Today, Michael Lewis performs a proctological examination of German national character in the twenty-first century. If this is a (fair & balanced) command to Bück Dich (“Bend Over”), so be it.
[x Vanity Fair]
It’s The Economy, Dummkopf!
By Michael Lewis
Tag Cloud of the following article
By the time I arrived in Hamburg the fate of the financial universe seemed to turn on which way the German people jumped. Moody’s was set to downgrade the Portuguese government’s debt to junk-bond status, and Standard & Poor’s had hinted darkly that Italy might be next. Ireland was about to be downgraded to junk status, too, and there was a very real possibility that the newly elected Spanish government might seize the moment to announce that the old Spanish government had miscalculated, and owed foreigners a lot more money than they previously imagined. Then there was Greece. Of the 126 countries with rated debt, Greece now ranked 126th: the Greeks were officially regarded as the least likely people on the planet to repay their debts. As the Germans were not only the biggest creditor of the various deadbeat European nations but their only serious hope for future funding, it was left to Germans to act as moral arbiter, to decide which financial behaviors would be tolerated and which would not. As a senior official at the Bundesbank put it to me, “If we say ‘no,’ it’s ‘no.’ Nothing happens without Germany. This is where the losses come to live.” Just a year ago, when German public figures called Greeks cheaters, and German magazines ran headlines like Why don't you sell your islands, you bankrupt Greeks? , ordinary Greeks took it as an outrageous insult. In June of this year the Greek government started selling islands or at any rate created a fire-sale list of a thousand properties—golf courses, beaches, airports, farmlands, roads—that they hoped to sell, to help repay their debts. It was safe to say that the idea for doing this had not come from the Greeks.
To no one but a German is Hamburg an obvious place to spend a vacation, but it happened to be a German holiday, and Hamburg was overrun by German tourists. When I asked the hotel concierge what there was to see in his city, he had to think for a few seconds before he said, “Most people just go to the Reeperbahn.” The Reeperbahn is Hamburg’s red-light district, the largest red-light district in Europe, according to one guidebook, though you have to wonder how anyone figured that out. And the Reeperbahn, as it happens, was why I was there.
Perhaps because they have such a gift for creating difficulties with non-Germans, the Germans have been on the receiving end of many scholarly attempts to understand their collective behavior. In this vast and growing enterprise, a small book with a funny title towers over many larger, more ponderous ones. Published in 1984 by a distinguished anthropologist named Alan Dundes, Life Is Like a Chicken Coop Ladder set out to describe the German character through the stories that ordinary Germans liked to tell one another. Dundes specialized in folklore, and in German folklore, as he put it, “one finds an inordinate number of texts concerned with anality. Scheisse (shit), Dreck (dirt), Mist (manure), Arsch (ass).... Folksongs, folktales, proverbs, riddles, folk speech—all attest to the Germans’ longstanding special interest in this area of human activity.”
He then proceeded to pile up a shockingly high stack of evidence to support his theory. There’s a popular German folk character called der Dukatenscheisser (“The Money Shitter”), who is commonly depicted crapping coins from his rear end. Europe’s only museum devoted exclusively to toilets was built in Munich. The German word for “shit” performs a vast number of bizarre linguistic duties—for instance, a common German term of endearment was once “my little shit bag.” The first thing Gutenberg sought to publish, after the Bible, was a laxative timetable he called a “Purgation-Calendar.” Then there are the astonishing number of anal German folk sayings: “As the fish lives in water, so does the shit stick to the asshole!,” to select but one of the seemingly endless examples.
Dundes caused a bit of a stir, for an anthropologist, by tracking this single low national character trait into the most important moments in German history. The fiercely scatological Martin Luther (“I am like ripe shit, and the world is a gigantic asshole,” Luther once explained) had the idea that launched the Protestant Reformation while sitting on the john. Mozart’s letters revealed a mind, as Dundes put it, whose “indulgence in fecal imagery may be virtually unmatched.” One of Hitler’s favorite words was Scheisskerl (“shithead”): he apparently used it to describe not only other people but himself as well. After the war, Hitler’s doctors told U.S. intelligence officers that their patient had devoted surprising energy to examining his own feces, and there was pretty strong evidence that one of his favorite things to do with women was to have them poop on him. Perhaps Hitler was so persuasive to Germans, Dundes suggested, because he shared their quintessential trait, a public abhorrence of filth that masked a private obsession. “The combination of clean and dirty: clean exterior-dirty interior, or clean form and dirty content—is very much a part of the German national character,” he wrote.
The anthropologist confined himself mainly to a study of low German culture. (For those hoping to examine coprophilia in German high culture he recommended another book, by a pair of German scholars, entitled The Call of Human Nature: The Role of Scatology in Modern German Literature.) Still, it was hard to come away from his treatise without the strong sense that all Germans, high and low, were a bit different from you and me—a point he made in the introduction to the paperback version of his book. “The American wife of a German-born colleague confessed to me that she understood her husband much better after reading the book,” he wrote. “Prior to that time, she had wrongly assumed that he must have some kind of peculiar psychological hang-up inasmuch as he insisted upon discussing at great length the state of his latest bowel movements.”
The Hamburg red-light district had caught Dundes’s eye because the locals made such a big deal of mud-wrestling. Naked women fought in a metaphorical ring of filth while the spectators wore plastic caps, a sort of head condom, to avoid being splattered. “Thus,” wrote Dundes, “the audience can remain clean while enjoying dirt!” Germans longed to be near the shit, but not in it. This, as it turns out, was an excellent description of their role in the current financial crisis.
