German Subprime Meltdown?? Interview With Achim Dübel

First we need to say congrats and then some to Barry for the publication of Bailout Nation.  His experience with the swarm of arschlochs who inhabited his first publisher should explain to the many people who ask why I never write a book. 

It is bad enough to do all of that work, but then to have some idiot from a “publisher” whose literary opinions are formed by watching daytime television judge your work is intolerable.   I’d rather publish our comic strip. This is not a minor decision for me having grown up as the child of a famous author, but I no longer cringe when people ask me when I am going to write a book. As Dad taught me years ago, the only free press is your own. Kudos Barry.

And speaking of serial truth telling, we have a real dandy this week.  I met Achim Dübel through some friends in the mortgage origination market.  He is a courageous and very intelligent guy who knows the EU banking system and mortgage market from the inside.  Like our representatives in Washington, the Germans are in denial HUGE regarding the impact of subprime assets on their banking system. 

Achim lays out some data that is really scary — but such is life when you focus on reality instead of spin.  He figures that nobody in the German government is going to be willing to actually talk about the situation until year-end elections are done.  Like the Bush/McCain wipeout, it looks like the ruling coalition is toast and that Germany may be headed down the road to political radicalization — like the US.

Germany’s Subprime Crisis: Interview With Achim Dübel
The Institutional Risk Analyst
May 27, 2009

“The United States is solely to be blamed for the financial crisis. They are the cause for the crisis, and it is not Europe and it is not the Federal Republic of Germany.”

Peer Steinbrück
German Finance Minister
September 25, 2008

“Excessively cheap money in the U.S. was a driver of today’s crisis… “I am deeply concerned about whether we are now reinforcing this trend through measures being adopted in the U.S. and elsewhere and whether we could find ourselves in five years facing the exact same crisis.”

Angela Merkel
German Chancellor
November 27, 2008

First a housekeeping note. On June 9, 2009, IRA CEO Dennis Santiago will be participating in a panel presentation and discussion sponsored by the UCLA Andersen Alumni Network. The event will be held at the UCI Faculty Club in Irvine, CA, from 6:30-9:00 PM. For more information or to register, please go to:

Second, on June 10, 2009 The IRA editor Chris Whalen will be making opeing remarks at a conference sponsored by PRMIA entitled “Regulation of Credit Default Swaps and Collateralized Debt Obligations.” The event will be held in Downtown Washington and will feature a panel discussion on the proposal by the US Treasury to reform the credit default swap markets. The panel includes Joseph Mason from Louisiana State University, Ann Rutledge from RR Consulting, Michael Greenberger from University of Maryland Law School, Christopher Laursen of NERA, Kevin McPartland of Tabb Group, and is moderated by Gary Kopff of Everest Management. For more information or to register, please go to:

Speaking of reforming derivatives, we want to send a big “high five” to our friends at Bloomberg News for the May 26, 2009 report by Matthew Leising, “Wall Street Derivative Proposal Adopted in Treasury Overhaul,” that Treasury Secretary Tim Geithner essentially took his OTC reform proposal verbatim from the large banks and called it his own. The Bloomberg News article seemingly confirms our worst fears that Geithner’s agenda continues to be a function of the wants and needs of the large NY dealer banks led by JPMorgan Chase (NYSE:JPM).

We could pretend to be surprised, but we’re not really. It just goes to prove that everything that Mark Twain every thought or wrote about American politicians is more true today than ever before. Twain observed in 1873: “I never can think of Judas Iscariot without losing my temper. To my mind Judas Iscariot was nothing but a low, mean, premature, Congressman.” Amen.

While the situation in Washington regarding the financial crisis and attempts to “reform” the discredited regulatory framework for supervising banks and financial markets goes from the sublime to the ridiculous with each passing day, it could be worse. We could all be living in Germany, a nation we have long held in great esteem from our days working as a dealer in German government bonds or bunds at Bear, Stearns International in London. Unfortunately, the Bear is gone and so too the political discourse in Germany today regarding the financial crisis is just about nil. Indeed, the silence in Germany makes the unseemly political free-for-all in Washington seem positively vigorous by comparison.

Foreign observers of Germany might be tempted to believe that the largest nation in the EU avoided the worst aspects of the crisis through a combination of prudent financial regulation and good old fashioned conservatism. But such a view is very far from the truth. In fact, Germany faces an financial crisis in its private and state sector banks that, relative to the size of that nation’s economy, could be every bit as serious as the US crisis.

