What Is Josef Ackermann’s Point?

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.

By Simon Johnson

23 responses to “What Is Josef Ackermann’s Point?

  1. Was the case for big banks EVER compelling?

  2. Isn’t one large unit the definition of perfect interconnectedness?

  3. Er, heir Josef – might you want to esplain how our betters in European banking got so overleveraged, and then you can lecture us on how big corrupt banks are good for us.

    Check out this post by John Maudlin that documents how incredibly overleveraged the European banks really are. It’s just stunning. http://www.frontlinethoughts.com/pdf/mwo071709.pdf

  4. Sir,

    It is quite clear from now on, as a responsible central banker of an emerging market, I shall have the responsibility to say to my American and European colleagues, quietly, politely, but firmly, on each and every one of these lecture tours that these gentlemen so much appear to specialize in, that thanks, but no thanks, we heard enough; my policies are mine and not yours, you should mind your own business.

  5. “Deutsche’s experience, its effective bailout by the German government”

    What Bailout??? DB is one of the few large banks that didn’t accept any capital from the government…

    Which in turn makes the following observation somewhat uncalled for….

    “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.”

  6. Cranky this morning as a result of reading Simon’s post and other news stories on the rampant corruption of the global financial system.

    Wanting desperately for our government to halt the sale of the government to the banks. Not sure that will ever happen though.

    Curious about the eccentric math models used in finance that make smart and highly compensated leaders believe that 50:1 leverage is an appropriate risk for a bank to take with OPM.

    Wonder how $3+ bil in profits adds up to $6+ bil in bonuses for the G-men in the second quarter, leaving me me to believe that Wall Street long ago moved away from the system I learned on, where 1+1=2….

    Feeling sad that the German banker is sounding so very much like a woman today, with his assertion that “size does not matter”…

    Had a nice vent about all this on my blog today.

  7. Keep on writing Anne!

    I too am feeling cranky at the volume of self-serving, life-sapping, twisted logic from the likes of the Cato Institute, Fox-TV and other churning mills for DoubleSpeak, DoubleTalk and Twisted Logic. The sad part being some people actually believe this stuff.

  8. When I first joined Baseline I privately disagreed with SJ that health reform should follow taking on the banking system with anti-trust laws. But I’ve now concluded meaningful health reform — or meaningful reform of any kind — is pretty much impossible without first reining in the power of the oligarchy.

    We need more members of the alleged-oligarchy like Wendell Potter to follow their conscience and recapture a shared humanity.

  9. Put Fox and Cato aside for now and read Enough by John Vogel. I’m telling you, you’ll like it!

  10. Yes. For the banks.

  11. Lawrence Baxter

    Mr. Ackermann relies on the arguments that were in vogue a few years ago about the benefits of universal banks–portfolio diversification, efficient capital management, and so on. (Some starry-eyed economists of the era breathlessly talked about “economies of super-scale”!) Mr. Ackermann also points to the importance of developing better insulators within the payments and processing systems.

    But he assumes diverse management skills that simply defy recent experience. It is also hard to see how, in the modern global financial system, insulators within the rapid flow of capital can have very significant effects on reducing “interconnectedness” without also reducing efficiencies in other areas.

    Research is suggesting that American banks declined in efficiency and ultimate profitability as they grew beyond $100 billion in assets–long before some of them actually imploded through overleverage and sheer inability to manage risk. If this research holds up, it is hard to see how Mr. Ackermann’s argument would hold water with anyone other than bank executives and deal makers.

    Both Mr. Ackermann and Mr. Johnson correctly note that smaller banks need also to be addressed. But the proponents of the “too big to fail” will have to mount a better defense of their value than has been made so far.

  12. You are correct. There was a “business case” for accepting bailout money from the German Govt due to low cost of funding. However no money was accepted in the end.

  13. There will always be “interconnectedness” between banks, large or small, in terms of deposits and withdrawals. I think the “interconnectedness” turns problematic only when banks become counter-parties to other banks thru risky complex financial products like derivatives.

    P.S.: Has any post ever explained how 1:50 leverage is possible? How many times can securities bought on credit be used as collateral?

  14. There is huge difference in the US between big banks and an aggregation of little banks with regard to systemic risk, herding, etc. The latter banks are allowed to fail. It is therefore feasible, albeit certainly not guaranteed, that individual bankers in the latter can learn from the mistakes of their brethren, mitigating the aforementioned risks. For the former it is infeasible.

  15. When someone writes utter nonsense how can one ask what his point is? Ackerman’s point is that it doesn’t matter how badly huge banks screw up because we have governments to offer them free money when they do. Perhaps, it is better to have only one gigantic world bank and allow it to do any &*^((*&(*&idj thing it thinks might possibly make a profit (which is pretty much what we do have these days). Then when the ratatouille hits the fan the government can rush in with free money and reinflate the bubble, with the result that the only casualty is five or ten years of underemployment and utter dislocation for the real economy but no problem whatsoever for the bankers who continue going straight to the teller windows without even having to maintain an account. Ah, Herr Ackerman. Nothing succeeds like success, except perhaps apocalyptic failure.

  16. markets.aurelius

    Josef Ackermann’s op-ed is larded with the same type of misdirection and pseudo-statements found in Lloyd Blankfein’s op-ed from February on the very FT Opinion page.


    Dr, Ackermann, as he prefers to be addressed, fails to see the immediate contradiction in his own verbiage. He writes: “Industry as well as political leaders must ensure that arrangements found deficient, instruments found wanting and industry practices found inappropriate are not re-established.” This is a truly extraordinary pseudo-statement — in and of itself it is devoid of meaning. However, it succeeds in being a thinly veiled indictment of the regulatory edifice that allowed banks like Deutsche Bank to run roughshod over customers’ legitimate right to full disclosure on “investments” being hawked to them by DB bankers presumed to be trustworthy financial intermediaries, advisors and trading partners.

