Bankers in Denial

Denial is a ubiquitous psychological defense mechanism. It involves the repression of bad news, unpleasant information, and anxiety-inducing experiences. Judging by the German press, the country is in a state of denial regarding the waning health of its economy and the dwindling fortunes of its financial system.

Commerzbank, Germany's fourth largest lender, saw its shares decimated by more than 80 percent to a 19-year low, having increased its loan-loss provisions to cover flood-submerged east German debts. Faced with a precipitous drop in net profit, it reacted reflexively by sacking yet more staff. The shares of many other German banks trade below book value.

Dresdner Bank - Germany's third largest private establishment - already trimmed an unprecedented one fifth of its workforce this year alone. Other leading German banks - such as Deutsche Bank and Hypovereinsbank - resorted to panic selling of equity portfolios, real-estate, non-core activities, and securitized assets to patch up their ailing income statements. Deutsche Bank, for instance, unloaded its US leasing and custody businesses.

On September 19, Moody's changed its outlook for Germany's largest banks from "stable" to "negative". In a scathing remark, it said:

"The rating agency stated several times already that current difficult economic conditions that are hurting the banking business in Germany come on top of the legacy of past strategies that were less focused on strengthening the banks' recurring earning power. Indeed, the German private-sector banks, as a group, remain among the lowest-performing large European banks."

Last week, Fitch Ratings, the international agency, followed suit and downgraded the long-term , short- term, and individual ratings of Dresdner Bank and of Bayerische Hypo- und Vereinsbank (HVB).

These were only the last in a series of negative outlooks pertaining to German insurers and banks. It is ironic that Fitch cited the "bear equity markets (that) have taken their toll not only on trading results but also on sales to private customers, the fund management business and on corporate finance."

Germans used to be immune to the stock exchange and its lures until they were caught in the frenzied global equities bubble. Moody's observes wryly that "a material and stable retail franchise in its home market, even if more modestly profitable, can and does represent a reliable line of defence against temporary difficulties in financial and wholesale markets."

The technology-laden and scandal-ridden Neuer Markt - Europe's answer to America's NASDAQ - as well as the SMAX exchange for small-caps were shut down last week, the former having lost a staggering 96 percent of its value since March 2000. This compared to Britain's AIM, which lost "only" half its worth. Even Britain's infamous FTSE-TechMARK faded by a "mere" 88 percent.

Only 1 company floated on the Neuer Markt this year - compared to more than 130 two years ago. In an unprecedented show of "no-confidence", more than 40 companies withdrew their listings last year. The Duetsche Boerse promised to create two new classes of shares on the Frankfurt Stock Exchange. It belatedly vowed to introduce more transparency and openness to foreign investors.

Banks have been accused by irate customers of helping to list inappropriate firms and providing fraudulent advisory services. Court cases are pending against the likes of Commerzbank. These proceedings may dash the bank's hopes to move from retail into private banking.

To further compound matters, Germany is in the throes of a tsunami of corporate insolvencies. This long-overdue restructuring, though beneficial in the long run, couldn't have transpired at a worse time, as far as the banks go. Massive provisions and write-downs have voraciously consumed their capital base even as operating profits have plummeted. This double whammy more than eroded the benefits of their painful cost-cutting measures.

German banks - not unlike Japanese ones - maintain incestuous relationships with their clients. When it finally collapsed in April, Philip Holzmann AG owed billions to Deutsche Bank with whom it had a cordial working relationship for more than a century. But the bank also owned 19.6 percent of the ailing construction behemoth and chaired its supervisory board - the relics of previous shambolic rescue packages.

Germany competes with Austria in over-branching, with Japan in souring assets, and with Russia in overhead. According to the German daily, Frankfurter Allgemeine Zeitung, the cost to income ratio of German banks is 90 percent. Mass bankruptcies and consolidation - voluntary or enforced - are unavoidable, especially in the cooperative, mortgage, and savings banks sectors, concludes the paper. The process is a decade-old. More than 1500 banks vanished from the German landscape in this period. Another 2500 remain making Germany still one of the most over-banked countries in the world.

