Ackermann Era Ends at Davos as Deutsche Bank CEO Cedes Power

Deutsche Bank AG CEO Josef Ackermann
Deutsche Bank AG Chief Executive Officer Josef Ackermann speaks to an attendee during day two of the World Economic Forum in Davos. Photographer: Chris Ratcliffe/Bloomberg

For Josef Ackermann, head of Germany’s biggest bank, the World Economic Forum is a curtain call for the top power broker of an industry under attack.

The 63-year-old Swiss native became Europe’s most prominent banker during a decade as chief executive officer of Deutsche Bank AG, transforming the Frankfurt-based firm into a top-tier investment bank. He also steered the campaign to water down tougher regulation and devised measures aimed at saving the euro as chairman of the International Institute of Finance, the Washington-based trade group.

Ackermann, who steps down from both posts in four months, is departing as the world’s biggest financial firms, facing political and public backlash after more than $2 trillion in losses and taxpayer bailouts, struggle to repair a broken model of low capital and high leverage. He remains one of Europe’s most influential and polarizing bankers, more than a dozen investors, analysts and academics say.

“Ackermann achieved the status of a global banker and political power broker,” said Christopher Wheeler, a London-based analyst at Mediobanca SpA, who has been following the lender for about 15 years. “He was a voice of authority and represented a German bank, which gave him an incredible amount of power to get stuff done, both within Deutsche Bank and the industry as a whole.”

Advising Merkel

The man who led the bank to record profit in 2007 and advised German Chancellor Angela Merkel and European officials during the financial crisis also oversaw the company’s first annual loss since World War II a year later. He was called “one of the most dangerous bank managers” in the world by Simon Johnson, a former chief economist at the International Monetary Fund, after pushing for a 25 percent pretax return on equity.

As the head of Europe’s biggest bank by assets and chairman of the IIF, which represents more than 450 financial firms, Ackermann was regularly spotted with government leaders and regulators in Athens, Brussels, Berlin and Basel, where he shaped talks to bail out German lenders, reduce Greece’s debt, leverage the euro-area’s rescue fund and influence regulation.

“Financial markets have become highly political over the past years,” Ackermann told Bloomberg News this week before heading to Davos, Switzerland, for the annual conference. “Politics and finance will become even more intertwined in the future. Accordingly, bankers have to think and act more politically as well.”

Local Hero

Davos, less than 60 miles from the town where Ackermann was born, has provided him with a stage for the past 20 years. He is as much a part of the scene as rock star Bono, winter boots and roof-top snipers, often followed by a scrum of Swiss reporters. A co-chairman of the forum’s foundation board, which manages statutes, strategy, new members and funding, according to the website, he has been mentioned as a potential successor to Klaus Schwab, the group’s founder and executive chairman.

Whether at the Palais Beauharnais residence of the German ambassador in Paris, the New Year’s reception at the bank’s office in Berlin or the Eiswette gathering in the port city of Bremen, Ackermann has spent the waning days of his 35-year career campaigning for European integration and the euro. In one speech, he called on Europeans to remember the centuries of war and millions of deaths as they weigh the costs of rescuing the political and currency union.

‘Very Effective’

“He was very effective on the national level and had some influence on the international stage, but he didn’t always get his way,” said Konrad Becker, a Munich-based analyst at Merck Finck & Co. “He always assured there was some kind of solution but that it didn’t put most of the burden on the banks or threaten the global investment-banking model.”

Before a summit of European Union leaders in October, Ackermann travelled to Brussels to meet with EU President Herman Van Rompuy and Luxembourg Prime Minister Jean-Claude Juncker to advise them on a deal to tackle the sovereign-debt crisis. His five-point proposal included a plan for private-sector involvement in restructuring Greek debt, economic reforms, closer fiscal integration, a leveraged 1 trillion-euro ($1.3 trillion) stability fund and the recapitalizing of weak banks, according to two people who saw the presentation.

Moscow Calls

As leaders gathered in Brussels on Oct. 26, the Deutsche Bank CEO flew to Moscow to discuss that capital city’s role as a financial hub with Russian President Dmitry Medvedev. He also attended the reopening of the Bolshoi Theater.

Later that evening, after midnight, Ackermann received at least three phone calls from Charles Dallara, managing director of the IIF, who was representing financial institutions holding Greek debt in talks in the Belgian capital, according to two people familiar with the conversations who asked not to be identified because the discussions were private.

