contact numerous times, he says.


“He is a political animal,” Roland Berger, founder of the management consulting firm that bears his name, and a longtime adviser to Mr. Ackermann, says of him. “I’m not sure Germany without him would have mastered these critical situations as well as it did.”


Mr. Ackermann has offered advice to Mrs. Merkel and other political leaders on how to avoid spooking the markets with their public statements. Mr. Ackermann seems to enjoy a good relationship with Jean-Claude Trichet, the outgoing president of the European Central Bank, whose office is a few blocks from Deutsche Bank’s headquarters here.


But Mr. Ackermann has also said some things that have displeased Mrs. Merkel. Soon after European leaders fashioned a bailout package for Greece last May, he warned that the country might not be able to repay its debts. The very existence of the euro, he cautioned, would be jeopardized if investors lost confidence in other weak economies in the 17-member monetary union.


His comments sent financial markets reeling, and prompted a rebuke from Mrs. Merkel’s finance minister, Wolfgang Schäuble, who called them “irritating” and “unhelpful.”


But last week, Mr. Ackermann’s comments seemed prescient as Prime Minister George A. Papandreou of Greece struggled to persuade Parliament and the public that the nation must agree to more austerity measures to qualify for a second portion of loans from the European Union and the International Monetary Fund.


And on Friday, Mr. Schäuble himself warned that a failure to keep aid flowing raised “an acute danger of Greece being unable to pay its debts, with grave consequences for the euro area.”


The vote on the new Greek measures, which include shutting public-sector enterprises and selling more assets is expected before the end of the month. In the interview in late May, Mr. Ackermann echoed the warnings that got him into hot water a year ago, saying the biggest challenge now was to “convince people of any country to help Greece even more.”


He called on European governments to devise a “Marshall Plan” for Greece that would offer more aid, while forcing the country to sell billions of euros’ worth of state assets, and provide a framework for rebuilding its economy.


European governments have largely followed that advice. At the same time, however, Mr. Ackermann has opposed the German government and sided with his friend Mr. Trichet at the European Central Bank in arguing against restructuring the Greek debt, which would force investors — and banks — to share Greece’s pain.


Any restructuring, Mr. Ackermann cautions, could be even worse than the crisis brought on by Lehman’s collapse. It could threaten the stability of major financial institutions, as well as the European Central Bank, which hold huge amounts of Greek debt, he says.


Worse, he says, there is a “very serious” risk of contagion in the euro area if the situation in Greece causes investors to lose confidence in other fragile European countries. “If you could isolate the Greek case, then we’d be taking a very different approach,” he says.


JOSEF ACKERMANN stands on the stage of the Festhalle, an arena here. The hall is almost full. Above him, his own face fills a giant video screen as he reads from a teleprompter.


This is the scene inside the annual shareholder meeting of Deutsche Bank, which was held in May. Mr. Ackermann’s speech is being broadcast into adjacent rooms, where silver-haired shareholders line up at buffet tables to collect the free food that is known in Germany as the “wurst dividend.” His words even boom from speakers in the restrooms. Outside, a handful of protesters hand out leaflets calling for Deutsche Bank to be broken up.


On the dais, Mr. Ackermann alludes to the loss of confidence that the banking industry suffered as a result of the financial crisis, but says Deutsche Bank’s reputation remains solid.


“Especially over the past few years,” he tells the shareholders, “Deutsche Bank has further enhanced the good reputation it enjoys all over the world.”


He continues: “No business transaction is worth risking this good reputation and the bank’s credibility.”


A few people in the audience boo. Most applaud.


In fact, the reputation of Deutsche Bank, and its leader, has taken a few hard blows at home and abroad. Deutsche Bank was a big player in those toxic collateralized debt obligations that Wall Street sold during the American mortgage bubble. This year, a Senate report about Wall Street and the financial crisis concluded that Deutsche Bank continued to churn out C.D.O.’s even as the market was collapsing. A top trader at the German bank also wagered against some of the mortgage bonds inside those C.D.O.’s, the report found, much the way Goldman Sachs has been accused of betting against its own clients. (Goldman denies that.)


In March, Germany’s highest appeals court ruled that Deutsche Bank must compensate a small-business customer for losses incurred as a result of another type of derivative: interest-rate swaps. That decision could compel Deutsche Bank to compensate other business customers who contend that they were not warned of potential huge losses from the instruments. The ruling marred Deutsche Bank’s image as friend of the Mittelstand, the midsize businesses that underpin the German economy.


