Stupid Germans in Düsseldorf – fact or myth?

In the 2011 book by Michael Lewis “The Big Short: Inside the Doomsday Machine” it is described how stupid bankers from Düsseldorf bought many of those crappy securities because they were stupid. The following graph from a Vanity Fair article paints that very same picture:

The global financial system may exist to bring borrowers and lenders together, but it has become over the past few decades something else too: a tool for maximizing the number of encounters between the strong and the weak, so that one might exploit the other. Extremely smart traders inside Wall Street investment banks devise deeply unfair, diabolically complicated bets, and then send their sales forces out to scour the world for some idiot who will take the other side of those bets. During the boom years a wildly disproportionate number of those idiots were in Germany. As a reporter for Bloomberg News in Frankfurt, named Aaron Kirchfeld, put it to me, “You’d talk to a New York investment banker, and they’d say, ‘No one is going to buy this crap. Oh. Wait. The Landesbanks will!’ ” When Morgan Stanley designed extremely complicated credit-default swaps all but certain to fail so that their own proprietary traders could bet against them, the main buyers were German. When Goldman Sachs helped the New York hedge-fund manager John Paulson design a bond to bet against—a bond that Paulson hoped would fail—the buyer on the other side was a German bank called IKB. IKB, along with another famous fool at the Wall Street poker table called WestLB, is based in Düsseldorf—which is why, when you asked a smart Wall Street bond trader who was buying all this crap during the boom, he might well say, simply, “Stupid Germans in Düsseldorf.”

Now, I am not from Düsseldorf and I am not from Cologne (Köln), its rival city. There must be stupid Germans in Düsseldorf just as they exist in Bremen, Berlin and other cities, and just as stupid French, Americans and so on exist in many, many cities. Let us focus on the specific content of “stupid Germans”: bankers in Germany. A recent article in the English-speaking section of the SPIEGEL is quite revealing. It’s title is “Junk Soup: UBS unloaded rotten securities on Leipzig“. Here is an excerpt:

Until now, it was widely felt that local politicians and the managers of their municipal operations often had only themselves to blame. With a mixture of naïveté and greed, they had bought financial products of which they understood neither the names nor the risks they were taking by making those investments.

It is now emerging that international bankers developed aggressive strategies to dispose of toxic securities by selling them to German municipalities. It appears the banks deliberately targeted inexperienced provincial managers and sold them bad deals from which only the banks could profit.

[…]

It was too late by the time city managers realized that in order to insure their sewage treatment plants, they were to be liable for the mortgage-backed securities of American banks.

Much is at stake. If the SEC can prove that the bankers acted fraudulently, other investment banks could also face consequences resulting from past deals. In Berlin, J.P. Morgan is claiming €155 million from a similar deal with the city’s public transport authority. In the case of the Leipzig water utility, UBS will likely be slapped with substantial fines. Leipzig, on the other hand, will probably not be ordered to pay the €300 million the Swiss bank has sought to recover in a lawsuit filed against the city.

Meanwhile, in the west of Germany – home of you guessed it: West LB – the bank has lost in court, as DIE WELT reported in March 2013:

Juristischer Sieg der Stadt Hückeswagen in einem Zinswetten-Prozess: Die Kommune soll nach einem Urteil des Kölner Landgerichts von der WestLB-Nachfolgerin Portigon knapp 1,4 Millionen Euro zurückbekommen. Die Summe hatte die Stadt nach verlorenen Wetten auf die künftige Zinsentwicklung an die Bank überwiesen.

Nur eines von insgesamt drei Geschäften gelte als ordnungsgemäß, entschieden die Richter am Dienstag. In den anderen Fällen hatte die Bank nach Ansicht der Hückeswagener Anwälte ihre Beraterpflichten verletzt. Gegen das Urteil kann Berufung eingelegt werden.

So, only one out of three business deals between the city of Hückeswagen and West LB was ok, the other two we ruled illegal because the bank did not honor its duty of professional advice. There are more cities that have sued West LB. Apparently, the bankers of West LB had this business model: buy toxic assets, sell them dearer to someone else. Lie if you must.

Banking in this version is not about stupidity. It is about predatory behavior that is socially damaging, and it should not have happened on such a scale. Actually, this activity should not be called banking in the first place. The regulation needs to be overhauled, because after these things happen European politicians can’t even agree on how to dissolve banks.