When negotiations stalled, Merkel and French President Nicolas Sarkozy threatened bondholders with “total insolvency of Greece,” which would’ve “ruined the banks,” Luxembourg Prime Minister Juncker later recalled.

At about 3 a.m., from his room in Moscow’s Ritz-Carlton hotel, Ackermann gave his approval for what he’d later call “a satisfying compromise” that foresaw a 50 percent writedown on the face value of Greek bonds with the aim of cutting the nation’s debt load by about 100 billion euros.

‘Political Instincts’

A few hours later, European leaders announced the debt-swap agreement along with plans to boost their rescue fund to 1 trillion euros and recapitalize the region’s lenders -- just what Ackermann had proposed about a week earlier. Bondholders are still haggling with Greek, European and IMF officials over the coupon for the new bonds to be issued in the swap.

“I’m confident that we can get our act together in Greece and avoid a major contagion, but that is still a very open question,” he told Bloomberg News in Davos yesterday. European Union Economic and Monetary Affairs Commissioner Olli Rehn said today authorities are “very close” to reaching an agreement on private-sector involvement in a Greek debt swap this month.

“Ackermann has the cunning and political instincts to make an impact,” said Klaus Fleischer, a professor of banking and finance at the University of Applied Sciences in Munich. “Of course, it’s in the bank’s own interest for him to be involved in the behind-the-scenes talks and influence the outcome.”

Forecast Scrapped

Deutsche Bank, like many European lenders, has a lot at stake: It holds 4.4 billion euros in Greek, Irish, Italian, Portuguese and Spanish sovereign debt, and turmoil in European markets forced it to scrap its full-year forecast for 2011.

As IIF chairman, Ackermann has scored some victories. EU leaders on Dec. 9 watered down provisions that would have exposed bondholders to losses in future debt restructurings, marking a defeat for Merkel, who had campaigned for the measures. He had blamed the chancellor for roiling markets, one of a series of public disagreements with Merkel, who had earlier counted him among her closest advisers on financial matters.

He also led a campaign to soften and postpone tougher capital and liquidity requirements, warning of job losses and economic consequences if banks were forced to curb lending. The Basel Committee on Banking Supervision in 2010 agreed to weaken and delay its proposals. The changes included phasing in new rules over a period stretching to 2019.

Liquidity Rule

The substance of the measures also was altered. Regulators watered down proposals made by the committee in December 2009 to toughen the definition of what assets banks could count toward their core reserves. The committee relaxed a planned liquidity rule that would require lenders to hold enough easy-to-sell assets to survive a 30-day credit squeeze.

“We were always supportive of regulatory changes, but cautioned against too far and too fast,” Ackermann said.

He hasn’t always prevailed. France and Germany are pushing ahead with a financial transaction tax over his opposition, and global regulators have introduced capital surcharges for firms such as Deutsche Bank deemed systemically important. Private creditors also have agreed to accept losses on Greek sovereign debt, something he warned against. And Deutsche Bank has been unable to dodge market pressure to meet higher capital requirements before Basel deadlines as well as European Banking Authority requests for capital buffers by mid-2012.

“He was there and expressed his opinions, but I’m not sure how big his influence was,” said Thomas Koerfgen, who helps oversee about $16 billion at SEB Asset Management in Frankfurt.

Government Aid

Ackermann’s greatest achievement at Deutsche Bank, said investors including Koerfgen, was steering the firm through the financial crisis without taking direct government aid, a feat few rivals can boast. He has been navigating turbulent markets now for half of his 10-year tenure, since the U.S. real estate bubble began to burst in 2007.

“He led Deutsche Bank though some very rough waters,” Koerfgen said. “It was a fight for survival half of the time, but he managed to build a powerful global bank.”

While the German lender didn’t get a direct capital injection, as did Switzerland’s UBS AG or New York-based Citigroup Inc., it tapped the U.S. Federal Reserve’s emergency-loan program for as much as $66 billion in November 2008 and received $11.8 billion from American International Group Inc., courtesy of a U.S. government bailout, to cover the insurer’s obligations on its credit-default swaps.

“Deutsche Bank got indirect help and should be grateful for government actions,” said Hans-Peter Burghof, a professor of banking and finance at the University of Hohenheim in Stuttgart. “The company is in a stronger position now than when Ackermann took over. But it remains too big to fail.”

