Deutsche Bank CEO Makes Case, Inadvertently, For Banking System Reform

By Simon Johnson

Writing in the Financial Times yesterday, Josef Ackermann – CEO of Deutsche Bank – argued that larger banks are not more dangerous to the health of financial system (and thus to taxpayers) than smaller banks. According to him, system danger arises primarily from the degree to which banks are “interconnected”.

Inadvertently, Mr. Ackermann makes a strong case for banking system reform. You can break this down into five parts.

1) There is no “either/or” structure to the discussion of size vs. interconnectedness vs. leverage vs. herding behavior of management. “All of the above” is a completely plausible answer, and Mr. Ackermann helps to make the case that relatively small banks also need to be addressed.

2) No doubt smaller banks will not be thrilled by his point – we should expect more Robert Wilmers-type diatribes, next time against Deutsche rather than Goldman. This, of course, is exactly the kind of division within bankers’ ranks that you need to push for meaningful reform. Divide and reregulate effectively, before they close ranks.

3) Mr. Ackermann nowhere mentions that Deutsche Bank’s leverage was, at its peak, judged by some market participants to be around 50:1, making it arguably the biggest hedge fund in world history. Deutsche’s response in 2008 was that such estimates were based on mismeasurement and its true leverage was “no higher than that of Citigroup.” Ouch.

4) Deutsche’s experience, its effective bailout by the German government, and the current misery of European banking more broadly emphasize the need for much stronger capital requirements across the board as part of our eventual response. Of course, these can be higher in percentage terms based on size, interconnectedness or anything else you want to worry about; but all of banking has become too dangerous (to your fiscal health). European-type loopholes, such as “off-balance sheet” activities, must be removed and – as Mr. Ackermann implicitly acknowledges – only action at the level of the G20 can really ensure cross-border bite on such rules.

5) Mr. Ackermann’s endorsement of the current G20 action plan is further confirmation that this plan does not constitute serious progress. Unless and until you get agitated pushback from the world’s biggest bankers, your reform efforts are not real.

Interestingly and surprisingly, Ackermann also makes only a weak case for large banks (in his last paragraph, which seems tacked on awkwardly). If this is the best his staff can do, the case for very big banks is in no way compelling.

Comments

[Zyx007:]

Would you care to elaborate on "its effective bailout by the German government" in point 4, as this seems to be in variance with what the management seems to be communication

Aug 01 08:58 AM

[User241885/...:]

Zackerman's comments well illustrate how the "big" mentality of size and scale has completely lost touch with the way the rest of industry thinks and operates; and in doing so has immeasureably screwed things up. That DB management provided leverage levels of 50:1 should give readers an idea of how "big" their mistakes could be as well. It is unthinkable to many of us who run businesses that management could knowingly accept that level of risk. But it is worse to think that senior management also could somehow not have known.

In the last two decades, when a certain finance transactions were overdone, went haywire and took down the orginating intermediaries (oil and gas loans to regional commercial banks, junk bonds to insurance companies, non-economic real estate deals to the savings and loan industry), the regulators were able to transfer the assets and liabilities to other viable members of that industry in an relatively orderly fashion. It was ugly but orderly.

In the current crisis, there probably was not even a discussion about an orderly transfer, in spite of the fact that there are plenty of regional and super regional banks, or other financial intermediaries that could have maintained deposit taking, credit offering, and managed the risk portfolios.

The cross polinators from Wall Street to Washington who jockeyed for control of the solution were "size" people from the outset. The astronomical bail out figures could not have been a more perfect non-partisan solution, not to mention a great way to end one administration and start another Let the government's illustrious history, republican or democrat alike, show how well size has solved complex problems, like healthcare and education for example.

What was different this time, to use a beloved Wall Street phrase, was that the private sector also came out voting in favor of size as well. And why not, it saved their jobs, didn't it? If you tried to go it alone, like Fuld, you were a dead man. But if you threw your lot in with the scaled-up gang, you would get through it no matter how bad a mess you made or continued to make. Just ask Ken Lewis.

It's sad that the discussion of an orderly transfer, or even an ugly but orderly transfer of bad assets never happened. It probably would have allowed the truly toxic assets to self-destruct, and in doing so would have saved a lot of time and money keeping the life support going into PPIP and where ever it all goes from there.

It would also have required less funds to the acquiring firms as well. I would venture that the top ten per cent of TARP-taking firms used or plan to use about 90% of the so-far total. Believe it or not, there are actually banks that did not take TARP money.

But that's not what most people heard earlier in the year. What they heard was that the big banks did not want to take it, but took it so they wouldn't give the appearance of having problems. Apparently, they were forced to do it (just like Ken Lewis was forced not to tell shareholders about Merril's problems). What a tortured and disengenous sentiment considering that many other firms never took a cent. You probably have one in your community.

It would appear the thinking in Wasington and Wall Street is now well aligned -- you need scale to do anything. How ironic that the same mindset is being entrusted to deal with the very problems it created. The unmistakable message here is that if you are big enough, you can do anything you want. Apparently, size really does matter.

Aug 01 06:14 PM

[BRUCE E. W.:]

Apparently the monetary theories of the Chicago School are still being orchestrated and the economy is being split into a financial schism that is cataclysmic and soon to be irreversible. The oligarchy is stealing our economy and our future. It's a shame we don't have a Bastille to STORM; but I think I know where we might start:: online.wsj.com/public/... It appears that YOU are all being transformed into human cattle; oh I meant chattel; oh, jeez; I meant human capital. Financialization will be the downfall of not just this economy, but of the American Constitution itself. Americans have been shocked into believing that the financial trickle down is essential and are traumatized from acting responsibly. The economy must be built from the ground up with equity and real assets not "fiat capital and created wealth made from creative destruction." This is not all a blended mistake; the sharks and baracudas are feeding in a frenzy and the American business sector and real bankers have the power and intelligence to stop it and correct it if they act now. SEE: prospect.org/cs/ar... SEE: globalresearch.ca/... SEE: letters.salon.com/opin...

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A WISE OWL KEEPS HIS EYE ON THE DEVIL BUT DOESN'T BLINK! Good Health to everyone (your goining to need it). Bruce, Cultural Anthropologist

Aug 02 10:55 AM