A week or so earlier, in Berlin, I had gone to see Germany’s deputy minister of finance, a 44-year-old career government official named Jörg Asmussen. The Germans are now in possession of the only Finance Ministry in the big-time developed world whose leaders don’t need to worry whether their economy will collapse the moment investors stop buying their bonds. As unemployment in Greece climbs to the highest on record (16.2 percent at last count), it falls in Germany to 20-year lows (6.9 percent). Germany appears to have experienced a financial crisis without economic consequences. They’d donned head condoms in the presence of their bankers, and so they had avoided being splattered by their mud. As a result, for the past year or so the financial markets have been trying and failing to get a bead on the German people: they can probably afford to pay off the debts of their fellow Europeans, but will they actually do it? Are they now Europeans, or are they still Germans? Any utterance or gesture by any German official anywhere near this decision for the past 18 months has been a market-moving headline, and there have been plenty, most of them echoing German public opinion, and expressing incomprehension and outrage that other peoples can behave so irresponsibly. Asmussen is one of the Germans now being obsessively watched. He and his boss, Wolfgang Schäuble, are the two German officials present in every conversation between the German government and the deadbeats.
The Finance Ministry, built in the mid-1930s, is a monument to both the Nazis’ ambition and their taste. A faceless butte, it is so big that if you circle it in the wrong direction it can take you 20 minutes to find the front door. I circle it in the wrong direction, then sweat and huff to make up for lost time, all the while wondering if provincial Nazis in from the sticks had had the same experience, wandering outside these forbidding stone walls and trying to figure out how to get in. At length I find a familiar-looking courtyard: the only difference between it and famous old photographs of it is that Hitler is no longer marching in and out of the front door, and the statues of eagles perched atop swastikas have been removed. “It was built for Göring’s Air Ministry,” says the waiting Finance Ministry public-relations man, who is, oddly enough, French. “You can tell from the cheerful architecture.” He then explains that the building is so big because Hermann Göring wanted to be able to land planes on its roof.
I have arrived about three minutes late, but the German deputy minister of finance runs a full five minutes later, which, I will learn, is viewed by Germans almost as a felony. He apologizes a lot more than he needs to for the delay. He wears the slender-framed spectacles of a German film director, and is extremely fit and bald, but by choice rather than circumstance. Extremely fit white men who shave their heads are making a statement, in my experience of them. “I don’t need body fat and I don’t need hair,” they seem to be saying, while also implying that anyone who does is a wuss. The deputy finance minister even laughs just as all extremely fit men with shaved heads should laugh, if they want to remain in character. Instead of opening his mouth to allow the air to pass he purses his lips and snorts the sound out through his nose. He may need laughter as much as other men, but he needs less air to laugh with. His desk is a template of self-discipline. It is alive with implied activity—legal pads, Post-it notes, manila folders—but every single object on it is perfectly aligned with all the others, and with the edges of the desk. Every angle is precisely 90 degrees. But the most striking optional décor is a big white sign on the wall beside the desk. It’s in German but translates easily back into the original English:
The secret of success is to understand the point of view of others.
—Henry Ford
This surprises me. It’s not at all what an extremely fit bald man should have as his mantra. It’s soft . The deputy finance minister further disturbs my wild assumptions about him by speaking clearly, even recklessly, about subjects most finance ministers believe it is their job to obscure. He offers up, without much prompting, that he has just finished reading the latest unpublished report by I.M.F. investigators on the progress made by the Greek government in reforming itself.
“They have not sufficiently implemented the measures they have promised to implement,” he says simply. “And they have a massive problem still with revenue collection. Not with the tax law itself. It’s the collection which needs to be overhauled.”
Greeks are still refusing to pay their taxes, in other words. But it is only one of many Greek sins. “They are also having a problem with the structural reform. Their labor market is changing—but not as fast as it needs to,” he continues. “Due to the developments in the last 10 years, a similar job in Germany pays 55,000 euros. In Greece it is 70,000.” To get around pay restraints in the calendar year the Greek government simply paid employees a 13th and even 14th monthly salary—months that didn’t exist. “There needs to be a change of the relationship between people and the government,” he continues. “It is not a task that can be done in three months. You need time.” He couldn’t put it more bluntly: if the Greeks and the Germans are to coexist in a currency union, the Greeks need to change who they are.
This is unlikely to happen soon enough to matter. The Greeks not only have massive debts but are still running big deficits. Trapped by an artificially strong currency, they cannot turn these deficits into surpluses, even if they do everything that outsiders ask them to do. Their exports, priced in euros, remain expensive. The German government wants the Greeks to slash the size of their government, but that will also slow economic growth and reduce tax revenues. And so one of two things must happen. Either Germans must agree to a new system in which they would be fiscally integrated with other European countries as Indiana is integrated with Mississippi: the tax dollars of ordinary Germans would go into a common coffer and be used to pay for the lifestyle of ordinary Greeks. Or the Greeks (and probably, eventually, every non-German) must introduce “structural reform,” a euphemism for magically and radically transforming themselves into a people as efficient and productive as the Germans. The first solution is pleasant for Greeks but painful for Germans. The second solution is pleasant for Germans but painful, even suicidal, for Greeks.
The only economically plausible scenario is that Germans, with a bit of help from a rapidly shrinking population of solvent European countries, suck it up, work harder, and pay for everyone else. But what is economically plausible appears to be politically unacceptable. The German people all know at least one fact about the euro: that before they agreed to trade in their deutsche marks their leaders promised them, explicitly, they would never be required to bail out other countries. That rule was created with the founding of the European Central Bank (E.C.B.)—and was violated a year ago. The German public is every day more upset by the violation—so upset that Chancellor Angela Merkel, who has a reputation for reading the public mood, hasn’t even bothered to try to go before the German people to persuade them that it might be in their interests to help the Greeks.