Back in the United States, the federal government filed a civil suit in May that accuses a Deutsche Bank subsidiary, MortgageIT, of lying about the quality of home loans it handled under a government program and demanding that the bank repay hundreds of millions of dollars of losses on the loans.


Mr. Ackermann says that almost all the transactions at issue in that suit occurred before his bank acquired MortgageIT, a real estate investment trust, in 2007. Since the crisis, he says, the culture of Deutsche Bank has changed.


NEARLY a year after Congress passed rules to rein in banks in the United States, America’s financial overhaul is mired in dissent. Europeans, too, want to get tougher on banks, but, as in the United States, the banks are pushing back.


Mr. Ackermann says he agrees that more banking regulation is needed, but warns that too much regulation would discourage banks from lending — the argument that so irks economist critics.


It would be impossible to eliminate the risk of financial crises without hurting the economy, Mr. Ackermann says. “If you wanted to reduce the probability to zero,” he says, “we would have trouble financing the real economy.”


On that point, many economists agree. But Mr. Ackermann says too much anger has been heaped upon banks like his. He boasts of how Deutsche Bank made it through the panic without direct government aid — another contention that annoys his critics. In fact, Deutsche Bank received the equivalent of a back-door bailout from American taxpayers when the United States government intervened to prevent the American International Group, the insurer, from collapsing.


Mr. Ackermann says Deutsche Bank’s direct exposure to A.I.G. would have resulted in a net loss of a few hundred million dollars, something that the bank would have been able to absorb.

But he acknowledges that if A.I.G. had been allowed to fail, Deutsche Bank — as well as the entire global financial system — would have been in much more trouble. “Of course, in that sense, we are very grateful” for governments’ support of the financial system, he says.


Warm words aside, some argue that Mr. Ackermann has continued to take big risks even after the harrowing events of 2008. Simon Johnson, the former chief economist at the International Monetary Fund and a prominent critic of Wall Street, has called Mr. Ackermann “one of the most dangerous bankers in the world.” The reason, Mr. Johnson has said, is that Mr. Ackermann is still pushing Deutsche Bank for a 25 percent annual return on equity, before taxes. Such a goal, Mr. Johnson says, is bound to encourage its bankers and traders to take more risks and employ lots of leverage, which can fuel profits on the way up but amplify losses on the way down.


Mr. Hellwig, the economist, says such hefty returns are possible only for banks that know they would be rescued if they ran into trouble — in other words, for banks too big to fail. Banks themselves would never lend to businesses that had such leverage, he says.


Mr. Ackermann maintains that his bank has drastically cut back on risky businesses. For example, he says, it no longer trades with its own money. He has promised to put more emphasis on traditional forms of banking, like providing advice and lending to midsize businesses. Last year, Deutsche Bank extended its German retail network by acquiring Postbank, which offers banking services from post offices.


Still, Deutsche Bank continues to rely heavily on its investment banking unit for profit. The unit, called the corporate and investment bank group, is based in London and reported a pretax profit of 2.56 billion euros in the first quarter. That amounted to about 85 percent of Deutsche Bank’s total pretax profit.


Deutsche Bank also belongs to a small circle of global banks that account for a huge proportion of international derivatives trading, prompting the European Commission to investigate the institutions for possible domination of the market for credit default swaps, an instrument used to insure debt.


MR. ACKERMANN seems such a fixture that it is hard to imagine Germany without him. He has already served almost as long as Hermann J. Abs, who led Deutsche Bank back to international prominence in the 1950s and 1960s, when Germany was rebuilding after World War II.


Mr. Ackermann’s contract has already been extended once, until 2013, and he vows that he won’t stay on beyond then. Already, there is fevered speculation about who may replace him.

Anshu Jain, the head of Deutsche Bank’s investment banking unit, is often mentioned. But Mr. Jain, who grew up in India, is not fluent in German and would be hard-pressed to take over the political obligations that come with the job of running Deutsche Bank.


Under one scenario, Mr. Jain would share top duties with Axel Weber, the former president of the German Bundesbank, who would handle interaction with government and central banks.


Mr. Ackermann says the decision on who will replace him lies with Deutsche Bank’s supervisory board. But, like so many things in European finance, he will no doubt play a role in choosing his replacement. “It is not my job,” he says, but “I am, of course, involved.”