Across Deutsche’s cavernous trading floors in New York and London, recklessness and disregard for rules were the norm. This, of course, was nothing new: Edson Mitchell had encouraged a cavalier attitude from the get-go. But he had been restrained, at least sometimes, by rigorous, old-fashioned German overseers—not a profit-obsessed enabler like Ackermann. And of course Mitchell had Bill Broeksmit as his sidekick—and everyone, back then, listened to Bill. That was no longer the case today.
Troy Dixon was one of Deutsche’s brash young traders, his unit specializing in bonds made up of home loans, an offshoot of Rajeev Misra’s old group. Dixon was straight out of central casting (except that he was African American, and Hollywood generally didn’t cast black men in movies about Wall Street). When things were going well, he would hoot and holler and everyone would know his team was on a roll. When things weren’t looking good, he would slouch at his desk, glum and silent.
In the summer of 2009, Dixon’s unit had made a massive wager that Americans with high-interest mortgages would not default—partly reversing the bank’s earlier Big Short on the U.S. housing market. Dixon’s team amassed a gargantuan $14 billion position of these mortgage bonds. At first the trades were making money, but risk managers worried that Dixon was cutting corners and that his bets were so massive that if they went wrong, it would present a very big problem for the entire company. The risk guys spent weeks compiling a dossier detailing how Dixon was on the verge of spinning out of control. They presented the materials to Broeksmit, who agreed that this didn’t look safe. He set up a meeting with Dixon and urged him to rein things in. Dixon refused. A week or two later, Broeksmit returned to the risk managers, who looked up to him as a rare voice of reason and restraint in the bank’s upper ranks. He said he had received “strong pushback” from above in his efforts to curtail Dixon.
Broeksmit kept noodging, though, and Dixon griped to his team that some nerd—a guy clearly lacking the killer instincts that propelled people to the top of Wall Street—was harassing him. Troy and his team were pretty sure Bill didn’t grasp the nuances of their trade. It was too complex, they believed, for someone of his age and lack of sophistication to comprehend.
Broeksmit could tell he was pissing off Dixon, and he decided to try to smooth things over. Bill invited Troy and his team out to dinner at an Italian restaurant in Manhattan’s Tribeca neighborhood. The men sat around a large candlelit table. Floral tapestries hung on exposed-brick walls. The dinner got off to an awkward start, with Broeksmit and Dixon continuing to bicker about the wisdom of the mortgage trades. Neither man would drop it. Across the table, some of the traders snickered to one another that Bill was out of his depth. The conversation eventually meandered to seemingly safer topics like Jerry Sandusky, the former college football coach who had just been sentenced to prison for child molestation. Broeksmit had never heard of him. When someone remarked that Sandusky was in for a tough time in prison, Bill asked why. The traders looked at each other—is this guy for real? Someone answered that it was because he molested boys. Bill asked, “So?” He didn’t get it: Child molesters are the most reviled crooks in a prison. Broeksmit kept asking questions that betrayed his ignorance about college football and prison hierarchies. The traders started chuckling again. This old man was clueless. At the end of the meal, Bill picked up the tab and bolted for the subway, hardly bothering to say goodbye. Dixon and the other traders went off to a bar to laugh about him and kept mocking him at work for several days: “This guy is fucking weird.”
Here was a powerful sign of the generational shift that had swept Wall Street and Deutsche in the decades since Broeksmit had been a pioneer of the derivatives market. Traders who had grown up viewing banks as casinos were replacing those who had conceived of derivatives as vehicles to make money by helping clients hedge their risks. The new breed of gamblers didn’t realize that they didn’t know everything. (Dixon’s trades ultimately blew up, costing Deutsche $541 million and attracting the attention of federal regulators.) Bill was astute and sensitive; surely he didn’t miss the unsubtle cues. His time had passed.
In 2010, Deutsche hired a young man named Eric Ben-Artzi to work in its risk-management group, with a specific focus on its holdings of hard-to-value derivatives. Ben-Artzi had grown up in Israel in a family full of big, stubborn personalities. His grandfathers fought to secure Israel’s independence. One of his uncles was a paratrooper killed in action. Another uncle was Benjamin Netanyahu, the once and future prime minister. Ben-Artzi’s brother had become Israel’s most famous, or infamous, refusenik—a conscientious objector who was locked up for shirking his mandatory conscription in Israel’s armed forces. Less dramatically, Eric became a mathematician and computer programmer. Like so many others with those qualifications, he had drifted into banking, lured by the money and the challenges of solving complex financial riddles. But after a spell at Goldman Sachs, he discovered that he didn’t have the right constitution for Wall Street. The way he saw it, he wasn’t aggressive enough to be a salesman and wasn’t greedy enough to be a banker. His goal was to ease into academia, and he figured the Deutsche gig—with a heavy emphasis on theoretical research about how to determine the value of derivatives—was a step in the right direction. He also figured a giant international bank knew what it was doing.