Moody's don't put much stock in the cost-cutting measures of the German banks. Added competition and a "more realistic pricing" of loans and services are far more important to their shriveling bottom line. But "that light is not yet visible at the end of the tunnel ... and challenging market conditions are likely to persist for the time being."

The woeful state of Germany's financial system reflects not only Germany's economic malaise - "The Economist" called it the "sick man" of Europe - but its failed attempt to imitate and emulate the inimitable financial centers of London and New-York. It is a rebuke to the misguided belief that capitalistic models - and institutions - can be transplanted in their entirety across cultural barriers. It is incontrovertible proof that history - and the core competencies it spawns - still matter.

When German insurers and banks, for instance, branched into faddish businesses - such as the Internet and mobile telephony - they did so in vacuum. Germany has few venture capitalists and American-style entrepreneurs. This misguided strategy resulted in a frightening erosion of the strength and capital base of the intrepid investors.

In a sense, Germany - and definitely its eastern Lander - is a country in transition. Risk-aversion is giving way to risk-seeking in the forms of investments in equities and derivatives and venture capital. Family ownership is gradually supplanted by stock exchange listings, imported management, and mergers, acquisitions, and takeovers - both friendly and hostile. The social contracts regarding employment, pensions, the role of the trade unions, the balance between human and pecuniary capital, and the carving up of monopoly market niches - are being re-written.

Global integration means that, as sovereignty is transferred to supranational entities, the cozy relationship between the banks and the German government on all levels is over. Last October, Hans Eichel, the German finance minister, announced OECD-inspired anti-money laundering measures that are likely to compromise bank secrecy and client anonymity and, thus, hurt the German - sometimes murky - banking business. Erstwhile rampant government intervention is now mitigated or outright prohibited by the European Union.

Thus, German Laender are forced, by the European Commission, to partly abolish, three years hence, their guarantees to the Landesbanken (regional development banks) and Sparkassen (thrifts). German diversification to Austria and central and east Europe will provide only temporary respite. As the EU enlarges and digests, at the very least, the Czech Republic, Hungary, and Poland in 2004-5 - German franchises there will come under the uncompromising remit of the Commission once more.

In general, Germans fared worse than Austrians in their extraterritorial banking ventures. Less cosmopolitan, with less exposure to the parts of the former Habsburg Empire, and struggling with a stagnant domestic economy - German banks found it difficult to turn central European banks around as successfully as the likes of the Austrian Erste Bank did. They did make inroads into niche structured financing markets in north Europe and the USA - but these seem to be random excursions rather a studied shift of business emphasis.

On the bright side, Moody's - though it maintains a negative outlook on German banking - noted, in November 2001, the banks' "intrinsic financial strength and diversified operating base". Tax reform and the hesitant introduction of private pensions are also cause for restrained optimism.

Pursuant to the purchase of Drsedner Bank by Allianz, Moody's welcome the emergence of bancassurance and Allfinanz models - financial services one stop shops. German banks are also positioned to reap the benefits of their considerable investments in e-commerce, technology, and the restructuring of their branch networks.

The Depression on 1929-1936 may have started with the meltdown of capital markets, especially that of Wall Street - but it was exacerbated by the collapse of the concatenated international banking system. The world today is even more integrated. The collapse of one or more major German banks can result in dire consequences and not only in the euro zone. The IMF says as much in its "World Economic Outlook" published on September 25.

The Germans deny this prognosis - and the diagnosis - vehemently. Bundesbank President Ernst Welteke - a board member of the European Central Bank - spent the better part of last week implausibly denying any crisis in German banking. These are mere "structural problems in the weak phase", he told a press conference. Nothing consolidation can't solve.

