How is life in Jain houses
BET Anshu Jain will head Deutsche Bank from June. Previously, he was head of investment banking. And sold the kind of papers that started the financial crisis in 2007. Although an employee warned him
■ Anshu Jain: Born in India in 1963, the banker has been a member of Deutsche Bank's extended board of directors for ten years and is responsible for investment transactions. Next Friday he will be the new CEO, together with Jürgen Fitschen, who was previously responsible for the bank's German business on the board.
■ Mortgages: When the real estate bubble bursts in 2007, banks and insurance companies around the world discover that they have speculated. The world economy plunges into crisis. Deutsche Bank has been at the forefront of home reselling mortgages in the United States. It also concludes transactions that are tied to bets and that were previously permitted in the course of the deregulation of the financial markets. Anshu Jain has expanded these businesses.
BY SEBASTIAN HEISER
On January 22nd, 2007, Anshu Jain, who will move up to the top of Deutsche Bank this week, meets with some of his best bankers in a hotel in Lisbon. You are discussing a business that is only worthwhile for the bank if others are suffering. And the more others suffer, the higher the profit.
It's a bet that the US housing market will collapse. Although there are concerns, the round decides to continue the bet. Deutsche Bank will make around $ 1.5 billion in profit over the next two years. It is the most successful deal in its history, says one who was at the meeting in Lisbon.
The deal is so hugely profitable because so many US homeowners are unable to repay their mortgages because many are evicted from their foreclosed homes. Some now live on the streets.
The biggest financial crisis in decades grew out of the real estate crisis. In Germany it leads to the nationalization of Hypo Real Estate. Other institutes are saved with billions in aid. The economy collapses. 250,000 people lose their jobs.
It was Deutsche Bank that helped fuel the development towards this crisis. And internal documents show that Anshu Jain was also involved in these deals. The man who will be Germany's most important banker from Friday.
Anshuman Jain was born in Jaipur, India, in 1963. His family belongs to the middle class, Jain wants to advance, studies economics in Delhi. When he was 20, he went to the United States with his wife Geetika and received an MBA in finance from the University of Massachusetts. In 1995 he came to Deutsche Bank. The solid institution is just beginning to turn to more profitable but riskier fields: investment business.
Jain is ambitious. In 2002 he was promoted to the extended board of directors of Deutsche Bank. His department helps companies get new stocks or bonds public and collects a fee for doing so. It's no longer really profitable. "In the bond business, the cake could get 15 to 20 percent smaller every year," Jain told investors in London in 2003. It is therefore becoming more important to focus on derivatives. Derivatives are bets on the development of prices and markets. With credit derivatives, for example, investors insure themselves against the bankruptcy of a debtor. The business with it increased by 170 percent in the last year, says Jain.
It is precisely such bets that later lead to the financial crisis.
Jain calls for Deutsche Bank to expand more into the US. At a press conference at the beginning of 2004 he said like a general before the campaign: "The USA remains as the bastion that we now want to take."
Anshu Jain achieved his goal, as so often. Over the next four years, US banks will pool and sell $ 1,400 billion worth of mortgage assets.
More than half of the bank's profits will soon come from Jain's division. Without him, Josef Ackermann could not promise a return of 25 percent.
Jain sells papers that colleagues call "crap"
The mortgage loan business works like this: Investors, i.e. insurance companies, banks and hedge funds, give their money to mostly small, regional banks, which pass it on to buyers of single-family houses, for example. In return, the investors receive interest and repayment. But they also bear the risk if a homeowner can no longer pay. In this case, however, they still have the house as security.
In order to spread the risk, however, an investor does not take responsibility for the loan of a single homeowner; instead, several investors jointly pay for thousands of houses. Experts speak of Mortgage Backed Securities. These mortgage bundles have good interest rates and are considered safe, since everything has always gone well so far.
The business is growing rapidly. While in 2000 mortgages worth 73 billion dollars were still bundled and passed on in the USA, in 2005 there were already more than eight times as many.
Little by little, the banks are loosening the rules for their lending. After all, they no longer bear the risk themselves if a loan fails, but the investors. Anyone who wants a home loan no longer has to prove their income and does not need equity. Loans are given to people who will never be able to repay them. Lowest income people who haven't saved anything.
At the same time, the houses are becoming more expensive: Because suddenly many more Americans are getting a loan to buy or build a house, the price of the house rises with this demand. When a homeowner can no longer pay the installments, they simply sell their home at the increased price, pay off the loan, and there is still a profit. The system works as long as new money flows into it.
