The curious behaviour of German banks

I mentioned the state-owned regional banks as one of the lynchpins of the post-war German success story – their support of the essentially family-owned industrial companies endowing its society with a long-term perspective difficult for Anglo-Americans to understand. In any other society, such a combination of finance and politics would make for collusive corruption of the highest degree - as is shown in the behaviour of the Spanish Cajas.
The consensual nature of corporate decision-making - as embodied in the Mitbestimmung system of worker representation and involvement has also been a key feature of the post-war German model. But. as Perry Anderson showed in his 2009 article on The New Germany 

the landscape of the Berlin Republic has become steadily more polarized in the past decade or so. At the top, traditional restraints on the accumulation and display of wealth were cast to the winds, as capital markets were prised loose and Anglo-American norms of executive pay increasingly accepted by German business.
Gerhard Schröder gave his own enrichissez-vous blessing to the process in the first half of the 2000s, slashing corporation and upper-bracket income tax, and rejecting any wealth tax,. Structurally still more important, by abolishing capital gains tax on the sale of cross-holdings, his government encouraged the dissolution of the long-term investments by banks in companies, and reciprocal stakes in firms, traditionally central to German corporatism—or in the consecrated phrase, the ‘Rhenish’ model of capitalism. In its place, shareholder value was increasingly set free. By 2006, foreigners had acquired an average of over 50 per cent of the free float of German blue-chip companies

I haven’t so far picked up any analysis on the internet about exactly how this has changed the German “social market”. On the face of it a lot of the basic features are still there – although the scale of the German banks’ exposure to the sub-prime market disaster did take us all by surprise. Michael Lewis got himself into some trouble a couple of years ago with his Vanity Fair article on Germany which focused a bit too much on anal vocabulary – but his article did contain some important vignettes -

He is a type familiar in Germany but absolutely freakish in Greece—or for that matter the United States: a keenly intelligent, highly ambitious civil servant who has no other desire but to serve his country. His sparkling curriculum vitae is missing a line that would be found on the résumés of men in his position most anywhere else in the world—the line where he leaves government service for Goldman Sachs to cash out. When I asked another prominent German civil servant why he hadn’t taken time out of public service to make his fortune working for some bank, the way every American civil servant who is anywhere near finance seems to want to do, his expression changed to alarm. “But I could never do this,” he said. “It would be disloyal!”

The curious thing about the eruption of cheap and indiscriminate lending of money during the past decade was the different effects it had from country to country. Every developed country was subjected to more or less the same temptation, but no two countries responded in precisely the same way. The rest of Europe, in effect, used Germany’s credit rating to indulge its material desires. They borrowed as cheaply as Germans could to buy stuff they couldn’t afford. Given the chance to take something for nothing, the German people alone simply ignored the offer. “There was no credit boom in Germany. Real-estate prices were completely flat. There was no borrowing for consumption. Because this behaviour is rather alien to Germans. Germans save whenever possible. This is deeply in German genes. Perhaps a leftover of the collective memory of the Great Depression and the hyperinflation of the 1920s.” The German government was equally prudent because, he went on, “there is a consensus among the different parties about this: if you’re not adhering to fiscal responsibility, you have no chance in elections, because the people are that way.”
In that moment of temptation, Germany became something like a mirror image of Iceland and Ireland and Greece and, for that matter, the United States. Other countries used foreign money to fuel various forms of insanity. The Germans, through their bankers, used their own money to enable foreigners to behave insanely.

This is what makes the German case so peculiar. If they had been merely the only big, developed nation with decent financial morals, they would present one sort of picture, of simple rectitude. But they had done something far more peculiar: during the boom German bankers had gone out of their way to get dirty. They lent money to American subprime borrowers, to Irish real-estate barons, to Icelandic banking tycoons to do things that no German would ever do. The German losses are still being toted up, but at last count they stand at $21 billion in the Icelandic banks, $100 billion in Irish banks, $60 billion in various U.S. subprime-backed bonds, and some yet-to-be-determined amount in Greek bonds. The only financial disaster in the last decade German bankers appear to have missed was investing with Bernie Madoff.

A German economist named Henrik Enderlein, who teaches at the Hertie School of Governance, in Berlin, has described the radical change that occurred in German banks beginning about 2003. In a paper in progress, Enderlein points out that “many observers initially believed German banks would be relatively less exposed to the crisis. The contrary turned out to be the case. German banks ended up being among the most severely affected in continental Europe and this despite relatively favorable economic conditions.” Everyone thought that German bankers were more conservative, and more isolated from the outside world, than, say, the French. And it wasn’t true. “There had never been any innovation in German banking,” says Enderlein. “You gave money to some company, and the company paid you back. They went [virtually overnight] from this to being American. And they weren’t any good at it.”
What Germans did with money between 2003 and 2008 would never have been possible within Germany, as there was no one to take the other side of the many deals they did which made no sense. They lost massive sums, in everything they touched. Indeed, one view of the European debt crisis—the Greek street view—is that it is an elaborate attempt by the German government on behalf of its banks to get their money back without calling attention to what they are up to. The German government gives money to the European Union rescue fund so that it can give money to the Irish government so that the Irish government can give money to Irish banks so the Irish banks can repay their loans to the German banks. “They are playing billiards,” says Enderlein. “The easier way to do it would be to give German money to the German banks and let the Irish banks fail.” Why they don’t simply do this is a question worth trying to answer.
…..On the surface IKB’s German bond traders resembled the reckless traders who made similarly stupid bets for Citigroup and Morgan Stanley. Beneath it they were playing an entirely different game. The American bond traders may have sunk their firms by turning a blind eye to the risks in the subprime-bond market, but they made a fortune for themselves in the bargain and have for the most part never been called to account. They were paid to put their firms in jeopardy, and so it is hard to know whether they did it intentionally or not. The German bond traders, on the other hand, had been paid roughly $100,000 a year, with, at most, another $50,000 bonus. In general, German bankers were paid peanuts to run the risk that sank their banks—which suggests they really didn’t know what they were doing. But—and here is the strange thing—unlike their American counterparts, they are being treated by the German public as crooks. The former C.E.O. of IKB, Stefan Ortseifen, received a 10-month suspended sentence and has been asked by the bank to return his salary: eight hundred and five thousand euros.