    Banks, particularly in Europe, rely to a far greater extent on the semiotics of banking — the written, visual and verbal accoutrements conveying trust, seriousness of purpose, and honest interest in the customer’s welfare — than do their US counterparts. There is a dignitas presumed of “Dr. Ackermann” when he speaks. He is accustomed to having regulators, customers, politicians and common folk defer to him because of his position and standing on the world stage. His dignitas.

    So, here we have the person that led, and continues to lead, an institution that destroyed or aided in the destruction of its customers’ wealth — pensions, public and private organizations, individuals — indirectly saying he and his ilk must not be allowed to do this again. It is not the banks, or those who lead them, that must ensure against a repeat of the reckless disregard for every principal of prudence and fiduciary obligation we have just endured. It is not the Herr Dr. Ackermanns or Lloyd Blankfeins of the world that are to be held accountable for the annihilation of countless persons savings and the ensuing destitution. Not at all. It is “industry as well as political leaders,” that are to effect this magical transformation in banking. It is “industry as well as political leaders” who will stop bankers from treating their customers as over-fed lambs to be slaughtered for their feast.

    Dr. Ackermann can deliver this message in a manner that obfuscates and misdirects, allowing an occasional glimpse of his, and his institution’s, true agenda. Like this: “For instance, a number of regulatory changes will lead to higher capital requirements, and care should be taken that the aggregate effect does not exceed levels deemed sufficient in the interest of an appropriate balance between stability and the ability of the financial system to raise the funds necessary for global growth.” Roughly translated, this means: “Do not require banks, particularly DB, to put more of their capital at risk.” (I was tempted to say equity at risk, but, given the banks pay out more in comp that they earn or return to shareholders, this would be incorrect: Shareholders provide sucker’s capital. The bankers themselves worry more that they won’t have as much money for immediate annual comp if capital requirements increase. See NY AG Cuomo’s report from this past week http://www.crainsnewyork.com/article/20090730/FREE/907309972 )

    Every sentence, every paragraph of Dr. Ackermann’s screed — which, to be fair, ranks up there with the best collections of pseudo-statements yet offered by a banker re the present state of the world — can be dissected and laid open for what it is: a blantant attempt to preserve the status quo and re-start the game in January 2007 when all the banks were just printing it like rock stars.

    But Dr. Ackermann ends as he began, as Simon notes, by offering up the very sort of pseudo-statement that demonstrates why he and others of his ilk cannot, and should not, ever be trusted to run anything more than a side show at an arcade. He writes, and I quote:

    “Moreover, large banks can better afford the increasingly expensive investments in information technology, risk management and market infrastructure that are also conducive to enhancing financial stability. As we move forward in our quest to make the global financial system less prone to crises, we would be well advised to bear this in mind.”

    Dr. Ackermann and his co-evals have completely — completely — failed to manage risk or protect their customers’ wealth. They all have demonstrated they do not know what they are doing, or the risks of what they are trading. They cannot argue they will “enhance financial stability” if they get everything they seek: They have demonstrated complete incapacity in this regard. Their quest is personal enrichment in the immediate present. It always has been. It always will be. Now it is just self-evident. And it will be more so during bonus season later this year. That is what politicians and regulators must bear in mind as this crisis continues to unfold.

    One reads things like Dr. Ackermann’s piece, and Mr. Blankfein’s op-ed, and all one can do is think of Robert Oppenheimer’s Trinity remark: “I remembered the line from the Hindu scripture, the Bhagavad-Gita… “Now, I am become Death, the destroyer of worlds.” I suppose we all thought that, one way or another.” Oppenheimer and his co-evals were truly brilliant, and they could consider the consequences of what they had wrought. They forever transformed reality as we all experience it. As have Ackermann, Blankfein, Dimon, Mack, etc. However, these bankers — a word that has, and deserves to remain, become a term of derision — are neither brilliant nor possessed of any insight on how to restore the world markets, regardless of how much dignitas their PR machines gin up. The pseudo-profitability of their institutions has been laid bare and the extent of their all-to-evident destruction now evident. They need to be replaced by honest people with a sense of fair-dealing.

  17. Revenues – Costs = Profits. Compensation is a cost. 2 – 1 = 1. Clearer?

  18. Equity = 2. Assets = 100. High leverage just means a small amount of equity, relative to the rest of the balance sheet. No fancy transactions necessary.

  19. So much for international co-ordination of reform efforts.

  20. Is the community bank going to provide international trade financing? For just one example? Is the community bank going to be a primary dealer in U.S. Treasury securities? What if deposits in the community are less than the need for mortgages and corporate loans to support economic activity? The list goes on and on. Large banks don’t exist on account of a conspiracy – sorry.

  21. Thanks Twotenths!

  22. markets.aurelius

    So, a 2% downmove in asset values (something that can occur in a day … in a morning, for that matter) wipes out all the equity there. A severe drop in cashflow consumes an ever-increasing portion of avail funds to service debt. Are you even remotely suggesting this is a business model?

    On any given day, equity is at risk of being wiped out. In a day. Not a month, not a year. Not a decade. A day.

    Is this the business model taxpayers are expected to prop up? Is the vast unwashed mass known as taxpayers really to be expected to keep such institutions and capital stuctures intact? I can appreciate convexity as much as the next guy. But 50:1 leverage is truly nuts. These institutions should be allowed to fail.