That is why Europe’s money problems feel not just problematic but intractable. It’s why Greeks are now mailing bombs to Merkel, and thugs in Berlin are hurling stones through the window of the Greek consulate. And it’s why European leaders have done nothing but delay the inevitable reckoning, by scrambling every few months to find cash to plug the ever growing economic holes in Greece and Ireland and Portugal and praying that even bigger and more alarming holes in Spain, Italy, and even France refrain from revealing themselves.
U ntil now the European Central Bank, in Frankfurt, has been the main source of this cash. The E.C.B. was designed to behave with the same discipline as the German Bundesbank, but it has morphed into something very different. Since the start of the financial crisis it has bought, outright, something like $80 billion of Greek and Irish and Portuguese government bonds, and lent another $450 billion or so to various European governments and European banks, accepting virtually any collateral, including Greek government bonds. But the E.C.B. has a rule—and the Germans think the rule very important—that they cannot accept as collateral bonds classified by the U.S. ratings agencies as in default. Given that they once had a rule against buying bonds outright in the open market, and another rule against government bailouts, it’s a little odd that they have gotten so hung up on this technicality. But they have. If Greece defaults on its debt, the E.C.B. will not only lose a pile on its holdings of Greek bonds but must return the bonds to the European banks, and the European banks must fork over $450 billion in cash. The E.C.B. itself might face insolvency, which would mean turning for funds to its solvent member governments, led by Germany. (The senior official at the Bundesbank told me they already have thought about how to deal with the request. “We have 3,400 tons of gold,” he said. “We are the only country that has not sold its original allotment from the [late 1940s]. So we are covered to some extent.”) The bigger problem with a Greek default is that it might well force other European countries and their banks into default. At the very least it would create panic and confusion in the market for both sovereign and bank debt, at a time when a lot of banks and at least two big European debt-ridden countries, Italy and Spain, cannot afford panic and confusion.
At the bottom of this unholy mess, from the point of view of the German Finance Ministry, is the unwillingness, or inability, of the Greeks to change their behavior.
That was what the currency union always implied: entire peoples had to change their ways of life. Conceived as a tool for integrating Germany into Europe, and preventing Germans from dominating others, it has become the opposite. For better or for worse, the Germans now own Europe. If the rest of Europe is to continue to enjoy the benefits of what is essentially a German currency, they need to become more German. And so, once again, all sorts of people who would rather not think about what it means to be “German” are compelled to do so.
Jörg Asmussen offers the first hint of an answer—in his personal behavior. He is a type familiar in Germany but absolutely freakish in Greece—or for that matter the United States: a keenly intelligent, highly ambitious civil servant who has no other desire but to serve his country. His sparkling curriculum vitae is missing a line that would be found on the résumés of men in his position most anywhere else in the world—the line where he leaves government service for Goldman Sachs to cash out. When I asked another prominent German civil servant why he hadn’t taken time out of public service to make his fortune working for some bank, the way every American civil servant who is anywhere near finance seems to want to do, his expression changed to alarm. “But I could never do this,” he said. “It would be illoyal!”
Asmussen agrees and then addresses the German question more directly. The curious thing about the eruption of cheap and indiscriminate lending of money during the past decade was the different effects it had from country to country. Every developed country was subjected to more or less the same temptation, but no two countries responded in precisely the same way. The rest of Europe, in effect, used Germany’s credit rating to indulge its material desires. They borrowed as cheaply as Germans could to buy stuff they couldn’t afford. Given the chance to take something for nothing, the German people alone simply ignored the offer. “There was no credit boom in Germany,” says Asmussen. “Real-estate prices were completely flat. There was no borrowing for consumption. Because this behavior is rather alien to Germans. Germans save whenever possible. This is deeply in German genes. Perhaps a leftover of the collective memory of the Great Depression and the hyperinflation of the 1920s.” The German government was equally prudent because, he went on, “there is a consensus among the different parties about this: if you’re not adhering to fiscal responsibility, you have no chance in elections, because the people are that way.”
I n that moment of temptation, Germany became something like a mirror image of Iceland and Ireland and Greece and, for that matter, the United States. Other countries used foreign money to fuel various forms of insanity. The Germans, through their bankers, used their own money to enable foreigners to behave insanely.
This is what makes the German case so peculiar. If they had been merely the only big, developed nation with decent financial morals, they would present one sort of picture, of simple rectitude. But they had done something far more peculiar: during the boom German bankers had gone out of their way to get dirty. They lent money to American subprime borrowers, to Irish real-estate barons, to Icelandic banking tycoons to do things that no German would ever do. The German losses are still being toted up, but at last count they stand at $21 billion in the Icelandic banks, $100 billion in Irish banks, $60 billion in various U.S. subprime-backed bonds, and some yet-to-be-determined amount in Greek bonds. The only financial disaster in the last decade German bankers appear to have missed was investing with Bernie Madoff. (Perhaps the only advantage to the German financial system of having no Jews.) In their own country, however, these seemingly crazed bankers behaved with restraint. The German people did not allow them to behave otherwise. It was another case of clean on the outside, dirty on the inside. The German banks that wanted to get a little dirty needed to go abroad to do it.
About this the deputy finance minister has not that much to say. He continues to wonder how a real-estate crisis in Florida could end with all these losses in Germany.
A German economist named Henrik Enderlein, who teaches at the Hertie School of Governance, in Berlin, has described the radical change that occurred in German banks beginning about 2003. In a paper in progress, Enderlein points out that “many observers initially believed German banks would be relatively less exposed to the crisis. The contrary turned out to be the case. German banks ended up being among the most severely affected in continental Europe and this despite relatively favorable economic conditions.” Everyone thought that German bankers were more conservative, and more isolated from the outside world, than, say, the French. And it wasn’t true. “There had never been any innovation in German banking,” says Enderlein. “You gave money to some company, and the company paid you back. They went [virtually overnight] from this to being American. And they weren’t any good at it.”
