I joined Deutsche Bank in 2006 to build an investment business within its commercial real estate lending operation, and I was generally surprised by the aggressive sales culture within our firm. While many people consider the banking sector’s problems to be caused by residential lending, I witnessed multibillion-dollar loan proposals for commercial property... these loans were “priced to perfection” and assumed that property prices and rental rates would continue to rise. For perspective, a single billion-dollar commercial real estate loan is equivalent to 2,000 residential loans of $500,000.
In general, my colleagues are hard-working, decent people, but the system of incentives encourages people to take risks. I have seen honest, high-integrity people lose themselves in this cowboy culture, because more risk-taking generally means better pay. Bizarrely, this risk comes with virtually no liability, and this system of O.P.M. (Other People’s Money) insures that the firm absorbs any losses from bad trades.
As these losses have grown, taxpayers are being forced to absorb these losses. As an example, my firm recently received nearly $12 billion from American International Group (which has effectively been nationalized with $180 billion in taxpayer funds). Essentially, every American household sent my firm a check for $105. The reason for this payment: my firm bought credit default swaps from A.I.G. In plain-speak, we bought unregulated “insurance” from A.I.G. to cover losses from bad trades. What did taxpayers get in return?
Nothing. Taxpayers simply paid an I.O.U. triggered by our gambling losses. (Note: This $12 billion payment was more than 50 percent of our market capitalization at the time of its disclosure).
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