Dirk Röthig had enjoyed a ringside seat not only to IKB but to the behavior of its imitators, the German state-backed banks, the Landesbanks. And in his view, the border created by modern finance between Anglo-American and German bankers was treacherous. “The intercultural misunderstandings were quite intense,” he says, as he tucks into his lobster. “The people in these banks were never spoiled by any Wall Street salesmen. Now there is someone with a platinum American Express credit card who can take them to the Grand Prix in Monaco, takes you 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 German reinsurance 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 ribbons 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 just want hookers: they wanted hookers with rules.
Perhaps 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. After all, a triple-A rating was supposed to mean “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 about 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 risk takers. They are genetically disposed to fucking it up.” 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 28, 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 CEO, Stefan Ortseifen, said publicly that IKB owned almost no subprime bonds at all—which is why he’s now charged with 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 proposed to build 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 twenty billion dollars, you are making two hundred million dollars a year and you are denying me six point five 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 twenty 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. On the outside, at least, it’s perfectly clean. 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 also 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 a train to Hamburg to find the mud wrestling. Along the way she humors me by parsing her native tongue for signs of anality. “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 continues, “you are said to shit money: Geldscheisser.” She rips a handful of other examples off the top of her head, a little shocked by how fertile is this line of thinking, 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 national character.
“It’s just in the words,” she says.
“Sure it is.”
“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 seventies but with the kick and bite of a much younger man. He has the chiseled features and silver hair of a patrician but the vocal cords of a bleacher bum. “The Greeks want us to pay their lunch!” he bellows, as he gives me a tour of his private goat pen. “That is why they are rioting in the streets! Baaa!” Back when the idea of the euro was being bandied about, Nölling had been a governor of the Bundesbank. From the moment the discussion turned serious he has railed against the euro. He’d written one mournful pamphlet called “Good-bye to the Deutsche Mark?” and another, more declarative pamphlet called “The Euro: A Journey to Hell.” Together with three other prominent German economists and financial leaders he’d 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 that he is engaged in an exercise futile and pointless. “Can you turn this back?” he says. “We know we can’t turn this back. If they say, ‘Okay, 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 econo
mists 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, which created the euro, the French prime minister 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, and not only Bundesbank governors, that these countries did not belong together.
But then how did people who seem as 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 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 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 away the past. It’s another Holocaust Memorial. The Greeks may have German public opinion polls running against them, 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 the world’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. Even now she continues to find 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 sift 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, of 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 on stage 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.”
V
TOO FAT TO FLY
On August 5, 2011, moments after the U.S. government watched a rating agency lower its credit rating for the first time in American history, the market for U.S. Treasury bonds soared. Four days later, the interest rates paid by the U.S. government on its new ten-year bonds had fallen to the lowest level on record, 2.04 percent. The price of gold rose right alongside the price of U.S. Treasury bonds, but the prices of virtually all other stocks and bonds in rich Western countries went into a free fall. The net effect of a major U.S. rating agency’s saying that the U.S. government was less likely than before to repay its debts was to lower the cost of borrowing for the U.S. government and to raise it for everyone else. This told you a lot of what you needed to know about the ability of the U.S. government to live beyond its means: it had, for the moment, a blank check. The shakier the United States government appeared, up to some faraway point, the more cheaply it would be able to borrow. It wasn’t exposed yet to the same vicious cycle that threatened the financial life of European countries: a moment of doubt leads to higher borrowing costs, which leads to greater doubt, and even higher borrowing costs, and so on until you become Greece. The fear that the United States might actually not pay back the money it had borrowed was still unreal.
On December 19, 2010, the television news program 60 Minutes aired a thirteen-minute piece about U.S. state and local finances. The correspondent Steve Kroft interviewed a private Wall Street analyst named Meredith Whitney, who, back in 2007, had gone from being obscure to famous when she correctly suggested that Citigroup’s losses in U.S. subprime bonds were far bigger than anyone imagined, and predicted the bank would be forced to cut its dividend. The 60 Minutes segment noted that U.S. state and local governments faced a collective annual deficit of roughly half a trillion dollars, and noted another trillion-and-a-half-dollar gap between what the governments owed retired workers and the money they had on hand to pay them. Whitney pointed out that even these numbers were unreliable, and probably optimistic, as the states did a poor job of providing information about their finances to the public. New Jersey governor Chris Christie concurred with her and added, “At this point, if it’s worse, what’s the difference?” The bill owed by American states to retired American workers was so large that it couldn’t be paid, whatever the amount. At the end of the piece Kroft asked Whitney what she thought about the ability and willingness of the American states to repay their debts. She didn’t see a real risk that the states would default, because the states had the ability to push their problems down to counties and cities. But at these lower levels of government, where American life was lived, she thought there would be serious problems. “You could see fifty to a hundred sizable defaults, maybe more,” she said. A minute later Kroft returned to her to ask her when people should start worrying about a crisis in local finances. “It’ll be something to worry about within the next twelve months,” she said.
That prophecy turned out to be self-fulfilling: people started worrying about U.S. municipal finance the minute the words were out of her mouth. The next day the municipal bond market tanked. It kept falling right through the next month. It fell so far, and her prediction received so much attention, that money managers who had put clients into municipal bonds felt compelled to hire more people to analyze states and cities, to prove her wrong. (One of them called it “The Meredith Whitney Municipal Bond Analyst Full Employment Act.”) Inside the financial world a new literature was born, devoted to persuading readers that Meredith Whitney didn’t know what she was talking about. She was vulnerable to the charge: up until the moment she appeared on 60 Minutes she had, so
far as anyone knew, no experience at all of U.S. municipal finance. Many of the articles attacking her accused her of making a very specific forecast—as many as a hundred defaults within a year!—that had failed to materialize. (Sample Bloomberg News headline: MEREDITH WHITNEY LOSES CREDIBILITY AS MUNI DEFAULTS FALL 60%.) The whirlwind thrown up by the brief market panic sucked in everyone who was anywhere near municipal finance. The nonpartisan, dispassionate, sober-minded Center on Budget and Policy Priorities, in Washington, D.C., even released a statement saying that there was a “mistaken impression that drastic and immediate measures are needed to avoid an imminent fiscal meltdown.” This was treated in news accounts as a response to Meredith Whitney, as she was the only one in sight who could be accused of having made such a prediction.
But that’s not at all what she had said: her words were being misrepresented so that her message might be more easily attacked. “She was referring to the complacency of the ratings agencies and investment advisers who say there is nothing to worry about,” said a person at 60 Minutes who reviewed the transcripts of the interview for me, to make sure I had heard what I thought I had heard. “She says there is something to worry about, and it will be apparent to everyone in the next twelve months.”
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