Thought du Jour

Many living in poverty fail to apply for government benefits because of stigma attached to them. You might think that banks do not feel similar shame. Think again. Germany’s largest bank, Deutsche, refuses to access cheap loans on offer from the European Central Bank (ECB) because this might damage its reputation. Josef Ackermann, the CEO we met yesterday (with video), claims that Deutsche Bank has “never taken any money from the government”. Presumably “government” includes the ECB.

Deutsche Bank does, however, shamelessly accept handouts when they are called “tax benefits” and don’t have to be repaid. The bank’s pre-tax loss of 351 million euros last quarter became net income of 186 million euros, thanks to a €537m tax benefit.

Perhaps if we labelled transfers to the poor “tax benefits”, or “negative income tax”, this would remove the stigma. It works for Deutsche Bank!

The ECB’s offer of … [unlimited three-year] loans to eurozone banks has been key to attempts by Mario Draghi, the central bank’s president, to ease market concerns over banks’ access to funding. In December, 523 eurozone banks took €489bn from the ECB in its first such offer and banks are widely expected to take part in a second chance to bid for funds this month.

Mr Draghi has said banks should see “no stigma” in using the ECB’s offer. Mr [Josef] Ackermann said Deutsche had not taken part in December and was reluctant to be seen as needing help. “The fact that we have never taken any money from the government has made us, from a reputational point of view, so attractive to so many clients in the world that we would be very reluctant to give that up,” Mr Ackermann told analysts on Thursday. ….

Mr Ackermann’s comments came as Deutsche Bank prepared for a change of leadership by making provisions for crisis-related lawsuits and writing down some corporate holdings, burdening its quarterly results. With the economic crisis also hitting investment banking profits, Deutsche reported a pre-tax loss of €351m, but net income of €186m after a tax benefit.

James Wilson, “Deutsche Bank concerned by offer of ECB loans“, Financial Times, 3 February 2012.

Banks are using the cheap ECB loans to purchase higher-yielding eurozone debt, so this is indirect aid to eurozone governments. But it is simultaneously aid to banks, which profit from the difference in interest rates.

Swiss banker Josef Ackermann (born 1948) warns of a “social time bomb” from growing wealth and income inequality. He is CEO of Deutsche Bank and also heads the Institute of International Finance, an association of the world’s largest financial institutions.

Josef Ackermann … told the BBC that bankers had a responsibility to be philanthropic with their bonuses.

He is due to receive a partially deferred bonus [from Deutsche Bank] of 8m euros.

However, he said, he felt people in his position had to make a contribution.

“We have a social responsibility, because if this inequality increases in income distribution or wealth distribution we may have a social time bomb ticking and no-one wants to have that.”

However, Dr Ackermann said he “preferred not” to talk about philanthropic gestures.

“Deutsche Bank chief Ackermann fears ‘social time bomb‘”, BBC News, 2 February 2012.

Ackermann is stepping down after a decade at the top of Germany’s largest bank. Deutsche Bank is not doing well. The bank posted a 4th quarter 2011 pretax loss of 351 million euros compared with a 707 million euro profit in the same quarter of 2010. Despite this loss, Ackermann will keep his 8 million euro bonus.

A former British academic argues that the current financial crisis happened because psychopaths, who lack a “conscience, have few emotions and display an inability to have any feelings, sympathy or empathy for other people”, took over the financial instructions.

It took a relatively obscure former British academic to propagate a theory of the financial crisis that would confirm what many people suspected all along: The “corporate psychopaths” at the helm of our financial institutions are to blame. ….

[Clive] Boddy argues in a recent issue of the Journal of Business Ethics [that] such people are “extraordinarily cold, much more calculating and ruthless towards others than most people are and therefore a menace to the companies they work for and to society.”

How do people with such obvious personality flaws make it to the top of seemingly successful corporations? Boddy says psychopaths take advantage of the “relative chaotic nature of the modern corporation,” including “rapid change, constant renewal” and high turnover of “key personnel.” Such circumstances allow them to ascend through a combination of “charm” and “charisma,” which makes “their behaviour invisible” and “makes them appear normal and even to be ideal leaders.”

William D. Cohan, “Did Psychopaths Take Over Wall Street Asylum?“, Bloomberg View, 2 January 2012.

Sounds reasonable to me.

HT: Michael Obersteiner

In a detailed memorandum, Standard & Poor’s analysts defend their decision to downgrade the debt of nine of the 16 eurozone sovereigns, and classify as negative the long-term outlook in all but two of them. Germany emerged in good health from Friday’s review, leaving it with the eurozone’s only stable AAA rating. S&P cut the AAA ratings of France and Austria to AA+. Finland, the Netherlands and Luxembourg retained their AAA ratings, but were placed on negative watch for the long-term.

Today’s rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone. In our view, these stresses include: (1) tightening credit conditions, (2) an increase in risk premiums for a widening group of eurozone issuers, (3) a simultaneous attempt to delever by governments and households, (4) weakening economic growth prospects, and (5) an open and prolonged dispute among European policymakers over the proper approach to address challenges. ….

In our opinion, the political agreement [reached in the Dec. 9, 2011 EU summit] does not supply sufficient additional resources or operational flexibility to bolster European rescue operations ….

We also believe that the agreement is predicated on only a partial recognition of the source of the crisis: that the current financial turmoil stems primarily from fiscal profligacy at the periphery of the eurozone. In our view, however, the financial problems facing the eurozone are as much a consequence of rising external imbalances and divergences in competitiveness between the EMU’s core and the so-called “periphery”. As such, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues.

Anonymous, “Factors Behind Our Rating Actions On Eurozone Sovereign Governments“, Standard & Poor’s, Frankfurt, 13 January 2012, 17:28 EST.

HT: The Browser

The third stress – “a simultaneous attempt to delever by governments and households” – is especially important. Translated into plain English, this refers to attempts by governments and households to reduce spending and pay off their debts. From this it follows that “fiscal austerity alone risks becoming self-defeating, as domestic demand falls …, eroding national tax revenues”.

Remember. A rating agency is concerned solely with risk of default – the inability or unwillingness of an issuer of bonds to keep its promises. The pain and suffering that fiscal austerity might mean for the general public is not taken into account. Recession is relevant only insofar as it makes it difficult for a country to meet its debt obligations.

The FT series on “Capitalism in Crisis” continues. Today, associate editor John Gapper looks at global banking, “where the crisis emerged and where its heart still lies”.

In the 1990s and 2000s, banks became a leading force in western economies. Their share of gross domestic product rose sharply; Wall Street banks such as Goldman Sachs extended their reach across Europe and Asia; the boundaries between commercial and investment banking were eroded, and bankers were highly rewarded and even regarded as glamorous.

Today, they are resented for holding taxpayers hostage by having become “too big to fail”. Many argue that banks have drifted from their basic social function – to encourage growth by making loans, underwriting securities and advising companies – into a self-interested drive to make money by any means possible. ….

Unless they can find a way to demonstrate their usefulness clearly, and to curb the practices that most alienate outsiders, banks face a long, debilitating trench war against new regulation. For economies, this could limit the beneficial aspects of a thriving and focused financial sector.

John Gapper, “Promises that proved ultimately empty“, Financial Times, 10 January 2012.