The head of the department within Deutsche Bank that sells these bundled mortgage loans to investors is Greg Lippmann. A great quick-talker who wears sideburns with pulled-back hair and likes to brag about his bonus payments. Lippmann recognized early on how risky the mortgage business is. “You can call it a pyramid scheme,” he writes in one of the many emails that he will later regret. Later, when the US Congress was investigating the causes of the financial crisis, it sifted through and published internal documents from banks and regulatory authorities. So now everyone can read what Lippmann emailed back then. And he emails a lot, day and night, obsessed with his business. His emails sound like a gamer's, cynical.
Lippmann calls a certain bundle of mortgages “crap”. Even so, his department allows that $ 5 million to be packed into a $ 1.1 billion jumbo bundle of mortgage loans. Deutsche Bank markets what Lippmann has long since identified as a dung heap under the name “Gemstone”. Investors from all over the world are supposed to buy parts of it, the Deutsche Bank chooses the contents of the gem and sells its splinters.
“Misleading and wrong”: Commerzbank complains
Gemstone also includes about $ 80 million in mortgages from the Californian bank Long Beach, "one of the weakest names in the market" according to Lippmann. He calls another plant “pig”, a million dollars of which is in Gemstone. "Absolute pig": 30 million.
At Deutsche Bank there is a competition to see who will be the most successful seller of such portfolios, and an internal presentation lists the sales figures of the 20 best representatives.
The bank uses its anchoring in Germany to get rid of the riskiest papers here. In the summer of 2007, an employee balanced the sales of the past three years and named “the customers who, as far as I know, have the greatest risk on our list: Commerzbank, Basis, BSAM and IKB”. Both the German Mittelstandsbank IKB and Commerzbank are plunging the mortgage business into the abyss. You go bankrupt and have to be saved by the federal government with billions in aid. The Australian hedge fund "Basis" and the investment bank Bear Stearns with its "BSAM" department can no longer bear the financial losses alone.
Commerzbank has invested 16 million dollars in Gemstone, and IKB 87 million. Both lose everything. IKB later files a fraud complaint against Deutsche Bank and claims damages. In the complaint, she writes that the bank provided "incomplete, misleading and incorrect information" about Gemstone. Deutsche Bank does not even try to go through with the process: it comes to an out-of-court settlement with IKB and thus escapes a judgment; it does not disclose the amount of the settlement.
Anshu Jain, the future head of the bank, is also involved in the Gemstone sales, the legality of which will not be clarified in court until further notice. Internal documents show that he personally offered shares in Gemstone to the Swiss bank UBS in early 2007. Did Jain refer this customer to the reviews of his dealer Greg Lippmann? "I don't think he had much contact there," says Deutsche Bank spokesman Ronald Weichert. In any case, Jain remains unsuccessful: UBS is not buying any Gemstone shares.
Greg Lippmann, one of Jain's finest men, becomes more and more certain that the real estate bubble is bursting. Should he warn potential homebuyers not to overpower themselves financially? Greg Lippmann, the gamer, has a much better idea: He wants to make money from the collapse of the housing market.
In early 2005, Lippmann invited a few investment colleagues from Goldman Sachs, Bear Stearns, Citigroup and J.P. Morgan to the Deutsche Bank address on Wall Street. There is fast food from the Chinese. You are considering how to standardize credit default swaps, credit default transactions.
Such a business is not part of the real economy, no money is invested in houses or factories. It is a pure bet between two players in the financial market. One side is betting that homebuyers cannot repay their mortgages. As a stake, she pays one to two percent of the amount wagered annually. The money flows to the other side, which has to pay out the entire bet amount in one fell swoop - if the homebuyers go bankrupt.
At its core, the construct is nothing more than an insurance contract. With the crucial difference that neither side has to own the insured property themselves. Deutsche Bank will soon become a “top company in this emerging market”, as it writes in a press release in which it praises Greg Lippmann for his work. With the bets, Lippmann protects the bank's mortgage portfolio from losses. He also recommends the bets to selected customers, for whom he creates a presentation. “The strategy for making money when the housing market cools” is on the first page. And about it: "Strictly private and confidential".
Now only one player has to be found. Someone who collects a small sum every year and pays everything for it when the bubble bursts.
At first, the insurance giant AIG often plays along, but the business becomes too tricky for them in the spring of 2006. Instead, hedge funds, banks from Asia - and Europe. Often not directly, but indirectly: Gemstone, for example, includes loan default agreements in addition to mortgage packages.
