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OO RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHFT #4624/01 2900857
ZNR UUUUU ZZH
O 170857Z OCT 07
FM AMCONSUL FRANKFURT
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3680
INFO RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
RUCNMEM/EU MEMBER STATES  IMMEDIATE
RUCNFRG/FRG COLLECTIVE IMMEDIATE

UNCLAS SECTION 01 OF 02 FRANKFURT 004624 
 
SIPDIS 
 
DEPARTMENT FOR EUR/AGS 
TREASURY FOR LUKAS KOHLER/OFFICE FOR EUROPE AND EURASIA 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EFIN ECON GM
 
SUBJECT: THE ECB STEPS IN AS GERMANY'S LARGEST BANK FEELS SUBPRIME 
STING 
 
 
ENTIRE TEXT IS SENSITIVE BUT UNCLASSIFIED.  NOT FOR INTERNET 
DISTRIBUTION 
 
REF: a) 07 Berlin 1574, b) 07 Berlin 1746 
 
¶1. (SBU) SUMMARY:  On October 3 Deutsche Bank, Germany's largest 
commercial bank, announced it would write off 2.2 billion euros 
($3.12 billion) in losses based in investments in U.S. 
mortgage-backed securities, ending several weeks of speculation 
about the bank's exposure to subprime debt.  The financial world was 
surprised to learn that Deutsche Bank, with its reputation as a 
shrewd and conservative actor, was the most deeply invested in 
subprime vehicles of all of Germany's large commercial banks. 
Deutsche Bank's overall financial position remains healthy with 
third-quarter net profits expected at 8.4 billion euros ($12 
billion).  The announced write-offs have contributed to the crisis 
of confidence in the banking sector.  Interbank lending, even among 
the major German banks, has ceased, with the European Central Bank 
plaYing a key intermediary role in providing liquidity to the 
market.  END SUMMARY. 
 
¶2. (U) In a series of meetings in Frankfurt on October 11-12, EMIN 
and Congen Econoff met with executives and senior officials at 
Commerzbank, Deutsche Bank, Morgan Stanley, the Bundesbank, and the 
European Central Bank (ECB).  Discussions ranged from the recent 
troubles of German banks to the role played by the ECB during the 
ongoing subprime crisis. 
 
DEUTSCHE BANK: FIREMAN OR ARSONIST? 
----------------------------------- 
 
¶3.  (SBU) The declared insolvency and subsequent bail-outs of two 
small German state-backed banks, SachsenLB and IKB Deutsche 
Industriebank AG, in August prompted widespread speculation about 
the health of Germany's banking system and its exposure to subprime 
debt (see reftels).  Media sources reported that these small German 
banks were driven by low returns on investments at home to invest 
heavily in U.S. mortgage-backed securities that seemingly promised 
the impossible: high returns and low risk.  Germany's three largest 
commercial banks (Deutsche Bank AG, Commerzbank AG and Dresdner Bank 
AG) were believed to be better protected from the subprime plague 
due to their larger size, greater diversification and perceived 
long-standing aversion to high-risk investments. 
 
¶4.  (SBU) In a September 4 article in Handelsblatt, Deutsche Bank 
Chief Executive Officer Josef Ackermann weighed in to calm panic in 
the financial community, saying:  "I am optimistic about the 
environment globally for financial institutions."  Ackermann argued 
that, in the current crisis, the bad debt in the U.S. was shared 
more widely due to the dispersal of risk worldwide and thereforethe 
system was more stable.  In a nod to the perceived need for banking 
consolidation in Germany, he said "Progress is a continuous process 
of creative destruction. The present subprime crisis and its 
consequences, harbors, like all crises, not only risks, but also 
opportunities."   His statements as "Germany's top banker" buoyed 
markets in Frankfurt, and led to Deutsche Bank's shares rebounding 
2.6% that day. 
 
¶5.  (SBU) Despite Ackermann's attempt to calm the panic, he came 
under fire for his apparent lack of sympathy for banks in trouble 
and Deutsche Bank's own role in selling high-risk products to small 
banks such as IKB.  On the same day Ackermann's article came out, 
Heinrich Haasis, the President of the German Savings Bank Federation 
(DSGV), said of Deutsche Bank at a conference in Frankfurt, "You 
should not give advice on putting out fires when, in the past, you 
not only did not put the fire out, but also sold the wood for the 
fire and profited from it."  Ackermann later rejected the criticism, 
rejoining that "of course we sold all sorts of products to IKB. 
That is our business.  They made a lot of money for a long time." 
 