To get a better understanding of the situation in Germany and the growing financial crisis affecting that nation’s banks, we spoke last week with Hans-Joachim (“Achim”) Dübel, CEO of FINPOLCONSULT ( ) in Berlin, one of the leading and relatively few independent voices in the German housing finance community.

The IRA: Tell our readers about yourself and why your views on Germany and the financial markets there are well informed. We worked in the market for German bunds and other European government bonds from London years ago, so we know a little about the local banking scene.

Dübel: I started my professional career working in housing policy and eventually began to focus on housing finance. I worked at the World Bank focused on housing finance policy globally and even worked for Westdeutsche Landesbank for a few months where I had a pretty traumatic experience. The traders basically dismissed all of the bank’s economists and risk managers. They said they were running the bank properly using purely tactical, short-term trading methods. They would draw triangles on charts of market data and call that risk management. These were the types of strategies that eventually sunk the bank. You will recall from the 1980s onward that WestLB was recapitalized every few years, they have four historic state aid cases with EU competition authorities from the last 15 years. I got a very quick introduction to the real role of an economist in a German financial institution.

The IRA: Well, maybe the German traders have it right. Most contemporary risk management tools used in banks were designed by financial economists and are entirely ineffective. The whole Basel II framework, for example, is an economist’s model, that is, a fantasy that has no link to the real world of finance and commerce. Professor Dick Richardson of the University of Texas wrote in 2001: “Economics is an artifact of human imagination, and the agreement among certain humans who “play the games” together — thereby it is a social technology.” But we digress. What did you do after WestLB?

Dübel: I pursued the housing field as a private consultant economist to agencies such as the World Bank and the EU Commission. My role here in Germany is somewhat that of the critic. Since I have worked outside of Germany and have relative freedom, I decided to use my perspective to provide an independent voice here. The sad fact is that there is virtually no discussion in the policy community in Germany regarding the financial crisis. Most of the professors in the universities in Germany that work in finance have their chairs co-sponsored by banks, so they are effectively gagged in many cases. It is easy to become a critic in Germany because there are so few independent voices. The political parties are deeply involved in finance through the state sector banks, (Landesbanken and Sparkassen ) and the private financial community takes its lead from Deutsche Bank (NYSE:DB), which has decided not to make a public issue out of the problems in the state sector institutions.

The IRA: Wait a minute! Was it not DB that sold most of the toxic waste to the Landesbanks? Our recollection is that it was DB, Merrill Lynch and Lehman who were the key perpetrators in stuffing the Landesbanks with toxic waste. No wonder the DB does not want to talk about it! We have the same problem in the US, namely that the larger banks have taken control over the federal government, leaving the real economy and the population at the mercy of Wall Street. Our colleagues who work in the financial world are mostly employees and thus are cowed into silence. The lack of critical debate in the US financial community regarding the crisis is stunning.

Dübel: I am familiar with the problem in the US from colleagues who ran into problems with the GSEs, particularly Fannie Mae. Funnily enough, we have the same problem in Germany with most bank lobby groups, and public banks are not different from private in that respect. They are very aggressive in going after independent economists to attack their reputations if they have the temerity to criticize them. I think both countries have a serious oversupply of bank lobbying groups, which mostly are staffed with aggressive lawyers.

The IRA: We used to get a lot of flak from Fannie and Freddie, but this is not a problem now. In fact, after we published a brief comment about the role of Peer Steinbrück in creating Germany’s financial crisis, we started getting calls from the German press before we even ran this interview. One reporter from the German edition of the Financial Times called last week demanding to know the identity of our sources. We gave our usual reply: “Foxtrot Oscar.”

Dübel: What Fannie Mae did in her worst days, which I think are behind us, was to put indirect pressure on people who were critical, usually to try to get them fired. German banks play the same games, some as direct as Fannie, but most are more subtle, working behind the scenes to undermine critics. The fact is that everything in Germany is public; all of the data that I use in my work is freely available, yet nobody looks at it or uses it in the public debates. The Brussels declaration of 2001 that allowed the Landesbanken to issue dozens of billions of state-guaranteed bonds without any other purpose than regulatory arbitrage clearly names the German politicians who were the negotiators. Each of these men are also the key figures in creating the problems within the Landesbanks in each state, but still there is virtually no debate in Germany regarding these issues.