It is this consistent refusal to confront reality that is the most worrisome. In the short to medium term, German banks are likely to outlive the storm. In the process, they will lose their iron grip on the domestic market as customer loyalty dissipates and foreign competition increases. If they do not confront their plight with honesty and open-mindedness, they may well be reduced to glorified back-office extensions of the global giants.

About The Author

Sam Vaknin is the author of Malignant Self Love - Narcissism Revisited and After the Rain - How the West Lost the East. He is a columnist for Central Europe Review, PopMatters, and eBookWeb , a United Press International (UPI) Senior Business Correspondent, and the editor of mental health and Central East Europe categories in The Open Directory Bellaonline, and Suite101 .

Until recently, he served as the Economic Advisor to the Government of Macedonia.

Visit Sam's Web site at http://samvak.tripod.com; palma@unet.com.mk

---

Missleading Fund Names Wreak Havoc On Investor Returns!

Mutual fund managers use fake fund names to part you... Read More

Four Key Components To Building A Trading System

Need some insight on what you should really be striving... Read More

Just Say NO to Your Stock Broker

We have all heard that slogan that started back when... Read More

Looking For a Safe Investment? Try a Certificate of Deposit

If you are looking for a safe investment and you... Read More

Annuity Investment - The Whole Truth

Do you ever feel like you haven't been told the... Read More

In a Time of Need

As I take my leisurely walk with my dog through... Read More

Is Your Mutual Fund the Right One for You?

Mutual Funds are considered to be one of the best... Read More

The Convertible Craze Brightens The Future Of Equities

Convertibles are stealing the show with their safe investment image... Read More

Will a Falling Dollar Derail Your Plans for Retirement?

How much are you willing to pay for a tank... Read More

Makin The Sauce

Let's face it, you're on a roll. After getting down... Read More

Why Should I Use Penny Shares to Build Wealth?

A strategic question. Why indeed?1. A penny share would usually... Read More

How to Choose the Right Share Class

You'll want to opt for the no-load or institutional share... Read More

Boost Your Income With Financial Spread Betting

About 6 years ago I started to notice that certain... Read More

Options Education: Financing the Calendar!

As a trader, one of the key things that I... Read More

Asset Allocation Lessons: The 70% Inflation Solution

For investors only... and for speculators who need to invest... Read More

Investing As A Sport?

I said last week that money doesn't generally buy happiness,... Read More

Investing Online Has Its Rewards: Find Out How To Take Advantage Of Them

Computerized investing. Online investing. Have you taken the next step... Read More

Critical Options Investing Tip When Trading Naked Calls and Puts

An option is a derivative trading product that is best... Read More

Why have Investment Plans for the Stock Market

If you do not have an investment plan in the... Read More

Before You Start Investing

There maybe several reasons why you to want to invest... Read More

Retirement is Never Urgent Until

If you're like many people, your retirement savings have not... Read More

Investing for Retirement - Not an All or Nothing Play

In 1519, Hernando Cortes, beached on the shores of unexplored... Read More

Bearish or Bullish?

If you are interested in stock investing and the stock... Read More

Which IRA Is Best For You?

An Ira is one of the greatest ways to save... Read More

Creating Momentum with Options - Pro and Cons of At-the-money, In-the-money, and Out-of-the-money

To create momentum in your options trading you need to... Read More

Variable Annuities

You know all the articles you read about annuities that... Read More

Evaluating A Money Manager

Scams and frauds are designed to take your money through... Read More

Advice for International Investors on How to Safeguard Their Profits

What are the risks?Today, investors are increasingly turning to global... Read More

Who Wants To Be A Millionaire?

I am sure you have probably read about the power... Read More

Buying a Home - Your BIGGEST Investment

This column has often focused on intangible investments like stocks... Read More

Investing and the Fear of Regret and Greed

People tend to feel sorrow and grief after having made... Read More

Inflation Proof Your Investment Portfolio with ETF?s

Even though inflation has been relatively quiet in the U.S.... Read More

Before You Invest You Must Read This

It is important to answer the following questions before you... Read More