DEUTSCHE BANK'S OWN FIRE 
------------------------ 
 
¶6. (SBU) Deutsche Bank's own exposure became apparent on September 
¶20.  In an address to German broadcaster ZDF, Ackermann admitted 
that the bank had "made mistakes during this crisis," and that third 
quarter profits would reflect those mistakes.  Ackermann stated that 
29 billion euros ($40.5 billion) yn credit agreements needed to be 
"reassessed" thanks to high risk investing in the United States 
housing market.  He said that Deutsche Bank would most likely not 
hire 4,000 additional staff by the end of the year as originally 
planned.  This preliminary statement caused Deutsche Bank shares to 
drop by 3% on the Frankfurt stock exchange.  Seeking to calm any 
panic, Germany's Finance Minister, Peer Steinbruck, weighed in later 
in the day, reassuring markets that "Deutsche Bank stands on a solid 
 
FRANKFURT 00004624  002 OF 002 
 
 
foundation." 
 
¶7.  (SBU) On September 24, a Reuters report claimed that Deutsche 
Bank was faring far worse than Ackermann had admitted.  According to 
the report, Deutsche Bank's credit was actually worth between 4% and 
6% less than face value, nearly twice as bad as Ackermann's 
predictions.  On the same day, Commerzbank, Germany's second largest 
bank, reiterated its announced profit target for 2007 in order to 
diffuse rumors that it too was suffering from the subprime collapse. 
 Several papers reported that Ackermann, who in November 2006 
survived widespread public criticism for his role in the Mannesmann 
affair, would be forced to step down earlier than the planned end of 
his term in 2010.  An executive at Deutsche Bank, told EMIN and 
Econoff that there was a misperception in the media that Ackermann 
either did not know about his bank's exposure when he made his 
remarks in early September or did not want to admit it, when in fact 
Ackermann had been consistent all along in his message, 
acknowledging that Deutsche Bank, too, had made mistakes. 
 
¶8.  (SBU) On October 3, Deutsche Bank announced that it would write 
off 1.5 billion euros ($2.1 billion) in residential mortgage-backed 
securities and structured credit products, as well as 700 million 
euros (nearly $1 billion) in leveraged loans. The announcement of 
the losses was offset by the news that other gains in asset sales 
and tax credits will lead to a third-quarter profit of 1.4 billion 
euros ($2 billion).  The announcement helped bring clarity to the 
question of Deutsche Bank's exposure.  Nevertheless, Deutsche Bank's 
shares are down 9% since the beginning of August.  Deutsche Bank 
officials told us that the write-offs were not so much a result of 
the fact that the securities were all that risky, but rather of 
Deutsche Bank's inability to find a buyer during the current 
turbulence. 
 
WEATHERING THE STORM 
-------------------- 
 
¶9.  (SBU) A senior official at the European Central Bank, confirmed 
to EMIN and Econoff that "lending markets between banks are still 
functioning poorly in Europe due to the crisis of confidence." 
Germany's other large commercial banks appear to have weathered the 
storm better than Deutsche Bank.  The chief executive of 
Commerzbank, Klaus-Peter Mueller, said on September 20 that the bank 
would set aside a comparatively small 92 million Euros ($128 
million) for possible losses from the subprime crisis, although it 
has been rumored that this sum may not be enough.  Dresdner Bank set 
aside an equally small 70 Million Euros ($100 million).  An 
executive at Commerzbank, confirmed to us that, although he does not 
believe the crisis is over, it poses no threat to Commerzbank (which 
reportedly owns very few mortgage-backed securities).  The 
securities that it does hold were mostly originated by the bank and 
not purchased from other institutions.  Deutsche Bank's greater 
exposure results mainly from a difference in investment strategy: 
Deutsche Bank under Ackermann's leadership has focused on capital 
markets, while  Commerzbank and Dresdner Bank retain a stronger 
focus on private banking. 
 
¶10.  COMMENT.  Deutsche Bank, which has enjoyed a reputation for 
prudence and foresight, is clearly the most exposed of Germany's 
large co-mercial banks.  While its balance sheet remains well in the 
black, the subprime crunch has left its financial position and 
Ackermann's image bruised, if not badly damaged.  The bank's 
write-offs may not be so large, but Ackermann's comments have fueled 
rather than alleviated the crisis of confidence that still has 
European banks uneasy.  Global investors will keep a close eye on 
the third quarter profit reports of Deutsche Bank and its 
competitors.  END COMMENT. 
 
¶11.  This cable has been coordinated with Embassy Berlin. 
POWELL