Germany's Performance After the Subprime Collapse
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Denial, Coverup, B Y K LAUS C. ENGELEN and the Blaming of or some it may be an eye-opener: European banks have now suffered more losses because of the credit crunch than their U.S. rivals—even though the turmoil was first triggered by problems in the Others U.S. subprime mortgage market—but raised less capital. These are the findings of a survey that the Institute of International Finance, the Washington- based association of leading financial institutions, recently published Germany’s performance Fin their “Capital Markets Monitor.” Of the $387 billion in credit losses that global banks have reported since the start of 2007, close to $200 billion were suffered by European banking groups and $165.7 billion after the subprime collapse. by U.S. financial institutions. Credit turmoil bank losses in Asia in the survey amounted to $21.4 billion. Capital raised by banks since the beginning of 2007 was $276.4 billion with $141.3 billion by financial institutions in the Americas, $125.5 billion in Europe, and $9.9 billion in Asia. Of the $387 billion in reported losses, about 13 percent repre- sents credit losses, the remainder mark-to-market losses. In terms of fallout from the U.S. subprime crisis, Germany may claim—after the United States and Great Britain—third place in announced losses, write-downs, and recapitalizations. Here some num- bers. To use the May 13, 2008, damage estimates of the German TV magazine “Frontal21,” German taxpayers may be faced with an added THE MAGAZINE OF INTERNATIONAL ECONOMIC POLICY fiscal burden in the form of public guarantees and recapitalization costs 888 16th Street, N.W., Suite 740 of €36.5 billion. Such are the consequences of importing “toxic waste Washington, D.C. 20006 Phone: 202-861-0791 • Fax: 202-861-0790 www.international-economy.com Klaus Engelen is a contributing editor for both Handelsblatt and TIE. SUMMER 2008 THE INTERNATIONAL ECONOMY 55 E NGELEN Street, and the principal villains, the international rating agen- German President cies making billions of dollars issuing Triple-A ratings for what Horst Köhler is making turned out to be junk mortgage securities. his contribution to It’s an eye-opener to look at the headlines in the German solving the financial press reporting on BaFin’s presentation of its 2007 annual crisis by starting a report: “BaFin sees itself as victim of rating agencies” “monster hunt.” (Frankfurter Allgemeine), “Sanio critical of risk systems” (Handelsblatt), and “BaFin sees no own fault in the crisis” (Kölner Stadt-Anzeiger). made in the U.S.A.” by insti- The official German way of coping with the worst finan- tutions such as IKB Deutsche cial crisis in living memory—that is mostly hitting the bloated Industriebank of Düsseldorf public Landesbanks—now has reached the highest office in and several Landesbanks the land. German President Horst Köhler, notes Gerd investing in high-yield struc- Langguth, author of a bestselling biography on Köhler, is mak- tured financial products ing his contribution to solving the financial crisis by starting related to the U.S. subprime mortgage sector. IKB might need a “monster hunt.” €8 billion, Sachsen LB €17.5 billion, BayernLB €6 billion, On May 14, Köhler in an interview accused banks of tak- and WestLB €5 billion. Last year the Landesbanks payed taxes ing on risky investments without adequate risk provisions, of only €137 million. A year earlier, in 2006, it was €1.4 billion. turning markets into “monsters that must be tamed.” Köhler, But some observers see “a mixture of denial, cover-up, who previously served as managing director of the and blaming others” in the way the German public sector and International Monetary Fund, told the weekly magazine Stern: a large part of the banking community are dealing with the dam- “We need stricter and more efficient rules, more capital set age. Although top managers of IKB and the problem-ridden aside to cover financial investments, more transparency, and Landesbanks had to go, Germany is still waiting to see an in- an independent global institution that monitors the stability depth critical internal report similar to that published by the of the international system—the IMF.” British Financial Services Agency on March 26, 2008. (Because After four years running the IMF and stints as junior state bank KfW is a major shareholder of IKB, its rescue with finance minister, president of the Association of German largely public funds underlines its role as a quasi-public-sector Savings Banks, and president of the European Bank for bank that the German government could not let fail.) Reconstruction and Development, Köhler knows how finan- German taxpayers have also not seen a report into the fail- cial markets tick. “Capitalism is not just about pulling profits ures of any particular bank, published as a summary on the but above