Europe’s Biggest

During Ackermann’s tenure, the bank grew into the biggest in Europe by assets because of acquisitions and a growing derivatives book, its balance sheet ballooning to about 90 percent of Germany’s gross domestic product. In the same period, its stock lost 52 percent, lowering the company’s market value to 31 billion euros, making it the 34th-largest bank in the world. The Bloomberg Europe Banks and Financial Services Index fell 61 percent in the period.

“Based on market cap, he punches above his weight,” said Matthew Clark, a London-based analyst at Keefe, Bruyette & Woods Inc. “He’s the most influential banker in the euro zone. The fact that he wasn’t bucked off the horse by now, like so many of his peers, is an achievement in itself.”

Ackermann’s role at Deutsche Bank has been a juggling act. He tried to strike a balance between the London-oriented investment bank, responsible for most of the profit and risk, and the less profitable, less volatile businesses of commercial and retail banking -- between a trading house with the majority of its revenue and employees abroad that competes with Goldman Sachs Group Inc. and a 142-year-old German institution with deep ties to the country’s companies and political establishment.

Succession Struggle

In 2004, he dispelled concerns that the bank might leave Germany. He also didn’t pursue approaches from Citigroup head Sanford Weill and Dutch lender ABN Amro Holding NV in the mid-2000s about a possible combination.

When he took over in 2002, Ackermann merged management of the investment bank with consumer banking and asset management into an executive committee that he oversaw. The structure sped up decision making and reduced the influence of the German-controlled management board, which operates by consensus, giving him more power along the lines of a U.S. CEO.

He also began selling the bank’s stakes in German companies, including insurer Allianz SE and Daimler AG, to raise money for investment banking as part of a politically encouraged countrywide unraveling of cross shareholdings known as Deutschland AG, or Germany Inc.

Finding Successor

The complexities of the job at Germany’s only remaining global bank were showcased last year, when the supervisory board struggled to choose a successor for CEO. After a two-year power struggle between Chairman Clemens Boersig and Ackermann, the board settled on dual leaders: Indian-born Anshu Jain, head of the corporate and investment bank, who is credited with building a fixed-income powerhouse and breaking into the top ranks in takeover advisory; and Juergen Fitschen, head of the bank’s operations in Germany and its regional management, who is known for his business and political contacts.

While Boersig managed to push through his choices to lead the bank, he was forced out as chairman after the supervisory board asked Ackermann to seek his post. Still, in November, he dropped plans to head the board after investor concern about corporate governance, and the bank instead named Allianz finance chief Paul Achleitner to the post.

“The handling of succession was unfortunate,” said Daniel Hupfer, who helps manage about $48 billion in assets, including Deutsche Bank shares, at M.M. Warburg in Hamburg. “The bank could have done a better job with the transition.”

Both Jain, 49, and Fitschen, 63, have been in top jobs at the bank for 10 years, evidence of Deutsche Bank’s stable management, analysts say. The new heads, who start after the annual general meeting on May 31, take over as the financial industry fights profit head winds amid tougher regulation, volatile stock and bond markets and slowing economic growth.

‘New Commercial Realities’

“The best possible help I could give is to hand over a bank in good shape, well-positioned and well-prepared for the future,” Ackermann said.

He’ll present Deutsche Bank’s full-year earnings for the last time on Feb. 2 in Frankfurt. The future strategy under the new heads may be set mid-April in the Swiss town of Montreux, where the annual closed-door executive meeting is taking place, two people familiar with the matter said.

When Ackermann departs, he’ll leave behind a firm that’s adapting to the “new commercial realities” of higher capital requirements, simplified, client-based products and lower profitability, which will presage a “turbulent” decade for the industry, he said in speeches in the past three months.

Capital Gap

Deutsche Bank has boosted capital levels, cut its dependence on borrowed money, or leverage, while increasing liquidity reserves to more than 180 billion euros, a record. Still, it remains the most leveraged among the 10 biggest banks by assets in Europe -- total assets exceeded Tier 1 capital by 49 times as of Sept. 30 -- and has the sixth-highest core capital level among the group with 10.1 percent, data compiled by Bloomberg show.

JPMorgan Chase & Co. analysts estimate the bank’s capital gap at 7.6 billion euros at the end of 2012 if new Basel rules are applied fully.

The company has cut reliance on investment banking in the last three years by acquiring German retail lender Deutsche Postbank AG, wealth manager Sal. Oppenheim Group and ABN Amro units. The long-term goal is to raise pretax earnings from consumer lending, money management and transaction banking to 50 percent of the total from 29 percent in 2009.