What Germans did with money between 2003 and 2008 would never have been possible within Germany, as there was no one to take the other side of the many deals they did which made no sense. They lost massive sums, in everything they touched. Indeed, one view of the European debt crisis—the Greek street view—is that it is an elaborate attempt by the German government on behalf of its banks to get their money back without calling attention to what they are up to. The German government gives money to the European Union rescue fund so that it can give money to the Irish government so that the Irish government can give money to Irish banks so the Irish banks can repay their loans to the German banks. “They are playing billiards,” says Enderlein. “The easier way to do it would be to give German money to the German banks and let the Irish banks fail.” Why they don’t simply do this is a question worth trying to answer.
The 20-minute walk from the German Finance Ministry to the office of the chairman of Commerzbank, one of Germany’s two giant private banks, is punctuated by officially sanctioned memories: the new Holocaust Memorial, two and a half times the acreage occupied by the U.S. Embassy; the new street beside it, called Hannah Arendt Street; the signs pointing to Berlin’s new Jewish Museum; the park that contains the Berlin Zoo, where, after spending decades denying they had ever mistreated Jews, they have newly installed, on the Antelope House, a plaque acknowledging their Nazi-era expropriation of shares in the zoo owned by Jews. Along the way you also pass Hitler’s bunker, but you’d never know it was there, as it has been paved over for a parking lot, and the small plaque that commemorates it is well hidden.
The streets of Berlin can feel like an elaborate shrine to German guilt. It’s as if the Germans have been required to accept that they will always play the villain. Hardly anyone still alive is responsible for what happened: now everyone is. But when everyone is guilty, no one is.
At any rate, if some Martian landed on the streets of Berlin knowing nothing of its history, he might wonder: who are these people called “the Jews” and how did they come to run this place? But there are no Jews in Germany, or not many. “They never see Jews,” says Gary Smith, the director of the American Academy of Berlin. “Jews are unreal to them. When they think of Jews they think of victims.” The farther away the German people get from their victims, the more conspicuously they commemorate them. Of course, no German in his right mind actually wants to sit around remembering the terrible crimes committed by his ancestors—and there are signs, including the memorials, that they are finding ways to move on. A good friend of mine, a Jew whose family was driven out of Germany in the 1930s, recently visited a German consulate to apply for a passport. He already held one European passport, but he worried that the European Union might one day fall apart, and he wanted access to Germany, just in case. The German official in charge—an Aryan out of central casting, wearing a Teutonic vest—handed him a copy of a pamphlet titled A Jew’s Life in Modern Germany.
“Would you mind if we take a picture in front of the flag?” he asked my friend after processing his passport application.
My friend stared at the German flag. “What’s this for?” he asked. “Our Web site,” said the German official, then added that the German government hoped to post the photo with a sign that read: this man is the descendant of Holocaust survivors and he has decided to return to Germany.
Commerzbank was the first private bank that the German government had to rescue during the financial crisis, with an injection of $25 billion, but that’s not why it had caught my attention. I’d been walking around Frankfurt one night with a German financier when I noticed the Commerzbank building on the skyline. There are strict limits on building heights in Germany, but Frankfurt allows exceptions. The Commerzbank Tower is 53 stories high and unusually shaped: it looks like a giant throne. The top of the building, the arms of the throne, looks more decorative than useful. The interesting thing, said a friend, who visited often, was a room at the top, peering down over Frankfurt. It was a men’s bathroom. Commerzbank executives had taken him up to the top to show him how, in full view of the world below, he could urinate on Deutsche Bank. And if he sat in the stall with the door open....
The bank’s chairman, Klaus-Peter Müller, actually works in Berlin inside another very German kind of place. His office is attached to the side of the Brandenburg Gate. The Berlin Wall once ran, roughly speaking, right through the middle of it. One side of his building was once a field of fire for East German border guards, the other a backdrop for Ronald Reagan’s famous speech. (“Mr. Gorbachev, open this gate! Mr. Gorbachev, tear down this wall!”) Looking at it you would never guess any of this. “After the wall came down we were offered the chance to buy [this building] back,” says Müller. “It had been ours before the war. But the condition was that we had to put everything back exactly the way it was. It all had to be hand-fabricated. ” He points out the seemingly antique brass doorknobs and the seemingly antique windows. “Do not ask me what it cost,” the bank chairman says, and laughs. Across Germany, in the past 20 years or so, town centers completely destroyed by bombs in World War II have been restored, stone by stone. If the trend continues, Germany will one day appear as if nothing terrible ever happened in it, when everything terrible happened in it.
He then offers me the same survey of German banking that I will hear from half a dozen others. German banks are not, like American banks, mainly private enterprises. Most are either explicitly state-backed “lands banks” or small savings co-ops. Commerzbank, Dresdner Bank, and Deutsche Bank, all founded in the 1870s, were the only three big private German banks. In 2008, Commerzbank bought Dresdner; as both turned out to be loaded with toxic assets, the merged bank needed to be rescued by the German government. “We are not a prop-trading nation,” he says, getting to the nub of where German banks went so wildly wrong. “Why should you pay $20 million to a 32-year-old trader? He uses the office space, the I.T., the business card with a first-class name on it. If I take the business card away from that guy he would probably sell hot dogs.” He is the German equivalent of the head of Bank of America, or Citigroup, and he is actively hostile to the idea that bankers should make huge sums of money.
