Josef Ackermann, Deutsche Bank

Wednesday 15th July 2009

Selwyn Parker delves deep into the career and mindset of Deutsche Banks' head honcho

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In June 2007, Josef Ackermann was having lunch in New York with Hank Paulson, US secretary of the Treasury, and several other senior banking officials in the Bush administration just as the credit crunch was beginning to envelop the world. Ackermann, chairman and chief executive of Deutsche Bank, was discussing with this elite group how the turmoil would play out. They talked about the fundamental imbalances in the world economy, frozen interbank lending markets, sub-prime loans and the precarious position of commercial as well as residential real estate, the highly leveraged state of hedge funds and private equity, and all the other storm clouds gathering on the horizon.

By early afternoon, after canvassing all the issues, the bankers had come to a reasonably optimistic conclusion. As Ackermann recalled recently in a little-known address to the influential Atlantic Council in New York, despite the dangers the consensus was that, because governments were pumping liquidity into the financial sector and the economy, “we will continue to muddle through”. In short, the situation, although alarming, could be contained: “We had the assumption that risks are spread globally, but everybody is only taking risks they can absorb.”

A few weeks later, those benign assumptions were blown sky-high when two US hedge funds collapsed, another had to be rescued over the weekend, public-sector banks in Germany and elsewhere in Europe got into trouble, and the pillars of Wall Street began to shake. Suddenly, the awful truth hit Ackermann and other international bankers. The financial sector was leveraged to the eyeballs, far higher than anybody around that high-level table had realised. The bubble was bursting.

Worse, remembers Ackermann, the turmoil was spreading globally: “Some people had taken risks they could not digest. Suddenly, there are many more defects in the system. Something happened, which we never anticipated. Namely, in a time of excess, liquidity from a central bank’s point of view, we had a complete investor strike and a complete drying up of money markets.”

The unthinkable was happening. Ever since those momentous months, Deutsche Bank’s top man has been grappling – intellectually and in a management sense – with the results. While working to restore his own bank to good order, he has toiled on another front to deal with the macro-economic fall-out in terms of government regulation, the supply of credit to a liquidity-starved real economy and, by no means least, how to prevent another such crisis. Additionally, like other top bankers, he’s been on the receiving end of personal attacks as the most visible face of Germany’s banking industry. As he says ironically: “On the streets of Europe, a lot of people, the unions, but also politicians have so many nice things to say about banks.”

Because of the financial meltdown, big was no longer beautiful. Headquartered in Frankfurt am Main, Deutsche Bank is the biggest financial institution in Germany, and one of the largest in Europe and the world. At December, 2008, it had total assets of €2,202 billion, operated in 72 countries through 1,981 branches worldwide, half of them in Germany. And although its balance sheet has shrunk lately, Deutsche Bank has moved up the international league table because of the difficulties of some of its rivals.

Criticism aside, the authorities on both sides of the Atlantic now look to Ackermann as one of the few working bankers – as opposed to central bankers – who can help develop the new framework for a safer global financial sector. Fortunately, the Deutsche Bank boss is well-fitted for the task on several counts. For a start, he’s one of very few senior bankers still in his old job. He was reappointed earlier this year as chairman and chief executive of Deutsche Bank at a time when bank executives are going down like ninepins.

More importantly, Ackermann takes the big, international view so often lacking in his US counterparts. Far from hiding in the executive suite, he sits on a wide variety of trans-Atlantic boards, supervisory and charitable entities including the World Economic Forum board. He’s a visiting professor in finance at two institutions – the London School of Economics where of course he lectures in English, and the Goethe University in Frankfurt where the delivery is in German. He’s chairman of the International Bankers Association.

But none of the above activities rate much if your own bank is going down the gurgler and Deutsche Bank has had its problems. “[Ackermann] thinks the group can power through a financial crisis and potentially deep recession, despite reporting its first annual loss since just after World War Two”, doubted the New York Times after the bank announced net losses of €3.9 billion for 2008 on the back of hefty write-downs on loans as well as massive losses in the corporate and investment division.

The chief executive ate humble pie. “Ladies and gentlemen,” he told shareholders. “Although our results for 2008 may still be thoroughly respectable when compared to the sector as a whole, they are completely unsatisfactory and a disappointment to us”. Still, unlike most of its rivals, Deutsche Bank didn’t have to go to the government for taxpayers’ funds.

But that was last year. In the opening quarter of 2009, Deutsche Bank has bounced back, posting revenues that match those of the good days of 2007. The bottom line? After taxes, the institution booked net income of €1.2bn, far better than international benchmarks. Deutsche Bank is safely capitalised to levels above 10 percent. Provisions for loan losses are much lower than its peers.

Before the meltdown, Deutsche Bank was regularly criticised for its much lower return on equity compared with Citibank and other US giants. Indeed, some of them were posting returns three times higher. You don’t hear that criticism any more. Right now, UBS, the biggest bank in Ackermann’s native Switzerland, would die for those numbers.

The institution appears to be taking opportunities presented by the financial meltdown. It’s opening new branches practically every week – over the next three years it will create another 400 branches in Europe, 150 of them in Germany, as it develops its new minority interest in Deutsche Postbank.

Meantime, Ackermann is looking at the bigger picture. As he told the Atlantic Council, he doesn’t think we’re out of the woods yet. “These large fiscal expenditures burden future generations at a time when we should be reducing budget deficits rather than increasing them in light of demographic developments,” he argues.

As for preventing a recurrence of the meltdown, he believes in a global solution where rules and regulation are harmonised across borders. “In no small part, the current crisis was caused by discrepancies between nation-based supervision and national rules on the one hand and global markets and global players on the other. Hence, we need to align our rules and our institutions with the reality of a global economy.”

And soberingly, the boss of Deutsche Bank is not convinced we’re through the worse. “You have major regions which are struggling right now. And if risks increase in that area, I think that will be a next wave hitting the banks… At first it was the subprime, then it was leverage loans, then it was commercial real estate and so on. And who knows where the next epicenter will be? And that is why the whole thing is so fragile.”

Ackermann and his luncheon companions have clearly learned a lot in two years, more than they would have thought possible.

Josef Ackermann CV

Born: February 7, 1948, Mels, Canton of St. Gallen.

Education: University of St. Gallen.

Salary: €1,150,000.

Trivia: Ackermann is also an accomplished pianist and skier.