Finance: The Global Casino Has Reopened

Investment banks are making giant profits again, thanks in part to taxpayers. Speculation is back—but now the public is shouldering the risk

By Frank Hornig, Christoph Pauly and Wolfgang Reuter

Anshu Jain, 46, listened stoically and silently to the remarks of shareholders at the annual meeting of Deutsche Bank (DB) at the end of May. Many were troubled by the fact that the bank had reported its biggest ever loss in 2008, €3.9 billion ($5.6 billion), for which Jain, as its top investment banker, was responsible.

Deutsche Bank, like all major investment banks, took great risks in the boom years, speculating with securities that we now call toxic, because they have poisoned bank balance sheets.

While many shareholders at the annual meeting discussed the causes and effects of the financial crisis, and while politicians around the globe debated the introduction of stricter regulations to impose tighter limits on the risky activities of investment bankers, Jain saw the crisis as an opportunity. His first step was to get customer accounts back into the game, followed by a return to speculative investment in proprietary trading.

"What we will see is five to six formidable global players in investment banking," the normally reserved banker told the British trade publication Euromoney in early May. "Sales and trading will continue to drive the lion's share of profits."

Apparently speculation has worked out for Deutsche Bank. Thanks to Jain's good timing, CEO Josef Ackermann was able on Tuesday to announce a profit figure in the billions for the first half of the year. The bank has also apparently set aside billions in reserves to pay bonuses to its investment bankers.

The casino is open again, worldwide. Many investment banks are raking in massive profits once again, driving up risks and attracting talent with high salaries. It's as if nothing had happened, and as if it hadn't been precisely this type of behavior that brought the financial system to the brink of collapse last fall and then plunged the world economy into its worst crisis since World War II.

The collapse of the financial system was averted, but only through colossal public spending, as governments bolstered ailing banks with loan guarantees and equity injections and central banks pumped billions in liquidity into the markets.

But now that the worst seems to be over, banks are back to behaving the same way they did before the crisis. Even worse, thanks to government guarantees for the financial sector and cheap money from central banks, it has never been easier for banks to make money.

Money-Making Opportunities Amidst the Crisis

"The taxpayer is paying for the chips in the casino," the head of the German operations of an international investment bank says quite openly, but anonymously nevertheless. "It doesn't get any better." The government, he says, provided guarantees for banks like Munich's Hypo Real Estate (HRXG.DE), whose securities are now being traded on the market at a huge discount. Investment banks, for their part, have bought the securities with money they borrowed from central banks at ridiculously low rates.

According to the anonymous bank executive, these investment banks, as well as hedge funds and major investors, expected that governments, in the wake of the Lehman Brothers bankruptcy in September, would ultimately bail out all major banks.

Indeed, rates for bank bonds soon began rising again, and the first aggressive players in the market collected exorbitant profits. "Unfortunately, the bad bonds of the bankruptcy candidates are now sold out," says the bank executive.

The biggest beneficiary of the crisis has been US investment bank Goldman Sachs (GS), which posted record earnings of $13.8 billion (€9.7 billion) in the second quarter. Its traders used money from the US government and the Federal Reserve Bank to speculate, behaving as if the bank were a gigantic hedge fund.

Business Exchange

Track and share business topics across the Web.