Differing levels of efficiency
Betting on the wrong horse
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Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world |
THOMAS FISCHER DID not have the immediate future of his own bank in mind when he began throwing impromptu snippets from The Second Coming into an interview with Euromoney in 2005. But the former CEO of WestLB, as much an aficionado of WB Yeats and Dylan Thomas as of extravagant pinstripe suits and large cigars, could scarcely have chosen a more appropriate way of foretelling his own demise. For Europe’s largest economy, the recent upheavals at WestLB and a handful of other German banks might turn out to be precisely what was needed to accelerate change in the country’s hopelessly outdated and inefficient banking industry. But for WestLB, as well as for Fischer and a number of his erstwhile colleagues, things have indeed fallen apart spectacularly in recent months.
Nobody imagined it was going to be easy for one of Germany’s most colourful bankers when he was appointed chairman of WestLB’s management board in October 2003, or for the bank’s new chief risk officer, Matthijs van den Adel, whose appointment was announced on the same day. Fischer arrived in Düsseldorf having famously fallen out in 2002 with Josef Ackermann in his previous post at Deutsche Bank, where he was board member in charge of risk management. Van den Adel had previously been responsible for central balance sheet and risk management at Fortis.
For both, it was a brave move, given that WestLB had been a disaster area for years, with its catastrophic dalliance with principal finance, led by the bank’s femme fatale, Robin Saunders, contributing to the €2 billion loss it had sustained in 2002. As was to be expected from a one-time amateur boxer not short of self-belief, Fischer immediately made pugnacious noises about restoring WestLB’s profitability. But the truth was that he and van den Adel had signed up for a bank with a business model that had the solidity of wet cardboard and a reputation that was wobbling like blancmange.
Fitch Ratings, for one, said as much at the start of 2006, when its senior director, Thomas von Lüpke, told a state parliament hearing on the future of the region’s savings banks that WestLB’s business model was unsustainable. WestLB responded furiously, with Fischer himself somewhat indecorously describing Fitch’s comments as flapsig – which is best translated as boorish or loutish. That, says one local observer, was counterproductive because it succeeded only in exciting the attention of journalists and other analysts who otherwise would probably have ignored WestLB. And intensified public scrutiny was one of the last things WestLB needed at the time.
Nevertheless, Fischer harboured a number of ambitions, most notably to steer WestLB into a position from which it could lead consolidation in the German banking sector. For a while, he seemed to be delivering on at least some of his promises, and by March 2005 WestLB was making the outspoken prediction that "together with the Sparkassen we will become the leading German universal bank".
Those lofty ambitions were dealt a shuddering, terminal blow when it came to light earlier this year that some rogue traders on WestLB’s prop desk had punted the wrong way on the common and preference shares of German automakers. The general consensus is that Fischer would have been entirely ignorant of any shenanigans being committed by the traders in question, who were promptly dismissed. But that did not satisfy regulator BaFin – or its boss, Jochen Sanio – which allegedly found that management had failed to report the trading irregularities promptly. The result was that, at the end of July, Fischer and van den Adel were shown the same door that had been shown to two key protagonists on the prop trading desk, Friedhelm Breuers (in April) and Robert Stein (in July).
From bad to worse
Since then, things have stumbled from bad to worse at WestLB. At the end of August, it announced a worse than expected net first-half loss of €170 million, with the gains it had made in such areas as fee and commission income insufficient to offset the €604 million lost by its proprietary trading desk. Barely a fortnight later, WestLB’s old adversary, Fitch, downgraded the bank’s individual rating from D to D/E and placed it on Rating Watch Negative (RWN). The downgrade, said Fitch, reflected "the expected impact of the current capital market development on WestLB’s off-balance-sheet funding vehicles and potential losses in connection with off-balance-sheet risks, particularly the bank’s two structured investment vehicles..." Fitch’s disconcerting update about WestLB added that it was also concerned about the bank’s "continued poor underlying profitability", "uncertainty about management and strategy", and the "hit" on its reputation.
Some analysts say that the WestLB story is quite different from those that unfolded soon afterwards at IKB and Landesbank Sachsen, both of which were casualties of the US sub-prime crisis, because the WestLB debacle that brought Fischer and van den Adel down had nothing to do with what was happening in the US mortgage market. WestLB, though, has said that it has €1.25 billion of exposure to sub-prime (most of which is highly rated), which it has described as a "relatively limited" exposure – certainly not big enough to lead to heads rolling at board level.
The underlying drivers of the difficulties at WestLB, SachsenLB and IKB were, however, the same – which is that it in the overpopulated German banking market it is murderously difficult to earn a decent crust. Those that have tried to earn more by abandoning traditional Teutonic caution have generally fallen flat on their faces, and WestLB has had an uncanny knack in recent years of backing the wrong horses. "After its well-documented problems with BoxClever it seems that WestLB was pressured into chasing ROEs that were comparable with other international houses," says one banker.