Munich, Sunday November 15
The supervisory board of Bavarian giant Hypovereinsbank decides discretion is the better part of valour and exonerates chief executive Albrecht Schmidt of all blame for causing the biggest ruckus in Munich since the 1972 Olympics.
For two weeks the Munich tabloids lived on the feud between Schmidt and Eberhard Martini, his former counterpart at Bayerische Hypobank, over which of them might be least well equipped to run a financial institution. At the centre of the row was a bunch of dummy investments in east German development projects, signed in the euphoria of unification, which are now worth next to nothing. Hypobank had kept these on its balance sheet at close to book value until the rumour mills started. Then it wrote them down to 85%. But for Schmidt that wasn’t enough. As soon as he took charge of the newly merged Hypovereinsbank on September 1 he ordered a revaluation by the auditors. They concluded that this sad property portfolio had somehow, between February and October, lost another 35% in street value. Schmidt bit the bullet and announced a Dm3.5 billion ($2.1 billion) additional write-down warning that there would be an enquiry and “appropriate consequences for personnel”. Martini took this as a personal slight on his tenure at Hypobank, and lashed back: “If that’s what Schmidt thinks, he’s a man consumed by vanity and not fit to run a bank.”
Within days, however, they had kissed and made up. Big shareholder Allianz, which calls the shots in Bavaria, if not most of the German financial sector, had brought them to their senses. Allianz had done well by swapping its 25% stake in Hypobank for shares in the new, bigger Hypovereinsbank and it didn’t want any suggestion in public that those shares might have been overvalued.
Too late, however. Various shareholder groups and lawyers saw their opportunity and accused Hypobank and its auditors of overvaluing the bank by some Dm5 billion. The peacemakers hastened to point out that this was equivalent to a net present value of only Dm300 million or so, amortized over 20 to 30 years. What was all the fuss about, especially as the shortfall had been met from Hypobank’s legendary hidden reserves?
From snow-sprinkled Bavaria to frost-covered Frankfurt, a week in which Dresdner Bank opens its euro fixed-income and derivatives trading on the whole of the 28th floor. It’s party-time. Board members Gerd Häusler and Lenny Fischer quaff champagne while lofty Heinrich Linz and diminutive TJ Lim plan the trade that will unseat the euro. Heresy. These guys are set to defend Euribor to the last drop of their minimum reserve requirement.
At the European Central Bank staff are so hard-pressed that no-one besides head honcho Wim Duisenberg has time to utter an opinion until after Christmas, that is, until the irrevocable has happened. What about contingency plans in case there’s a crisis? What about the lender of last resort? There won’t be a crisis. We won’t need a lender of last resort. Don’t you discuss these things hypothetically? That would invite moral hazard. Anyway if we did discuss these things and if we did have a plan, we certainly wouldn’t tell you!
Feeling very small I console myself at the European Banking Congress, the annual bash for bankers and central bankers, at which the great and good read from prepared scripts and feed each other easy questions. Commerzbank’s Martin Kohlhaussen chairing the second panel of the day reminds BIS chief Andrew Crockett: “Recognition of internal models for determining capital requirements is the right approach.” Funny: Kohlhaussen’s own bank is one of the few whose internal model hasn’t yet got past the regulators.
Barclays chairman Andrew Buxton has some Luddite things to say about marking to market “the non-tradable assets of banks” which he regards as a “very dangerous concept”: it might make banks dump their loans to small and medium-size companies rather than take the hit on the chin. Sir Leon Brittan urges that regulation should be firm, but light, and comments, of regulatory arbitrage, that “the most deregulated country wins only in the short term”. The hallways of the Alte Oper are teeming with bankers waiting to bump into each other. Chain-smoking Dresdner chief Bernhard Walter in the shiny suit of a mafia don, flanked by his minders, appears briefly, then escapes to his high-rise to avoid the interview of his career. Paul Achleitner, Wunderkind of Goldman Sachs, dodges the big question on everyone’s lips: is this the weekend that Deutsche Bank will buy Bankers Trust, a deal masterminded by, guess who, Goldman Sachs?
After lunch, a disembodied Greenspan, levitated by satellite like the mighty Mekon, pronounces on exchange rate targeting – good or bad? Bad, says Greenspan, bad says Eddie George, bad says Tietmeyer, bad says Duisenberg, and they all go off to dinner.
At the Charles Club there’s a less formal gathering of rocket scientists: a reunion for the 10th anniversary of the German futures exchange now called Eurex, better known as the DTB. Jörg Franke, the Helmut Schmidt of futures, lays out his usual repertoire of jokes; Stefan Volk, the most capped player on the Frankfurt scene (Dresdner, Mitsubishi, UBS, Paribas) defends Merton Miller’s opinions on Metallgesellschaft. It’s a time for nostalgia and whimsy, especially for those who left Frankfurt too early to bet on Berlin as the next financial centre. There’s a Dm1 billion hole which says it isn’t.
Finally to the Schifferstrasse and the Maingau Stuben, the only restaurant in Frankfurt (sorry, Sachsenhausen) to offer nouvelle German cuisine. Laura is taking her job as food critic extremely seriously, writing notes under the table as I romp through the caviar and several helpings of goose – hers is the chestnut-fed pheasant shot on the Taunus that morning. The waiters get more attentive as we order all the recommended wines, then lose interest as our bloated look sets in. Such gourmandisme clearly needs intensive training. The evening degenerates as we tell Herr Ober that we thought the dessert would come with cream not ice cream. “That’s not ice cream,” he points out (the customer is not always right), “it’s cream that happens to be frozen.”