The IRA: You stated that you think that the Germans are not given sufficient credit for their role in creating the subprime crisis. Start from the beginning of the story and explain for our readers how Germany reached its present predicament. We notice that Germany has moved forward with a very watered down version of its own plan for dealing with problem toxic assets in the banks. We also saw that Günter Verheugen, the EU commissioner from Germany, has been attacking the German banks and Finance Minister Peer Steinbrück. Is he a critic?

Dübel: Verheugen is at the end of his career. German politicians only speak up before retirement, if at all. It must be added here that we are currently in a state of “omertà” to use the Sicilian term – i.e. no politician of the coalition government will speak about the scandal before this fall’s Bundestag elections. Both main parties are afraid of another Berlin. After the Bankgesellschaft Berlin scandal earlier this decade the CDU was reduced from governing party to near-oblivion status. It is a classical prisoners dilemma, nobody wins politically from a debate. And what the main political parties do not want to be debated does not make it into the public media, and even most private media.

The IRA: Sicilians say: “He who is deaf, blind, and silent will live a hundred years in peace.” What was the condition of the German housing market in 2005? Was there a boom in housing prices or was the crisis purely caused by poor investment decisions by the state banks?

Dübel: The level of housing prices in Germany was relatively stable and – as German economic conditions in general – had no serious impact on the Landesbanken. During the current decade, the Landesbanken were not lending at home, but rather converted themselves into mutual funds to invest in international securities. The crisis started with the decision in the 1990s by the EU Commission, which had launched an EU Treaty violation process against Germany after the protest of German private banks against one of WestLBs recapitalizations. The EU argued that the state guarantees for the Landesbanken were illegal. Many publications such as the Financial Times and The Economist wrote about this extensively. We had the great Milan-based economics professor, Mario Monti, as the head of the EU competition authority. He pushed through the proposal against the combined weight of the German public bank lobby and both levels of government – state and federation. There was a protracted debate and finally, in early 2001, the EU decided to terminate the use of state guarantees by 2002. However, the public bank lobby in Germany continued to fight the proposal and basically sent federal and state government representatives to negotiate with Brussels.

The IRA: Was the counter-attack successful?

Dübel: Partly. The result was a postponement of the end of issuance of state guaranteed debt for all banks from 2001 to 2005, where the last bonds guaranteed would have to mature by 2015. The salient point is that there was only a time limit set in the agreement, but there was no volume limit, so the German state banks started to issue massive amounts of state-guaranteed debt after 2001. This money was not used to finance German or even European lending but simply to park funds in investment vehicles and make more money on it to boost their bottom lines. A nice euphemism they found for this is ‘Kreditersatzgeschäft’ (credit substitution business). If you look at research reports in the period, you will see that the volume of guaranteed bonds shot up dramatically after 2001 and especially during 2004 and early 2005. Critically, every guarantee given by the Landesbanken themselves would benefit from the guarantee standing behind the Landesbanken , so they kept guaranteeing ABCP-conduits and other off-balance sheet vehicles such as SIVs that boomed precisely during the critical period.

The IRA: So the German Landesbanks started to issue debt and buy toxic assets from DB, Merrill and Lehman? Great. Was there any legitimate purpose for this debt? How much are we talking about?

Dübel: The direct extra issuance by the banks following the EU transition period decision was already massive and totaled probably €100 billion. However, if you consider guarantees given by Landesbanken you might well end up at €200, perhaps €300 billion in total exposure. Those guarantees were called upon when the banks and investors funding ABCP and SIV called in their capital during 2007. Moreover, there was a considerable balance sheet shift inside Landesbanken in particular from interbank market exposures to securities holdings. All in all, the data leaking out of various sources suggest that Landesbanken today sit on problem assets of €300-500 billion, much of them funded effectively with German government debt. Individual banks, such as WestLB, LBBW, BayernLB, HSH Nordbank sit on high double-digit € billion exposure positions. Compare these pictures to peak outstandings of US high-risk markets in €, e.g. Subprime RMBS of € 575 billion in 2007, and you get an idea about to what extent the Landesbanken funded Wall Street. Take all high-risk securities markets at peak levels together – from leveraged loan CLOs to Alt-A RMBS, and I think we are looking at some 15% of the Buy Side demand.

Click here to read the rest of the interview with Achim Dübel.

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