Ben-Artzi’s job consisted in part of using Microsoft Excel to build models to check the valuation of derivatives and to see how they would fare in various scenarios, including once-in-a-millennium financial storms. Ben-Artzi quickly realized the bank’s clunky systems produced fuzzy, imprecise results. One of the biggest problems was that the trades he was plugging into Excel were leveraged—meaning the traders had made them using borrowed money, a tactic that could increase their profitability but also made them much riskier—but the numbers he had been given didn’t account for the financial consequences of that leverage. In other words, they were greatly underestimating the risk involved in the transactions. At first Ben-Artzi gave the bank the benefit of the doubt—presumably this was the result of sloppiness, not fraud, and the bank’s higher-ups didn’t realize how inadequate their models were. Within a few weeks, though, he had asked enough questions and received enough stonewalling to conclude that executives didn’t want to know why the models were wrong; they just wanted results that would confirm the wisdom of the present course. When he flagged the leverage problem to his superiors, he was told not to ask so many questions. When he persisted, a superior marched over to his desk and shouted at him to stop.
Like his relatives, Ben-Artzi was stubborn, and he didn’t stop. The more he dug, the more concerned he became. Trades that the bank was valuing in the billions of dollars appeared to be basically worthless. This did not look like an accident. The bank appeared to have been systematically inflating the value of tens of billions of dollars of derivatives. This meant that Deutsche’s much-touted resilience during the financial crisis had been illusory, the product of bogus accounting. That was so stunning that Ben-Artzi initially doubted it could be true.
Soon his doubts faded. The risk department at the time was run by Hugo Bänziger, the former tank commander. Shortly after Ben-Artzi joined Deutsche, Bänziger held a town hall meeting for employees in the basement of 60 Wall Street. When a senior risk manager asked about how well the bank was coping with all of the government authorities examining Deutsche, Bänziger derided the “fucking regulators.” Ben-Artzi wondered whether this was a normal attitude at Deutsche—it certainly wasn’t how Goldman had operated. The answer came a few months later, when Ben-Artzi attended a bank retreat at a hotel in Rome. This time another senior risk manager gave a talk about how employees should craft their explanations about risk to suit different audiences. If they were talking to a regulator, for example, they should play down the amount of risk involved. Sitting in the heavily air-conditioned conference room, Ben-Artzi and his colleagues exchanged nervous glances as the executive counseled them on how to pull the wool over the authorities’ eyes. The executive wrapped up his presentation on an ominous note: If risk managers didn’t let traders take chances, he warned, the bank would have to shrink, and that would mean fewer risk managers would have jobs. To Ben-Artzi and his dumbfounded colleagues, it sounded like a threat: Play ball, or risk losing your job.
Ben-Artzi had seen enough. It was time to follow his brother’s lead; he had to stand up for his principles. He dialed an internal bank hotline to blow the whistle on what he regarded as serious misconduct involving how the bank was valuing its derivatives—the fraud was so vast, he and some colleagues believed, that Deutsche would have been insolvent during the financial crisis if it had come clean about its assets. Worried that Deutsche might point the finger at him for the wrongdoing he was revealing, he also lodged a complaint with the Securities and Exchange Commission. Soon Deutsche barred Ben-Artzi from any further examination of the bank’s derivatives and, not long after, fired him. Another employee who similarly warned the SEC that Deutsche had hidden crippling losses was pushed aside, too. Deutsche was sweeping its plentiful problems under an enormous carpet.
Around lunchtime on Wednesday, December 7, 2011, employees in the basement mailroom of Deutsche’s Twin Towers in Frankfurt noticed a bulky brown envelope addressed to Joe Ackermann. When they ran it through an X-ray machine, they spotted what looked like shrapnel. Police and a bomb squad rushed over, their sirens screaming. Inside the envelope was a small explosive device, sent by an Italian anarchist group. An accompanying letter attacked “banks, bankers, fleas, and bloodsuckers.”