In the bargain, he tells me why the current financial crisis has left so unsettled the German banker’s view of the financial universe. In the early 1970s, after he started at Commerzbank, the bank opened the first New York branch of any German bank, and he went to work in it. He mists up a bit when he tells stories about the Americans he did business with back then: in one story an American investment banker who had inadvertently shut him out of a deal hunts him down and hands him an envelope with 75 grand in it, because he hadn’t meant for the German bank to get stiffed. “You have to understand,” he says emphatically, “this is where I get my view of Americans.” In the past few years, he adds, that view has changed.
“How much did you lose?” I ask.
“I don’t want to tell you,” he says.
He laughs and then continues. “For 40 years we didn’t lose a penny on anything with a triple-A rating,” he says. “We stopped building the portfolio in subprime in 2006. I had the idea that there was something wrong with your market.” He pauses. “I was in the belief that the best supervised of all banking systems was in New York. To me the Fed and the S.E.C. were second to none. I did not believe that there would be e-mail traffic between investment bankers saying that they were selling … ” He pauses and decides he shouldn’t say “shit.” “Dirt,” he says instead. “This is by far my biggest professional disappointment. I was in a much too positive way U.S.-biased. I had a set of beliefs about U.S. values.”
The global financial system may exist to bring borrowers and lenders together, but it has become over the past few decades something else too: a tool for maximizing the number of encounters between the strong and the weak, so that one might exploit the other. Extremely smart traders inside Wall Street investment banks devise deeply unfair, diabolically complicated bets, and then send their sales forces out to scour the world for some idiot who will take the other side of those bets. During the boom years a wildly disproportionate number of those idiots were in Germany. As a reporter for Bloomberg News in Frankfurt, named Aaron Kirchfeld, put it to me, “You’d talk to a New York investment banker, and they’d say, ‘No one is going to buy this crap. Oh. Wait. The Landesbanks will!’ ” When Morgan Stanley designed extremely complicated credit-default swaps all but certain to fail so that their own proprietary traders could bet against them, the main buyers were German. When Goldman Sachs helped the New York hedge-fund manager John Paulson design a bond to bet against—a bond that Paulson hoped would fail—the buyer on the other side was a German bank called IKB. IKB, along with another famous fool at the Wall Street poker table called WestLB, is based in Düsseldorf—which is why, when you asked a smart Wall Street bond trader who was buying all this crap during the boom, he might well say, simply, “Stupid Germans in Düsseldorf.”
The drive from Berlin to Düsseldorf takes longer than it should. For long stretches the highway is choked with cars and trucks. A German traffic jam is a peculiar sight: no one honks; no one switches lanes searching for some small, illusory advantage; all trucks remain in the right-hand lane, where they are required to be. The spectacle, sparkling Audis and Mercedeses in the left lane, and immaculate trucks neatly rowed up in the right lane, is almost a pleasure to watch. Because everyone in it obeys the rules, and believes that everyone else will obey them, too, it moves as fast as it can, given the circumstances. But the pretty young German woman behind the wheel of our car doesn’t take any pleasure in it. Charlotte huffs and groans at the sight of brake lights stretching into the distance. “I hate being stuck in traffic,” she says apologetically.
She pulls from her bag the German edition of Alan Dundes’s book, the title of which translates as You Lick Mine First. I ask her about it. There is a common German expression, she explains, which translates directly as “Lick my ass.” To this hearty salutation the common reply is “You lick mine first!” “Everyone will understand this title,” she says. “But this book, I don’t know about this.”
The last time I’d been in Germany for more than a few days was when I was 17 years old. I traveled across the country with two friends, a bike, a German phrase book, and a German love song taught to me by an American woman of German descent. So few people spoke English that it was better to deploy whatever German came to hand—which usually meant the love song. And so I assumed on this trip I would need an interpreter. I didn’t appreciate how much the Germans had been boning up on their English. The entire population seems to have taken a total-immersion Berlitz course in the last few decades. And on Planet Money, even in Germany, English is the official language. It’s the working language used for all meetings inside the European Central Bank, even though the E.C.B. is in Germany and the only E.C.B. country in which English is arguably the native tongue is Ireland.
At any rate, through a friend of a friend of a friend I’d landed Charlotte, a sweet-natured, keenly intelligent woman in her 20s who was also shockingly steely—how many sweet-natured young women can say “Lick my ass” without blushing? She spoke seven languages, including Chinese and Polish, and was finishing up her master’s degree in Intercultural Misunderstanding, which just has to be Europe’s next growth industry. By the time I realized I didn’t need an interpreter, I’d already hired her. So she became my driver. As my interpreter, she would have been ridiculously overqualified; as my chauffeur, she is frankly preposterous. But she’d taken on the job with gusto, going so far as to hunt down the old German translation of Dundes’s little book.
And it troubled her. For a start she refused to believe there was such a thing as a German national character. “No one in my field believes this anymore,” she says. “How do you generalize about 80 million people? You can say they are all the same, but why would they be this way? My question about Germans’ being anally obsessed is how would this spread? Where would it come from?” Dundes himself actually made a stab at answering that question. He suggested that the unusual swaddling techniques employed by German mothers, which left German babies stewing in their own filth for long periods, might be partly responsible for their energetic anality. Charlotte was not buying it. “I’ve never heard of this,” she says.
But just then she spots something and brightens. “Look!” she says. “A German flag.” Sure enough, a flag flies over a small house in a distant village. You can spend days in Germany without seeing a flag. Germans aren’t allowed to cheer for their team in the way other peoples are. That doesn’t mean they don’t want to, just that they must disguise what they are doing. “Patriotism,” she says, “is still taboo. It’s politically incorrect to say, ‘I’m proud to be German.’ ”
The traffic now eases, and we’re once again flying toward Düsseldorf. The highway looks brand new, and she guns the rented car until the speedometer tops 210.
“This is a really good road,” I say.
