Chris Bambery looks at the Deutsche Bank crisis in Germany, and speculates about the consequences for the European and global economies
“As safe as the Bank of England:” it’s not a phrase you hear much these days. In part, I suppose, because of its diminished role in the world, but more importantly, because banks aren’t seen as very safe after the financial crash of 2008.
But the one country whose banks were once seen as the paragon of dependability was Germany. Its commercial and investment banks had helped Germany’s industrialisation from unification in 1871 onwards through lending to industrial corporations and then holding seats on the company’s board of directors. This was long term investment, dubbed “patient capital.” It was often contrasted with the more short termism of the City of London (missing out the fact that the City has never been that involved in investing in British industry).
The German model was famously analysed by the Austrian Marxist, Rudolf Hilferding, as Finance Capital, the merging of industrial and financial capital, and taken up by Lenin in his analysis of imperialism.
The bank that played a key role in the rebuilding of German industry after 1945 was Deutsche Bank. How the mighty have fallen!
Not content with this role from the 1980s onwards Deutsche Bank set itself the ambition of becoming a global investment bank, capable of challenging the US giants like Lehmann Brothers (remember them), JP Morgan and Wells Fargo. In part it felt it needed to break from its emphasis on a struggling German domestic market. Accordingly it bought up first the British investment bank, Morgan Grenfell, and then a US one, Bankers Trust.
But its real take off into the brave new world of international finance came under the government of Gerhard Schröder, the Social Democratic Chancellor from 1998 to 2005.
We rightly picture Margaret Thatcher as the pioneer of the neoliberal assault on working people, and it’s certainly true she and US President Ronald Reagan presided over the initial neo-liberal offensive, characterised by big set piece battles with the trade unions. But what’s often overlooked was that the second wave in the 1990s and 2000s was in many ways even nastier and presided over by the centre left, Bill Clinton in America, Blair in Britain and Schröder in Germany. He was the most successful of the lot in the sense that he drove down German labour costs leading to an export boom which revived the German economy.
The key element was what was called Agenda 2010. Aside from the usual measures such as raising the age of retirement, privatising health insurance, extending shopping hours, abolishing craft requirements which had maintained skill levels and reducing subsidies to businesses in difficulty, Schröder did something Thatcher never did – he cut wages.
Key to that was an attack on Germany’s benefit system. What a Social Democratic government did was to grasp that if you reduce the safety net under employees it means they are more likely to hang onto their job come what may because becoming unemployed was too dreadful a prospect.
But Schröder was also notoriously close to big business, and he shared the ambition of Deutsche Bank and its rival Commerzbank, to become global investment banks. So he abolished trading restrictions to clear their way. As a result Deutsche Bank plunged into the latest investment craze in the giant US market, subprime mortgages, to the tune of $32 billion.
We know what happened next. In 2007 investors suddenly took fright at a fall in the US property market and some grasped the sub-prime mortgages weren’t worth a tin of beans they started piling out of that market which began to collapse. Even as it did Deutsche Bank kept on buying! The result was disastrous.
Nevertheless its CEO, Josef Ackermann, boasted to German reporters that his bank did not need and would not accept a government bailout, telling reporters: “I would be ashamed if we were to take state money during this crisis.”
He didn’t, in the sense that Deutsche Bank’s debts weren’t nationalised like those of RBS and HBOS here, nor was it forced into rushed mergers to prevent bankruptcy, as in the USA, but it did take state money. Lots of it, if rather more indirectly. It took $11.8 billion from the German state as part of the bail out of the giant AUG insurance group, borrowed $2 billion at low cost from the US Federal Reserve, money used to bail out investment banks, and it handed over $290 billion of toxic mortgages to the Fed.
Deutsche Bank has never recovered from its fall in 2008 and that’s important because its fall was the result of its going global. It still holds too much toxic debt acquired in the years before the crash. That’s why in June the IMF delivered a damming verdict on Deutsche Bank: “Deutsche Bank AG is the riskiest financial institution in the world as a potential source of external shocks to the financial system.”
In addition to its debt problem the US government has pursued Deutsche Bank over its role in the 2008 collapse, involvement in fixing international rates of exchange, its breaking of international sanctions and it was the fine imposed over the first of these, plus the introduction of negative interest rates in Europe which occasioned the collapse in its share price we saw last week. It followed an earlier one in February.
The concern then, was that EU regulations banned the use of state money to bail out banks. If a bank could not pay its monthly payments on its bonds, and at the start of this year Deutsche Bank froze repayments, those bonds could be converted into shares in the banks. Faced with the prospect of well paying bonds becoming worthless shares investors ran with their money.
Last week those piranhas of international finance, the hedge funds, were testing whether the German government would intervene to bail out the country’s biggest bank. Financial analysts believe that Deutsche Bank needs to raise an extra €5 billion to €7 billion from investors in order to restore it to health. How likely is that to occur?
The phrase “too big to fail,” which most people believed would never be heard again after 2008, was being bandied about once more.
The size of Deutsche Bank derivatives portfolio is a $60 trillion. That’s almost 20 times the GDP of Germany which stands at $13 trillion. That makes the cost of a bail out by the German state very high indeed.
Deutsche may survive this latest crisis, but it’s not going away for long. It will happen again sometime soon.
The problem for German Chancellor Angela Merkel is twofold. Next year is election year in Germany and she is doing badly in the polls. Bailing out a bank is not popular with voters but letting Deutsche Bank go to the wall would create an enormous mess.
Secondly, if she uses state funds to bail out Deutsche Bank she is doing what she herself banned Italian premier, Matteo Renzi, from doing when faced with collapsing Italian banks. There’s a lot of resentment in Italy against Germany, and the EU which follows German economic policy, as is true in Greece, Spain and Portugal. Any German bank bail out would create a bigger crisis for the EU than Brexit.
There must be many in Germany looking nostalgically back to the days when Deutsche Bank doled out “patient capital” to German industry. But there’s no going back to that because of what neoliberalism has achieved and the casino into which Deutsche Bank entered with glee back in the 2000s. Now it’s looking like the man who lost his short in Monte Carlo.
Chris Bambery is an author, political activist and commentator, and a supporter of Rise, the radical left wing coalition in Scotland. His books include A People's History of Scotland and The Second World War: A Marxist Analysis.