‘In the Dark’

“He kept us in the dark about what Deutsche Bank wanted to be for a long time -- an investment bank or diversified bank,” said Mediobanca’s Wheeler, who recalled discussing with Ackermann in 2004 whether the bank should look like Lehman Brothers Holdings Inc. or JPMorgan. “He’s positioned the bank very well to continue to take market share in its main business lines, but he’s left it relatively weak in terms of capital.”

The securities unit, led by Jain, shut stock and bond trading with the bank’s own money and scaled back trading risk at the investment bank to pre-crisis levels. In October, it announced 500 job cuts. That month Deutsche Bank abandoned Ackermann’s goal of reaching 10 billion euros in operating pretax earnings for 2011. The German lender may report 6.81 billion euros in full-year pretax profit, according to 25 analysts surveyed by Bloomberg.

Ackermann has had his share of public gaffes and wrong predictions. He said in November 2007 he was “cautiously optimistic” the effects of the U.S. subprime crisis would remain limited. In May 2010, Ackermann unnerved markets with remarks on television that Greece might not be able to repay its debt in full, only to reverse his stance a month later. In February 2011, he said the “euro crisis is behind us.”

Victory Sign

His defense of the company’s profitability goals and high pay, as well as his campaign to soften regulation, has hurt his reputation among the German public. In a survey conducted for Stern magazine in December, half of those polled said they find the Deutsche Bank CEO “unlikeable.”

Ackermann is still trying to shake an image from 2004, a photograph of him flashing a victory sign during a trial to determine whether it was unlawful for him and five Mannesmann AG co-defendants to approve more than 57 million euros of bonuses for executives at the German mobile-phone company following its 154 billion-euro takeover by Vodafone AirTouch Plc. It was the nation’s first criminal probe into excessive executive pay.

While Ackermann apologized for the gesture, and his mea culpa was carried on newspaper front pages, he criticized Germany as “the only country where people who are successfully creating value have to go to court.” The case was settled in November 2006 for 5.8 million euros. Ackermann, who wasn’t accused of making any personal gain, paid 3.2 million euros.

Arrest Ackermann

Deutsche Bank’s profitability goal became a symbol for anti-capitalist sentiment in the country. Peter Sodann, the Left Party candidate for president, told a German newspaper in October 2008 that if he were a police commissioner he would arrest Ackermann. Two months later, Berlin-Brandenburg Bishop Wolfgang Huber attacked him for idolizing money.

“Deutsche Bank and its CEO are the target of all the people who feel our social or economic system is unfair or wrong,” said Horst Loechel, professor of economics at the Frankfurt School of Finance and Management. “He’s one of the most successful, if not the most successful, managers in Germany, but in the population Ackermann is still seen somewhat critically and the Mannesmann case is still in people’s minds.”

Ackermann is accompanied by a bodyguard at public events. In November, while speaking in Hamburg, protesters wearing masks stormed the stage. He invited them to participate in the discussion on the condition they remove their masks, according to people in the audience.

Letter Bomb

In December, an Italian anarchist group claimed responsibility for a letter bomb sent to Ackermann’s office. Alfred Herrhausen, a former Deutsche Bank CEO, was killed by the left-wing terrorist organization Red Army Faction in 1989.

The Deutsche Bank CEO’s calm, statesman-like demeanor has earned him the respect of fellow German benchmark DAX members, which are among the lender’s most important clients.

“He’s not scared by the roller coasters of public opinion,” said Juergen Grossmann, CEO of Germany’s second-largest utility, RWE AG, in an interview Jan. 17. “He always says what he stands for, and you can count on his word.”

Chairman Candidate

Ackermann hasn’t said what his next move might be after the curtain comes down at Deutsche Bank. He is on the boards of Siemens AG, Europe’s biggest engineering company, and Royal Dutch Shell Plc. He holds honorary positions at Johann Wolfgang Goethe University in Frankfurt and the London Business School. And he’s been mentioned as a candidate to be chairman of Zurich Financial Services AG.

“I presume it will be a mixture of all three,” Ackermann said when asked whether he’ll enter the private or public sector or academia. “I look forward to slowing down a bit.”

Wherever he lands, his last Davos cameo as head of Deutsche Bank is scheduled for tomorrow, when he will be on a panel titled “Trust and the Social Contract.” After that, the local hero may be coming home for good.

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