“The Nazis built it,” she says. “That’s what people say about Hitler, when they get tired of saying the usual things. ‘Well, at least he built good roads.’ ”
Back in February 2004 a financial writer in London named Nicholas Dunbar broke the story about some Germans in Düsseldorf, working inside a bank called IKB, who were up to something new. “The name ‘IKB’ just kept coming up in London with bond salesmen,” says Dunbar. “It was like everybody’s secret cash cow.” Inside the big Wall Street firms there were people whose job it was, when the German customers from Düsseldorf came to London, to have a wad of cash and make sure they got whatever they wanted.
Dunbar’s piece appeared in Risk magazine and described how this obscure German bank was rapidly turning into Wall Street’s biggest customer. IKB had been created back in 1924 to securitize German war-reparation payments to the Allies, morphed into a successful lender to midsize German companies, and was now morphing into something else. The bank was partially owned by a German state bank, but was not itself guaranteed by the German government. It was a private German financial enterprise, seemingly on the rise. And it had recently hired a man named Dirk Röthig, a German with some experience in the United States (he’d worked for State Street Bank), to do something new and interesting.
With Röthig’s help IKB created, in effect, a bank, called Rhineland Funding, incorporated in Delaware and listed on the exchange in Dublin, Ireland. They didn’t call it a bank. Had they done so, people might have asked why it was not regulated. They called it a “conduit,” a word that had the advantage that hardly anyone understood what it meant. Rhineland borrowed money for short periods of time by issuing what is called commercial paper. It invested that money in longer-term “structured credit,” which turned out to be a euphemism for bonds backed by consumer loans. Some of the same Wall Street investment banks that raised the money for Rhineland (by selling the commercial paper) sold Rhineland, among other things, U.S. subprime bonds. Rhineland’s profits came from the difference between the rate of interest it paid on the money borrowed and the higher rate of interest it earned on the money it lent through its bond purchases. As IKB guaranteed the entire enterprise, Moody’s gave Rhineland its highest rating, enabling it to borrow money cheaply.
The Germans in Düsseldorf had one critical job: to advise this offshore bank they had created on which bonds it should buy. “We are one of the last to get money out of Rhineland,” Röthig told Risk magazine, “but we’re so confident in our ability to advise it in the right way that we still make a profit.” Röthig further explained that IKB had invested in special tools to analyze these complicated bonds, called collateralized debt obligations (C.D.O.’s), that Wall Street was now peddling. “I would say it has proven a worthwhile investment because we have not faced a loss so far,” he said. In February 2004 all this seemed like a good idea—so good that lots of other German banks rented IKB’s conduit and bought subprime-mortgage bonds for themselves. “It sounds like quite a profitable strategy,” the man from Moody’s who had awarded Rhineland’s commercial paper its top rating told Risk .
I met Dirk Röthig for lunch at a restaurant in Düsseldorf, on a canal lined with busy shops. From their profitable strategy the German banks have declared losses of something like $50 billion, though their actual losses are probably greater, as German banks are so slow to declare anything. Röthig viewed himself, with some justice, more as victim than perpetrator. “I left the bank in December 2005,” he says quickly as he squeezes himself into a small booth. Then he explains.
The idea for the offshore bank had been his. The German management at IKB had taken to it, as he put it, “as a baby takes to candy.” He’d created the bank when the market was paying higher returns to bondholders: Rhineland Funding was paid well for the risk it was taking. By the middle of 2005, with the financial markets refusing to see a cloud in the sky, the price of risk had collapsed. Röthig says he went to his superiors and argued that IKB should look elsewhere for profits. “But they had a profit target and they wanted to meet it. To make the same profit with a lower risk spread they simply had to buy more,” he says. The management, he adds, did not want to hear his message. “I showed them the market was turning,” he says. “I was taking the candy away from the baby, instead of giving it. So I became the enemy.” When he left, others left with him, and the investment staff was reduced, but the investment activity boomed. “One-half the number of people with one-third the experience made twice the number of investments,” he says. “They were ordered to buy.”
H e goes on to describe what appeared to be a scrupulous and complicated investment strategy but was actually a mindless, rule-based investment strategy. IKB could “price a C.D.O. to the last basis point,” as one admiring observer told Risk in 2004. But this expertise was a kind of madness. “They would be really anal about, say, which subprime originator went into these C.D.O.’s,” says Nicholas Dunbar. “But it didn’t matter. They were arguing about bonds that would collapse from 100 down to 2 or 3. In a sense they were right: they bought the bonds that went to 3, rather than to 2.” As long as the bonds offered up by the Wall Street firms abided by the rules specified by IKB’s experts, they got hoovered into the Rhineland Funding portfolio without further inspection. Yet the bonds were becoming radically more risky because the loans that underpinned them were becoming crazier and crazier.
After he left, the IKB portfolio went from $10 billion in 2005 to $20 billion in 2007, Röthig says, and “it would have gotten bigger if they had had more time to buy. They were still buying when the market crashed. They were on their way to $30 billion.” By the middle of 2007 every Wall Street firm, not just Goldman Sachs, realized that the subprime market was collapsing, and tried frantically to get out of their positions. The last buyers in the entire world, several people on Wall Street have told me, were these willfully oblivious Germans. That is, the only thing that stopped IKB from losing even more than $15 billion on U.S. subprime loans was that the market ceased to function. Nothing that happened—no fact, no piece of data—was going to alter their approach to investing money.