Like Abs and Herrhausen before him, Ackermann had assumed the mantle of statesman. He traveled the world on a private NetJets plane, dining with world leaders including Vladimir Putin and George W. Bush—not to mention a who’s who of European politicians and royals. With Europe now in its own financial crisis, and entire countries like Greece and Ireland falling apart, Ackermann had become a sort of shadow finance minister for the entire continent. Germany was Europe’s most powerful country, dictating bailout terms for failing nations, and it was Ackermann to whom Germany’s chancellor, Angela Merkel, regularly turned for financial advice. But unlike the role that Herrhausen had played, such as urging the forgiveness of the debts of third-world countries, the advice Ackermann provided tended to benefit banks—and one bank in particular. Restructuring Greece’s crushing debt in a way that would help that country recover but that would saddle its creditors with losses was dangerous, he warned. And indeed it was dangerous—for Deutsche, which owned boatloads of Greek government bonds. (Because of their riskiness, the bonds came with high interest rates, which had attracted profit-hungry institutions.) Ackermann got his way, and the Greek government, unable to dramatically reduce its public debts, needed to find other, draconian ways to come up with money, such as slashing budgets and selling prized public assets. The results were savage: Islands, marinas, and airports were put up for sale. Unemployment, homelessness, crime, and suicide rates soared.
Ackermann’s successful fearmongering didn’t endear him to the public. In many parts of the world, he had become a villainous figure. A Berlin songwriter composed a satirical ditty that cheerfully called for his assassination. Several months before the letter bomb was sent, the International Monetary Fund’s former chief economist branded Ackermann as “one of the most dangerous bankers in the world.”
In the United States, the Occupy Wall Street movement had taken hold in Lower Manhattan, with protesters brandishing placards, sleeping in tents—and transforming the public, tree-lined, and well-heated atrium of Deutsche’s headquarters at 60 Wall Street into a locus for activists. American regulators, too, had Deutsche in their sights. During the head-in-the-sand regulatory era of the Clinton and the second Bush administrations, Deutsche had housed its vast Wall Street business in a few shell companies that weren’t subject to American oversight. At the time, the government’s assumption had always been that American regulators didn’t need to worry about a giant foreign bank’s U.S. operations because the parent company would rescue them if they encountered trouble. But the financial crisis had shown that was wishful thinking; there were plenty of examples of frail banks leaving their foreign subsidiaries to die lonely deaths. And Deutsche’s wobbly finances—in particular its bottomless pit of derivatives and its exposure to the European economic crisis—seemed to put the American outpost at risk of being abandoned in a pinch. So regulators in the United States introduced rules that required banks like Deutsche to buttress their American operations.
Deutsche’s first response was to tinker with the legal structure of its main U.S. business entity to exploit a gap in the law (which initially didn’t apply to certain types of holding companies) and evade the new rules. But when that plan came to light, angry lawmakers and regulators slammed the loophole shut. Deutsche shrieked in protest: Requiring more money to be kept in the United States meant less money being available elsewhere in the world, and that could hurt the global economy, Ackermann threatened. The claim was implausible, but he was well positioned to lean on regulators. He chaired a powerful lobbying organization called the Institute of International Finance. When policymakers—including senior U.S. officials like Treasury secretary Tim Geithner and Federal Reserve chairman Ben Bernanke—convened gatherings to hash out new rules, the IIF’s representatives, often Ackermann himself, generally were in the room. (The IIF also was one of the most outspoken advocates against restructuring the debt of Greece and other stricken countries in southern Europe.)
At a time when regulators seemed to be gaining the upper hand, the reality was more complex. Different countries jealously guarded their authority over their domestic banks. Deutsche more than almost any other multinational financial institution deftly managed to exploit rivalries among regulators to shield itself from tougher rules or greater outside scrutiny. German regulators—in particular an agency called BaFin, which prided itself on protecting its local companies—rushed to circle the wagons. They pushed to water down proposed international rules that would cap how much risk banks like Deutsche were allowed to take. When foreign governments tried to investigate the bank, BaFin ran interference, insisting that any demands for information be diverted into a labyrinth of German bureaucracy.
Frustrated American and British regulators took to deriding their German counterparts as “the representatives of Deutsche Bank” because they were so clearly doing its bidding. For now, Deutsche executives sat back and enjoyed the regulatory turf war. Their amusement wouldn’t last.