International Business: Germany
SUDDENLY, GERMANS LOVE TO HATE THEIR BANKS
When Deutsche Bank CEO Hilmar Kopper dismissed $33 million of unpaid bills owed to construction craft workers as "peanuts" last April, he unleashed a new wave of antibank populism in Germany. The workers are victims of the spectacular--and allegedly fraudulent--bankruptcy of the giant Schneider real estate group. The $33 million is indeed small change alongside the $3.2 billion that "construction lion" Jurgen Schneider owes to Deutsche and other banks. But Kopper's seemingly callous tone ignited popular resentment against German banks' power.
The flare-up is now turning into a political firestorm. On Jan. 30, the opposition Social Democratic Party (SPD) introduced federal legislation to cut down the banks' sizable shareholdings in key industrial companies to no more than 5% equity stakes. And it would end the banks' power to vote huge blocks of proxies for corporate shares they hold as custodians. Such a move would radically reshape Germany's economy by ending the banks' tight control over wide swaths of the nation's industry.
Adding to the furor, district attorneys are investigating banks on suspicion of money laundering and aiding tax-evasion schemes using foreign havens. On Feb. 2, federal tax agents raided offices of Bayerische Hypotheken- und Wechsel-Bank searching for such evidence, following an earlier raid on Dresdner Bank. No indictments have been issued, and the banks deny any wrongdoing.
Another powerful impetus for change is coming from outside Germany. The nation urgently needs to tap global investors for huge new infusions of capital. Right now, German capital markets are too puny to finance the coming series of megabuck privatizations of phone monopoly Deutsche Telekom and other state-owned companies.
To attract outsiders to buy into such privatizations means adopting foreign, particularly U.S. and British, approaches to transparent accounting and corporate governance. That will be a major break from the current pattern of clubby ties, shielded from public scrutiny, between corporate Germany and its financial institutions.
Already, the banks' political support seems to be slipping. Chancellor Helmut Kohl's coalition partner, the Free Democratic Party (FDP), is as eager to see bank power crimped as is the SPD. And now, even members of Kohl's own party are leaning toward legislation to rein in the banks.
The banks are vulnerable because of their conflicts of interest. Besides voting proxies, a bank is often, quite legally, both a major creditor and a shareholder of the same company, with bank officers serving as members of the company's board and even as chairman. Take Daimler Benz, Germany's biggest industrial group. Deutsche Bank, the country's No.1 bank, owns 24% of Daimler's shares and is a major lender, while CEO Kopper chairs Daimler's supervisory board.
Trouble is, even though banks might want to be evenhanded in their multiple roles, German law won't let them. When bankruptcy looms, the law gives priority to creditors, mainly banks, over all other parties. "Under German corporate law, the principle is to protect creditors and not shareholders," says Gerhard A. Koning, head of corporate finance at Frankfurt's Commerzbank.
BAILOUT LEGACIES. The problem is amplified by Germany's debt-heavy system of corporate finance. Debt-to-equity ratios average as high as 4 to 1, compared with around 1.3 to 1 in the U.S. During the most recent recession, lack of capital quickly pushed many companies to the wall. Cologne-based diesel engine maker Kluckner-Humboldt-Deutz, for example, said on Jan. 30 that it needed a $605 million bailout. Deutsche Bank holds a 36% stake in KHD, and Kopper chaired its supervisory board until the start of this year.
Such troubles are no surprise to bank critics such as University of Mannheim professor Manfred Perlitz, who says bank-controlled companies perform far worse than those not under bank influence. In rebuttal, the banks argue
that many of their equity stakes are the involuntary legacy of earlier basket-case bailouts. And bankers say they don't interfere in day-to-day management.
All the same, pressure for change is increasing. As the global competition for scarce capital heats up, German banks may need to yield some of the power they insist they don't want anyway.
WHAT THE BANKS ARE UP AGAINST
New draft law would limit banks' equity stakes in industrial companies to 5%
Spate of corporate bankruptcies and bailouts hurts banks' reputations as company lenders, shareholders, and directors
Pending privatizations are stepping up pressure from abroad for new rules to curb banks' potential conflicts of interest
DATA: BUSINESS WEEKBy John Templeman in Frankfurt