O n the surface IKB’s German bond traders resembled the reckless traders who made similarly stupid bets for Citigroup and Morgan Stanley. Beneath it they were playing an entirely different game. The American bond traders may have sunk their firms by turning a blind eye to the risks in the subprime-bond market, but they made a fortune for themselves in the bargain and have for the most part never been called to account. They were paid to put their firms in jeopardy, and so it is hard to know whether they did it intentionally or not. The German bond traders, on the other hand, had been paid roughly $100,000 a year, with, at most, another $50,000 bonus. In general, German bankers were paid peanuts to run the risk that sank their banks—which suggests they really didn’t know what they were doing. But—and here is the strange thing—unlike their American counterparts, they are being treated by the German public as crooks. The former C.E.O. of IKB, Stefan Ortseifen, received a 10-month suspended sentence and has been asked by the bank to return his salary: eight hundred and five thousand euros.
The border created by modern finance between Anglo-American and German bankers was treacherous. “The intercultural misunderstandings were quite intense,” Röthig says as he tucks into his lobster. “The people in these banks had never been spoiled by any Wall Street salesmen. Suddenly, there is someone with a platinum American Express credit card who can take them to the Grand Prix in Monaco, takes them to all these places. He has no limit. The Landesbanks were the most boring bankers in Germany, so they never got attention like this. And all of a sudden a very smart guy from Merrill Lynch shows up and starts to pay a lot of attention to you. They thought, Oh, he just likes me!” He completes the thought. “The American salespeople are much smarter than the European ones. They play a role much better.”
At bottom, he says, the Germans were blind to the possibility that the Americans were playing the game by something other than the official rules. The Germans took the rules at their face value: they looked into the history of triple-A-rated bonds and accepted the official story that triple-A-rated bonds were completely risk-free.
This preternatural love of rules, almost for their own sake, punctuates German finance as it does German life. As it happens, a story had just broken that a division of a German insurance company called Munich Re, back in June 2007, or just before the crash, had sponsored a party for its best producers that offered not just chicken dinners and nearest-to-the-pin golf competitions but a blowout with prostitutes in a public bath. In finance, high or low, this sort of thing is of course not unusual. What was striking was how organized the German event was. The company tied white and yellow and red armbands to the prostitutes to indicate which ones were available to which men. After each sexual encounter the prostitute received a stamp on her arm, to indicate how often she had been used. The Germans didn’t want just hookers: they wanted hookers with rules .
P erhaps because they were so enamored of the official rules of finance, the Germans proved especially vulnerable to a false idea the rules encouraged: that there is such a thing as a riskless asset. There is no such thing as a riskless asset. The reason an asset pays a return is that it carries risk. But the idea of the riskless asset, which peaked in late 2006, overran the investment world, and the Germans fell for it the hardest. I’d heard about this, too, from people on Wall Street who had dealt with German bond buyers. “You have to go back to the German mentality,” one of them had told me. “They say, ‘I’ve ticked all the boxes. There is no risk.’ It was form over substance. You work with Germans, and—I can’t emphasize this enough—they are not natural risktakers.” So long as a bond looked clean on the outside, the Germans allowed it to become as dirty on the inside as Wall Street could make it.
The point Röthig wants to stress to me now is that it didn’t matter what was on the inside. IKB had to be rescued by a state-owned bank on July 30, 2007. Against capital of roughly $4 billion it had lost more than $15 billion. As it collapsed, the German media wanted to know how many U.S. subprime bonds these German bankers had gobbled up. IKB’s C.E.O., Stefan Ortseifen, said publicly that IKB owned almost no subprime bonds at all—which is why he’s recently been convicted of misleading investors. “He was telling the truth,” says Röthig. “He didn’t think he owned any subprime. They weren’t able to give any correct numbers of the amount of subprime they had because they didn’t know. The IKB monitoring systems did not make a distinction between subprime and prime mortgages. And that’s why it happened.” Back in 2005, Röthig says, he had proposed building a system to track more precisely what loans were behind the complex bonds they were buying from Wall Street firms, but IKB’s management didn’t want to spend the money. “I told them, You have a portfolio of $20 billion, you are making $200 million a year, and you are denying me $6.5 million. But they didn’t want to do it.”
For the third time in as many days we cross the border without being able to see it, and spend 20 minutes trying to work out if we are in East or West Germany. Charlotte was born and raised in the East German city of Leipzig, but she is no less uncertain than I am about which former country we are in. “You just would not know anymore unless you are told,” she says. “They have to put up a sign to mark it.” A landscape once scarred by trenches and barbed wire and minefields exhibits not so much as a ripple. Somewhere near this former border we pull off the road into a gas station. It has three pumps in a narrow channel without space to maneuver or to pass. The three drivers filling their gas tanks need to do it together, and move along together, for if any one driver dawdles, everyone else must wait. No driver dawdles. The German drivers service their cars with the efficiency of a pit crew. Precisely because the arrangement is so archaic Charlotte guesses we must still be in West Germany. “You would never find this kind of gas station in East Germany,” she says. “Everything in East Germany is new.”
She claims she can guess at sight whether a person, and especially a man, is from the East or the West. “West Germans are much prouder. They stand straight. East Germans are more likely to slouch. West Germans think East Germans are lazy.”
“East Germans are the Greeks of Germany,” I say.
“Be careful,” she says.
From Düsseldorf we drive to Leipzig, and from Leipzig we hop on a train to Hamburg, to find the mud-wrestling. Along the way she searches for signs of anality in her native tongue. “ Kackwurst is the term for feces,” she says grudgingly. “It literally means ‘shit sausage.’ And it’s horrible. When I see sausages I can’t think of anything else.” She thinks a moment. Bescheissen: “Someone shit on you.” Klugscheisser: “an intelligence shitter.” “If you have a lot of money,” she says, “you are said to shit money: Geldscheisser. ” She rips off a handful of other examples, off the top of her head, a little shocked by how fertile this line of thinking is, before she says, “And if you find yourself in a bad situation you say, Die Kacke ist am Dampfen: the shit is steaming.”
She stops and appears to realize she is encouraging a theory of German character.
