Big banks: From Greek bailout to Hamlet's castle
Two years ago, German Chancellor Angela Merkel wanted something that sounded quite reasonable. Instead of having European taxpayers foot the bill of a Greek bailout, why not make the banks help pay for it?
They were after all equally to blame for the bankruptcy Athens was facing. Goldman Sachs, the US investment bank giant, had for years sold so-called credit default swaps to the Greek government. This allowed the Hellenic government to hide its real deficit.
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So in October 2010, at a meeting in Deauville, Merkel and French President Nicolas Sarkozy decided that "Private Sector Involvement" (PSI) would be imperative for any further bailouts.
Athens had already received a €110 billion earlier that year via bilateral loans from the eurozone and the International Monetary Fund, but it became increasingly evident that more was needed.
Cue the bankers. Josef Ackermann, head of Germany's biggest bank, Deutsche Bank, was at the time head of the International Institute of Finance (IIF), the powerful lobby group representing over 400 of the world's biggest banks. Merkel had already dealt with him in the previous two years, when some German banks had to be bailed out.
Deutsche Bank itself had, under his leadership, taken up much more riskier activities and had been part of the investment frenzy speculating on the American real estate market and packaging the risk related to bad loans as top-rated products. These were then sold to regional banks in Germany.
Ackerman said he was "sceptical and reluctant" about accepting a deal with governments on a 'voluntary' debt restructuring for Greece as the German government envisaged.
Talking to his peers at his farewell party in June, Ackermann said he only agreed to start negotiation with the Greeks because his American deputy Charles Dallara, "convinced me that it's a fantastic platform in order to strengthen the IIF contribution to the most urgent, most complex and most challenging task in Europe."
Another of his deputies, Hung Tran, told this website that the initial work after the Merkel-Sarkozy decision was for the IIF to try and convince EU leaders to drop it.
"We went to Paris, to Brussels, to Berlin to explain that it was not a very good decision. However, since they already took that decision, they should do it in a cooperative way, abiding by the IIF principles: to have good faith negotiations with the sovereign debtor on a transparent basis, sharing enough information and equal treatment of creditors."
It took another year until PSI talks on Greece actually started.
"Negotiations took a long time and the economic conditions of the country continued to worsen. Therefore when the agreement came and the exchange was done, it involved a very significant haircut. But in the end, 83 percent of bondholders accepted the government's offer," Tran recalls.
As for public disappointment in Greece that the PSI deal and the €130 billion bailout focus too much on the banks and too little on the real economy, where hospitals have run out of money to pay for medicines, the IIF deputy said:
"The debt restructuring is a sacrifice on the part of investors, with bondholders losing more than half of the face value of the bond. I don't think any debtor country should complain about that."
No more losses for banks
Meanwhile, the other Merkel-Sarkozy decision - to establish a permanent bailout fund, the European Stability Mechanism - was subsequently heavily influenced by the IIF.
Greece, it was decided, would be a one-off. EU leaders in December 2011 stated that private creditors would never again take a loss in any future bailouts.
The ultimate bill for the banks' losses in Greece - passed on from the banks, insurance companies and pension funds that held Greek bonds - is paid by the average citizen, in higher interest rates on their loans and mortgages.
"At the end of the day, the citizens in Europe are the ones paying," Tran admits.
"The idea of subjecting the sovereign debt of a European country to credit risk is really not a good idea. The fallout of that will continue to be with us for many years to come. Particularly in this case of Greece, given the circumstances, I think it was worth it and a positive contribution to eventually a resolution of the crisis," he argues.
But Kenneth Haar from Corporate Europe Observatory, a transparency watchdog following IIF's dealings in Greece, thinks differently. "If the banks had gone to the markets and sold off the Greek bonds, they would have received much less. In the end it was very much a deal in their favour."
As for burying the PSI idea after the Greek experiment, Haar argues it sends the wrong signal. "What it all comes down to is the irresponsibility of banks. Now they are guaranteed that governments will come to their rescue if they engage in speculation. It is a bad thing to say no to haircuts."
Party in Hamlet's castle
The farewell party the IIF threw in June to honour its outgoing chief, Josef Ackermann, served to underline how well the banks are doing. Some 500 guests were shuttled in buses from Copenhagen, where the IIF spring meeting was being held, to Elsinore castle - an hour's drive up north.
Just renting the Hamlet castle cost some €40,000. Catering, transport and the fees for Alyson Cambridge, a soprano from the Metropolitan opera in New York - Ackermann being a big opera fan - as well as for a painter to have made his portrait - added several more tens of thousands of euros to the bill.
"This was a special event, paying tribute to an outgoing chairman. It is not extravagant," Abdessatar Ouanes, IIF's event manager told this website. He added that being state-owned property, the Hamlet castle was "not particularly exorbitant."
Part of the four-hour long dinner were video testimonials from high level politicians praising Ackermann's work. EU economics commissioner Olli Rehn said he had been "instrumental in restoring the confidence of the financial sector."
International Monetary Fund chief Christine Lagarde said he was a "great friend and a great dancer" whom she always respected, "even if not always of the same opinion."
And the head of the Paris-based OECD - a club of the most developed economies - said Ackermann was a "statesman, politician and banker."
Pictures showing him talking to Angela Merkel, to Russian President Vladimir Putin or to Saudi royals were projected onto the walls of the castle rooms where the guests were dining.
"We need weavers like Joe between politics and economics," said Charles Dallara, the outgoing IIF managing director. He recalled that the Swiss banker had been "always available," even when in Moscow and having to pick up the phone at 3am when Dallara and EU politicians were cobbling together the last details of the Greek bailout.
As for Ackermann, he said it was perhaps a good time to step down. He also left Deutsche Bank to return to a Swiss outfit, Zurich insurance company. His successor at the helm of the IIF is British banker Douglas Flint, the boss of HSBC, the world's second largest bank.
Speaking from a podium displaying his own portrait, Ackermann said he was proud to have boosted the profile of the IIF. "We have seized the opportunity of the crisis. The IIF became a body between the public and private sector."
Democratic legitimacy was never mentioned. Neither the fact that when seeking the banks' advice, governments were mostly betraying the public interest.
But in an ARD documentary produced in November 2011, Ackermann admitted that he had "told Merkel several times that I could not give advice against the interests of my shareholders." He also said it was "out of the question" that banks put the public interest first.
"What we need to think about are our global customers and shareholders. Politicians have to think first and foremost about their voters in their constituency. That is the clear difference between political and economic thinking," he told the German TV crew.
And that same interest prevails when it comes to regulation aimed at making banks more solid and deterring them from the 'casino mentality' that led to the 2008 financial crisis.
Banks in continental Europe, including Deutsche Bank, continue to hold very few real assets - cash, buildings - and take on risky bets. In their balance sheets, these appear as solid because they are secured via so-called credit default swaps, a form of privately-traded insurances.
Yet as was the case before the Lehman Brothers bankruptcy, EU regulators still have no clear picture on the amount of these insurances and whether they are worth what they promise.
In 2008, America's insurance giant AIG had to be bailed out with €144 billion worth of taxpayers' money to cover for insurances linked to real estate mortgages gone bad. Deutsche Bank received over €9 billion, and so did France's Societe Generale.
"At the moment banking legislation goes very much along the lines of what banks are saying. There is no real political will there to change things fundamentally. And this is because of the strong tight relationships between people in power and bank lobby groups," Kenneth Haar from Corporate Europe Observatory concludes.