In 2006, Anshu Jain is already considered Crown Prince Ackermanns, and thanks to high bonuses, he earns more than the bank manager. The business papers are working on the question of whether a native Indian can become head of Germany's most important bank.
On October 25th of that year, Jain received an email from an employee of the investment bank J.P. Morgan. He thanks Deutsche Bank for helping him bet on the drop in prices in the housing market. With a loan default agreement called Ixion 6-6, he was betting on the decline in value of a “tailor-made portfolio of BBB and BBB subprime mortgage bundles” This entire risk found investors and was a great partner in portfolio selection, structuring, pricing and distribution. ”He hoped the deal would be followed by many more.
The man who will be at the helm of Deutsche Bank from next week is well informed about this crap trade and the bets that will trigger the crash.
Anshu Jain replied that he was “delighted to hear that”, praising the “smart deal”. As the employee of J.P. Morgan judging the housing market? He replies: "Unlike Greg Lippmann, I don't think the housing market is about to armageddon, even though I think second-rate mortgage owners will have some real problems when house prices drop a little."
The suffering of the people that Deutsche Bank is betting on has long been evident.
"Not noteworthy," said a bank spokesman
How do you think the rating agencies rate a contract where you have to pay if mortgage bundles with the bad BBB– and BBB rating fail? Ixion 6-6 received a rating of Aa3 from Moody’s on September 28, 2006, which means: safe investment. Ixion 6-6 is therefore rated significantly better than the mortgage bundles it contains - and Anshu Jain knew of their poor rating at least since he received the email. He did not warn the customers who invested in the product.
"Mr. Jain was not involved in the Ixion 2006-6 transaction," explains bank spokesman Roland Weichert. And so the paper continues to be traded, new customers keep investing in the belief that their system is very safe. Moody’s only downgraded the paper to Baa3 in April 2008, and two months later to Ca - of the 21 rating levels, this is the second from the bottom. Anyone who invests here will lose their money to J.P. Morgan.
Deutsche Bank spokesman Weichert finds all the internal e-mails “not remarkable”. They would show "that there were different views on the market as well as within Deutsche Bank about the prospects for the US residential real estate market".
Lippmann, the gamer, becomes a security advocate over time. At a hearing before the Senate investigative committee, he said he had urgently advised the bank to fully secure its investments in the mortgage market with bets. But at the meeting in the hotel in Lisbon on January 22, 2007, Jain and the other managers criticized the existing bets because they were too expensive. Jain doesn't think the market will collapse.
When the real estate market begins to tip over in February, the crash becomes more likely - and Lippmann's betting position is more valuable. Jain suggests taking the winnings straight away. Lippmann can defend his position, with which he is now betting 5 billion dollars. After another meeting with Jain, this time in London, Lippmann emailed that the bank would make further bets: "480 million are still ahead of us."
Why is Deutsche Bank making new bets on the housing market collapse at this point? "I can't answer that," says Deutsche Bank spokesman Ronald Weichert. The bank's strategy was to secure its investments in the housing market - but the collapse made more loss than profit.
In the summer of 2007 the bubble bursts. More and more homeowners are trying to sell their home because they cannot pay off the mortgage. The price is falling due to the increasing supply of houses. At the same time, it becomes clear that all of the home mortgages were built on sand. Waste billions. The biggest economic crisis in decades comes.
Spring 2012. Anshu Jain, who looks strangely down-to-earth with his gray backpack over his anthracite-colored suits, is preparing to head Deutsche Bank with Jürgen Fitschen.
Greg Lippmann has since left the bank and co-founded a hedge fund. "LibreMax" manages 1.3 billion dollars, and in the first three months of this year the portfolio gained 5 percent in value. Also thanks to second-rate mortgage loans: He wrote to his investors that the investments were “cheaper than they have been for a long time in relation to other markets”.
Lippmann relies on a booming housing market again.
Anshu Jain too: In April 2012, Deutsche Bank and the British Barclays Bank bought a huge package of mortgage bundles on corporate and apartment building lots that was once worth $ 7.5 billion and that the US government took over three years ago. to stabilize the financial market. Both sides are silent about the current price of the paper.
Can a native Indian who loves cricket and speaks no German run Deutsche Bank?
■ Sebastian Heiser, 33, is the sonntaz editor. For this text he went through 5,901 pages of files from the US investigative committee
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