“It’s just in the words,” she says. “It doesn’t mean it applies.”
Outside of Hamburg we stopped for lunch at a farm, owned by a man named Wilhelm Nölling, a German economist now in his 70s. Back when the idea of the euro was being bandied about, he’d been a council member of the Bundesbank. From the moment the discussion turned serious, Nölling has railed against the euro. He wrote a mournful pamphlet, Goodbye to the Deutsche Mark? He wrote another, more declarative pamphlet, The Euro: A Journey to Hell. Together with three other prominent German economists and financial leaders, he filed a lawsuit, still wending its way through the German courts, challenging the euro on constitutional grounds. Just before the deutsche mark got scrapped, Nölling had argued to the Bundesbank that they should just keep all the notes. “I said, ‘Don’t shred it!,’ ” he now says with great gusto, leaping out of an armchair in the living room of his farmhouse. “I said, ‘Pile it all up, put it in a room, in case we need it later!’ ”
He finds himself stuck: he knows he is tilting at windmills. “Can you turn this back?” he says. “We know we can’t turn this back. If they say, ‘O.K., we were wrong. You were right,’ what do you do? That is the hundred-thousand-million-dollar question.” He thinks he knows what should be done, but doesn’t think Germans are capable of doing it. The idea he and his fellow dissident German economists have cooked up is to split the European Union in two, for financial purposes. One euro, a kind of second-string currency, would be issued for, and used by, the deadbeat countries—Greece, Portugal, Spain, Italy, and so on. The first-string euro would be used by “the homogenous countries, the ones you can rely on.” He lists these reliable countries: Germany, Austria, Belgium, the Netherlands, Finland, and (he hesitates for a second over this) France.
“Are you sure the French belong?”
“We discussed this,” he says seriously. They decided that for social reasons you couldn’t really exclude the French. It was just too awkward.
As he presided over the Maastricht treaty, that created the euro, the French president François Mitterrand is rumored to have said, privately, that yoking Germany to the rest of Europe in this way was sure to lead to imbalances, and the imbalances were certain to lead to some crisis, but by the time the crisis struck he’d be dead and gone—and others would sort it out. Even if Mitterrand didn’t say exactly that, it’s the sort of thing he should have said, as he surely thought it. At the time, it was obvious to a lot of people that these countries did not belong together.
But then, how did people who seem so intelligent and successful and honest and well organized as the Germans allow themselves to be drawn into such a mess? In their financial affairs they’d ticked all the little boxes to ensure that the contents of the bigger box were not rotten, and yet ignored the overpowering stench wafting from the big box. Nölling felt the problem had its roots in the German national character. “We entered Maastricht because they had these rules, ” he says as we move off to his kitchen and plates heaped with the white asparagus Germans take such pride in growing. “We were talked into this under false pretenses. Germans are by and large gullible people. They trust and believe. They like to trust. They like to believe.”
If the deputy finance minister has a sign on his wall reminding him to see the point of view of others, here is perhaps why. Others do not behave as Germans do: others lie. In this financial world of deceit, Germans are natives on a protected island who have not been inoculated against the virus carried by visitors. The same instincts that allowed them to trust the Wall Street bond salesmen also allowed them to trust the French when they promised there would be no bailouts, and the Greeks when they swore that their budget was balanced. That is one theory. Another is that they trusted so easily because they didn’t care enough about the cost of being wrong, as it came with certain benefits. For the Germans the euro isn’t just a currency. It’s a device for flushing the past—another Holocaust Memorial. The German public-opinion polls are now running against the Greeks, but deeper forces run in their favor.
In any case, if you are obsessed with cleanliness and order yet harbor a secret fascination with filth and chaos, you are bound to get into some kind of trouble. There is no such thing as clean without dirt. There is no such thing as purity without impurity. The interest in one implies an interest in the other.
The young German woman who had driven me back and forth across Germany exhibits interest in neither, and it’s hard to say whether she is an exception or a new rule. Still, she marches dutifully into Europe’s largest red-light district, seeking out a lot of seedy-looking German men to ask them where she might find a female mud-wrestling show. She continues to discover new and surprising ways in which Germans find meaning in filth. “ Scheisse glänzt nicht, wenn man sie poliert —Shit won’t shine, even if you polish it,” she says as we pass the Funky Pussy Club. “ Scheissegal: it just means I don’t give a shit.” She laughs. “That’s an oxymoron in Germany, right?”
The night is young and the Reeperbahn is hopping: it’s the closest thing I’ve seen in Germany to a mob scene. Hawkers lean against sex clubs and parse likely customers from the passing crowds. Women who are almost pretty beckon men who are clearly tempted. We pass several times the same corporate logo, a pair of stick figures engaged in anal sex. Charlotte spots it and remembers that a German band, Rammstein, was arrested in the United States for simulating anal sex onstage, while performing a song called “Bück Dich” (“Bend Over”). But on she charges, asking old German men where to find the dirt. At length she finds a definitive answer, from a German who has worked here for decades. “The last one shut down years ago,” he says.” “It was too expensive. ” Ω
[Michael Lewis is a non-fiction author and financial journalist. His bestselling books include The Big Short: Inside the Doomsday Machine (2010), Liar's Poker (1989), The New New Thing (2000), Moneyball: The Art of Winning an Unfair Game (2003), and The Blind Side: Evolution of a Game (2006). He is currently a contributing editor to Vanity Fair. Lewis received a BA in art history from Princeton University and an MSc in economics from the London School of Economics.]
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Sapper's (Fair & Balanced) Rants & Raves by Neil Sapper is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 United States License. Based on a work at sapper.blogspot.com. Permissions beyond the scope of this license may be available here.
Copyright © 2011 Sapper's (Fair & Balanced) Rants & Raves
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