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Friday, October 14, 2011

Walter Wriston and Joseph Ackermann

The legendary CEO of Citibank Walter Wriston went down into history for his famous quote during the 1970s: "Countries can't go bankrupt. Citibank has never lost a dime on sovereign loans and it will not ever!" Over the years, Mr. Wriston and his bank did have to learn.

Mr. Ackermann apparently has not yet found time to study Citibank's and Mr. Wriston's learning curve during the 1970s and 1980s.

In today's lengthy interview with CNBC, Mr. Ackermann emphasized that the problem was not one of recapitalizing banks; it was not one of bailing out banks. Instead, he stated emphatically the following: "Measures must be taken that sovereign loans are made risk-free again, which is what they should be!"

Come again, Mr. Ackermann! Who has the obligation to make sovereign loans risk-free? Better yet, has anyone ever promised that sovereign loans would be risk-free? If sovereign loans are risk-free, why do markets price the risk of, say, Germany differently than the risk of, say, Australia?

Mr. Ackermann, you proudly mentioned that Deutsche Bank has been able to reduce its Greek exposure significantly. How did you do that? If you did that in the free markets, your P+L statement would show that because of the discount on Greek paper in free markets. Or did you mean to say that Deutsche Bank was able to unload much of its Greek risk at near-par prices to the ECB?

I grant you that Deutsche Bank is one of the best suited in the world to cope with the present crisis. But this does not give you the right to say irresponsible (and silly!) things.  If you had been responsible (and a true representative of the classic Deutsche Bank culture), you would have said something like the following:

"I believe the time has come for all banks to mark the value of their sovereign assets down to realistic market prices, cost it what it may. If it means that we may have to request (temporarily) public funds to rebuild our capital & reservers, we will do that. We at Deutsche Bank have decided to be the first ones to follow this policy and we expect others to follow suit!"

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