While it still won't accept help from the government, the record loss by Germany's Deutsche Bank leaves CEO Josef Ackermann on shaky ground
Barack Obama has assembled many disciples with his rallying cry of "Yes, we can," but Josef Ackermann has to be the most unusual one. After announcing in Frankfurt one morning that the institution he manages, Deutsche Bank, lost about €4 billion ($5.3 billion) in 2008, he gave a speech in Berlin that very same evening and told his audience: "Yes, we can."
Okay, but what was he talking about? Surviving the financial crisis? Doing everything in his power to prevent his bank from having to retreat underneath the government's bailout umbrella? What exactly can the people at Deutsche Bank do?
What they certainly can do is burn money—€4.8 billion ($6.3 billion) in the fourth quarter of last year alone. It was the biggest loss in Deutsche Bank's 140-year history.
But that didn't stop Ackermann from giving a highly optimistic speech on Wednesday evening, over champagne and hors d'oeuvres at Deutsche Bank's New Year reception in Berlin.
He received enthusiastic applause when he stressed, once again, that his bank does not need money from the government. "We are a long way from that," Ackermann said. As if the recent miserable financial results hadn't happened, he praised the strength of his bank and handed out advice to people around the world, especially politicians. Don't jettison too much freedom now, was his message.
But his warnings have fallen on deaf ears in the political circles of Berlin. Ackermann, who spoke of "toxic assets" in his speech, is apparently being treated as such in the German capital these days. One doesn't like being seen with him.
Ackermann is fighting—against the crisis, against politicians and against public opinion—and ever since last Wednesday, he's wounded.
Losses Reveal Culture of Risk-Taking
So far, Deutsche Bank seemed to have weathered the crisis relatively well, or at least far better than most of its competitors. But the fourth-quarter figures paint a different picture, no longer portraying Deutsche Bank as a sound institution, but as one that took far too many risks. As a bank that speculated not just for its clients but for itself and at its own risk, that acted like a hedge fund—and ended up losing.
It is true that many of its competitors are in far worse shape. Citigroup lost about $18.7 billion (€14.2 billion) in 2008, and now it is likely to be split up. Investment bank Merrill Lynch expects to see a loss of $15.3 billion (€11.6 billion) for the fourth quarter alone, causing serious problems for Bank of America, which now owns the brokerage house.
But Deutsche Bank was the exception to the rule until now. That role has since passed to JP Morgan, which managed to complete the last quarter without a loss. Ackermann, for his part, had to admit that the crisis has uncovered "a number of weaknesses" at his bank.
These are the weaknesses of his own strategy. He put too much faith in his investment bankers in recent years, the people who had generated billions in profits, year after year, in the good times. But now they are responsible for gigantic losses that far exceed the bank's overall losses.
The team of bankers working for the charismatic Anshu Jain, co-head of Deutsche's investment banking unit, wiped out a total of roughly €8.5 billion ($11.2 billion) before taxes.
The bank's overall loss was smaller than that because of tax credits for the substantial losses and because of profits earned by other parts of the bank.
Hit by Perfect Financial Storm
When the perfect financial storm was raging at the end of last year, it became clear that Ackermann's bank was traveling with far too many sails hoisted. "We were hit by the third wave during that storm," says Ackermann with uncharacteristic modesty.
Last year, 11,000 investment bankers invested €19 billion ($25 billion), or about 60 percent of the bank's entire venture capital. But even in the midst of the crisis, Ackermann continued to give free rein to the Indian-born Jain and his staff.
Ackermann trusted Hugo Bänziger, a fellow Swiss. Bänziger, in charge of risk management, was initially blessed with the necessary good fortune. Deutsche Bank sold its toxic US mortgage loans early enough, and before the flow of cash in the international capital markets ran dry, the bank was able to secure many billions of euros.
But then came Sept. 15, the day the Americans allowed investment bank Lehman Bros. to go bankrupt. Many securities with which the investment bankers had secured their positions, supposedly without risk, were suddenly worthless.
The financial tsunami hit the bank's results with full force, and Ackermann will have to present them in early February. Analysts say that the devaluation of the so-called securities that supposedly made the bankers' trades crisis-proof was responsible for losses of €3.5 billion ($4.6 billion).
Investment Banking Stars Tumbling
The stars that are now crashing down to earth include people like Richard Carson. Rich, as his friends call him, started working for the bank in 1996. By the spring of 2008, he had risen to become head of its London-based global equity derivatives trading unit. He engaged in energetic stock trading, partly with the bank's money, while at the same time spiriting away the associated risk with increasingly audacious options trades
The supposedly risk-free deals went well for a few years. Because investment bankers like Carson can treat almost half of their profits as personal property, he collected bonuses in the millions for many years.
Together with Carson, Nino Kjellman and Andrew Kent, two derivatives traders, were making a killing. Last September, Kjellman moved from London to Hong Kong, where he was named head of Asian equity derivatives trading and also took over risk control. That combination is seen as a recipe for disaster ever since British equities trader Nick Leeson sealed the demise of an entire bank while performing a similar dual role in Singapore. Officials at Deutsche Bank say, however, that Kjellman did not monitor his own deals.
The third member of the group was Andrew Kent, a young options trader who, after learning the ropes at Deutsche Bank, worked at a hedge fund for a short time, where he was allowed to wage bets with $500 million (€378 million) in so-called "volatility trading." But the boom years at hedge funds had already ended by early 2008, and bonuses at Deutsche Bank were pretty good too, so Kent returned to the bank last March.
Such rapid job moves are not unusual at Deutsche Bank. Investment banks and the supposedly far more risky hedge funds are all after the same deals. By early November, the game the three bankers had been playing was over. Their unit had gambled away $400 million (€303 million), and they had to go.
Huge Losses From Credit Derivatives Trading
As recently as the second half of 2008, a few hundred so-called proprietary traders were allowed to speculate, with a sum numbering in the double-digit billions, on the future development of stock prices, credit derivatives and pork bellies. This activity constituted up to 20 percent of all securities transactions at Deutsche Bank. In good years, proprietary trading was responsible for about one third of total profits.
New Yorker Boaz Weinstein, now 35, was one of the biggest stars. In early January, the bank announced that Weinstein, one of its co-heads of global credit trading, was leaving the company, together with 15 other traders. The men, who plan to start a hedge fund, have left behind a loss estimated at $1 billion (€757 million).
Weinstein learned his first strategic moves when he attended a chess school at the age of five. He later became a chess champion and, at 27, one of the youngest directors Deutsche Bank had ever had. At 31, he was believed to be earning more than $10 million (€7.6 million) a year, putting him in a similar salary bracket similar to that of his boss in faraway Germany.