BY MARC LEVINSON WITH THERESA WALDROP
SCANDALS: GERMANY’S BIG LENDERS COME UNDER FIRE
SCHADENFREUDE-JOY at another’s misfortune-doesn’t translate easily into English. But no word better describes Germans’ glee over the misadventures rocking the twin towers of Europe’s second largest financial institution, the powerful Deutsche Bank. The sudden collapse of a real-estate empire has left Deutsche officials stammering to offer explanations-and may open a chance for foreigners to break into Germany’s tightknit financial industry. Says one top banker in Frankfurt, “There are just too many problems with the loan portfolios of some of the banks here, with irrational lending, with bad credit decisions. People get worried.”
The scandal broke two weeks ago with the disappearance of flamboyant developer Jurgen Schneider. Schneider, who is rumored to have abandoned his house in the hills above Frankfurt for a Florida hideout, left behind half-finished projects from Wiesbaden to Leipzig and $3 billion in debt to 50 banks, including $700 million owed to Deutsche. Then, last week, Deutsche revealed that it had received a letter from him acknowledging serious problems on April 7, but hadn’t informed authorities and other banks for four days. Deutsche painted itself as the victim of a criminal fraud, but district attorney Hans-Christoph Schaefer countered that the bank’s lending practices may have been so lax that it had no cause for complaint. “If the victim was willing to let itself in for anything at all, it can’t cry fraud afterward, Schaefer was quoted as having said.
How could the very model of an ultraconservative bank not have known that Frankfurt’s Zeilgalerie shopping mall, for which Schneider borrowed $260 million, contains less than half the retail space he promised? Deutsche chairman Hilmar Kopper offered an unusual public repentance: “Mistakes were made in the Schneider case. We just don’t know which ones.” Experts familiar with the big banks’ inner workings, however, think they do know: the tendency of German bankers to make decisions based on reputation and acquaintance rather than hard financial analysis. Schneider, whose credo was to own the best buildings in the best locations and never to sell, succeeded in winning their favor. “There’s a strong personal network via the golf-club circuit, and that’s one of the problems in the case of Schneider,” says finance professor Reinhart Schmidt.
It’s not the first time that the golf-club circuit has dealt German banks a costly blow. In December, metals-and-mining conglomerate Metallgesellschaft (MG) nearly collapsed owing to ill-managed speculation in the oil markets. MG is a classic example of German corporate incest. Deutsche and Dresdner Banks each own large stakes, and the board is chaired by Deutsche executive Ronaldo Schmitz. Schmitz blamed MG chairman Heinz Schimmelbusch, who was quickly fired. But MG’s near collapse bared a far deeper problem: Germany’s bank-dominated corporate boards lack the independence and the authority to represent other shareholders. They meet infrequently, and many don’t even super-vise the annual audit-a basic function of boards in the United States. Although the big banks lost a bundle on MG, other investors still complain that they abused their control.
With pressure building to loosen the ties between banks and big corporations, Deutsche and other banks have trimmed their shareholdings and surrendered a few of their board seats. American banks and investment banks are gaining business from corporate financial officers who are suddenly free to shop around-and who find foreign banks much more nimble when it comes to raising capital and managing risk. “These German banks are the world’s least financially sophisticated players,” says Roy Smith, a former investment banker now at New York University.
Despite the debacles and the public scorn, German financiers are trying to hang on to the old ways. German tax law makes it attractive for banks to own blocks of corporate shares-and Germany’s banking elite can’t shake the habit of shaping the course of industry over cognac and cigars. After exploring a listing on the New York Stock Exchange, Dresdner is now selling stock privately to U.S. investors. The reason? Private placement lets it avoid disclosing how much of German industry it owns.