all about being able to handle risk, and the financial Internet, as was done by the Swiss financial watchdog EBK markets crisis shows that too many players in banking houses in the case of UBS. Instead, German officials responsible for did not understand precisely that,” he told Stern, and contin- financial market supervision—such as finance minister Peer ued: “The over-complexity of financial products and the pos- Steinbrück, BaFin head Jochen Sanio, or Bundesbank presi- sibility of undertaking huge leverage operations with the dent Axel Weber—are mostly addressing two themes in their smallest of capital as security allowed the monster to grow. speeches and statements. First, they mention all the important We have to hold up a mirror to the finance world. They have things that Germany is doing in international bodies such the deeply embarrassed themselves. And I still have not heard a G7, the Financial Stability Forum, the International Monetary clearly audible mea culpa.” Fund, and Ecofin to repair the international financial architec- But things may change. ture. And second, they point fingers at those responsible for Opposition parties have now taken the first concerted the hundreds of billions of dollars in losses: the greedy, reck- steps to press the German government for a full accounting of less packagers and distributors of toxic waste products in Wall huge public sector bank losses to be picked up by German taxpayers. “The German government and its ruling parties are so far refusing to carry out a systematic investigation into those aspects of the financial crisis that are solely related to Such are the consequences of importing Germany,” begins the May 14 statement of three leading opposition members of the German parliament’s influential Finance Committee. Frank Schäffler (Free Democrats), “toxic waste made in the U.S.A.” Gerhard Schick (Greens) and Axel Troost (Left) are de facto speakers on banking and financial market matters for the three opposition parties. 56 THE INTERNATIONAL ECONOMY SUMMER 2008 A Tale of Mass different banking groups have five Consider the political opposition. In members, the insurance industry four, spite of huge fiscal burdens to Conflict of Interest and the investment funds industry one German taxpayers because of the sub- representative on the BaFin board. prime-fallout, as yet the three oppo- lthough some top managers sition parties in the German of problem banks like IKB, Consider finance minister Peer parliament have been unable to get AWestLB, Sachsen LB and Steinbrück. He has been blocking their act together and push for a spe- Bayerische LB had to go, the weak- any meaningful independent investi- cial investigation committee of the nesses of Germany’s financial mar- gations for sound personal reasons. Bundestag. There are good reasons. ket supervision and corporate As a former minister First, the opposition parties also governance systems became again of economy, minister have their man on the BaFin apparent in the fallout from the sub- of finance, and prime board, Carl-Ludwig Thiele, a prime crisis. When legions of politi- minister of the state member of the FDP. Second, all cians at all levels, flanked by of Nordrhein- three opposition parties are rep- representatives of labor unions under Westfalen, he resented on the supervisory the German co-determination laws, belonged to those board of the state bank KfW dominate a public banking sector ruling state politi- with party leaders. Germany’s that represents almost half of total cians watching over maverick Oskar Lafontaine, banking assets, the diseases of poli- the state’s major head of the German Left party, tization and conflict of interest make investment, WestLB. is a member of KfW’s board of investigations by independent According to the old Peer Steinbrück directors as are Christine experts almost impossible. There is banking wisdom that Scheel, a former finance com- broad consensus among the coun- “bad loans are made mittee chairwoman from the try’s political class on the desire to in good times,” Greens, and FDP parliamentary shift—under an opaque smoke- Steinbrück was more part of the prob- whip Jürgen Koppelin. screen—the huge losses of the banks lem than part of the solution with to German taxpayers without com- respect to WestLB at the time when Consider the major banking associa- ing up with mea culpas in order to this public sector bank started to tions. They also have reasons to rebuild confidence and credibility. invest into toxic waste products from block any independent inquiry into the U.S subprime mortgage market in the huge fiscal burdens. The Consider those responsible in a major way. Association of German Banks, repre- Germany for financial market super- senting the private banks, has to take vision, the BaFin and the Deutsche Consider Steinbrück’s key aid, Jörg into account that Deutsche Bank AG, Bundesbank. So far, they have not Asmussen.