The Trials Of Josef Ackermann As CEO, he helped build Deutsche Bank into a global giant. Now he's facing ten years in prison.
By Janet Guyon

(FORTUNE Magazine) – For a man about to go on trial for a crime that could send him to prison for ten years, Josef Ackermann, CEO of Deutsche Bank, seems remarkably calm. It's not long before Christmas, and sitting in Deutsche's Zurich office he flips through a presentation he's about to give to Swiss investors. He points out the company's strengths in sales and trading, its success at cutting retail-banking costs, and the potential to boost returns by selling old investments in German companies such as DaimlerChrysler. As he presses the bank's case, a secretary interrupts to tell him that Chancellor Gerhard Schroder is on the phone. "Nothing newsworthy," Ackermann shrugs upon his return.

What is newsworthy is Ackermann's predicament. In one of the most bizarre attacks on the corporate excesses of the 1990s, German prosecutors have charged Ackermann, 55, and five others with Untreue, or breach of trust, for their actions as executives or members of the board of Mannesmann, a German telecommunications company. Their alleged crime: unlawfully granting $56 million in appreciation awards and accelerated pensions to Mannesmann executives, including $15 million to former CEO Klaus Esser, after Britain's Vodafone agreed to acquire the company in a hostile $163 billion takeover in February 2000.

The board made the awards to recognize management's success in forcing Vodafone to raise its bid by nearly 30%. Ackermann isn't accused of looting Mannesmann, or creating billions in fictitious profits, or even awarding himself a bonus. No, German prosecutors have taken the view that $56 million is just too much appreciation. After a two-year criminal investigation, Ackermann, Esser, and four others--including Klaus Zwickel, former head of IG Metall, Germany's largest union--were charged last February with violating an obscure law (normally used to prosecute smalltime embezzlers) by approving payouts that weren't part of the executives' employment contracts.

So, starting Jan. 21, Ackermann will be spending two days a week in a tiny Dusseldorf courthouse, more than 100 miles from Deutsche Bank's Frankfurt headquarters. The trial could drag on for as long as six months. Few people expect Ackermann to wind up behind bars, but the outcome of the case is far from certain. "In Germany we have a saying," says Johannes Mocken, a spokesman for the Dusseldorf prosecutors' office. " 'On a ship and before the court, you are in God's hand.' No one knows how it will end."

Ackermann won't talk about the case in public. But Deutsche Bank is squarely behind him and funding his defense. In filings with the SEC in the U.S., Deutsche's board calls the charges "arbitrary and incomprehensible." Its senior counsel says the criminal charge isn't applicable because the awards were legal under German corporate law. Ackermann has refused to resign and says he will appeal to Germany's highest court if he loses. But some bank executives fear that a long, drawn-out struggle could damage his reputation and make it impossible for him to remain head of one of Germany's flagship companies.

The case comes at a critical time for Deutsche Bank--and for Germany. The country is struggling to liberalize its labor laws, overhaul its pension system, cut unemployment benefits, and reform its corporate governance rules in order to boost growth, which was flat in 2003. Many of those efforts are being fought by unions and politicians who want to preserve Germany's social welfare system and the business regulations that support it. Within Deutsche, the Ackermann trial is seen as yet another sign of resistance to making changes necessary to respond to the forces of globalization. "There is a battle for the soul of Germany," says one high-ranking bank executive, who doesn't want to be quoted by name. "Joe is sounding the call for reform, and some find his agenda of becoming international objectionable."

Reaction to the case shows how deeply split Germany is. Oskar Lafontaine, former chairman of the ruling center-left Social Democratic Party, has called the Mannesmann payouts "organized crime." And some newspapers have questioned whether Ackermann should resign. But Angela Merkel, leader of Germany's opposition center-right Christian Democrats, has called the case a "blow to Germany as a place to do business." And Schroder's finance minister has expressed his support for the Deutsche CEO.

"The country has to come to grips with whether to tolerate this kind of level of pay," says Theodor Baums, a law professor at Frankfurt University who headed a commission on corporate governance in 2000. But dragging Ackermann into court to debate executive payouts could inflict severe damage on one of the few German companies to make a mark outside its borders. Should Ackermann go, says one bank insider, "I'm not sure the bank would remain independent." (Rumors have swirled that Citigroup wouldn't mind buying it, an idea Ackermann dismisses.) "If Ackermann is forced to resign, that would be a disaster for Deutsche Bank," says Baums. "He stands for a certain plan of restructuring and taking the bank into the next decade. They are in the middle of this process."

Long the bank of choice for corporate Germany, Deutsche (2002 revenues: $52.1 billion) is about half the size of Citigroup, the world's biggest bank. It has investment-banking operations in New York City and London, retail branches in Germany, Italy, and Spain, and $1.2 trillion in assets under management. Under Ackermann, who became CEO in May 2002, Deutsche has built a world-class investment bank that is the leading seller and trader of debt and equity securities. It has also begun selling off shares in slow-growth German companies such as Allianz and RWE. Revenue from outside Germany now accounts for 68% of the total, up from 38% in 1998, largely the result of growth in investment banking and asset management, as well as the U.S. acquisitions of Bankers Trust in 1999 and Zurich Scudder Investments in 2002. "Ackermann has modernized Deutsche in a most impressive way," says Carl Hahn, a former Volkswagen CEO.

Yet there's more to be done. While Deutsche is the world's second-largest bank by revenue, it is a lowly 19th by market capitalization ($49 billion), behind smaller European rivals such as Switzerland's UBS ($75 billion) and France's BNP Paribas ($58 billion). And with a pretax return on equity of 9.7%, it's not nearly as profitable as Citigroup (28.5%) or Goldman Sachs (20.5%). Ackermann's goal is to raise pretax returns to 25%.

If the bank continues to follow the Ackermann strategy, its shares, which are trading at about $84, could finally approach the valuations typical of its global peers and meet the goal Ackermann set when he became CEO of $126 by the end of 2004. It's a challenging target, given recent history: The stock is trading at roughly the same price it was four years ago. "We suffer from being German because German companies have lower valuations in general than U.S. or U.K. companies," says Ackermann in a rare interview with the non-German media. "But in a globalized world, if you do not adjust to how the world functions, you will never be successful."

Ackermann was brought to Deutsche Bank in 1996 by former CEO Rolf Breuer, now chairman, after 19 years at Credit Suisse. His assignment: to build a truly global investment bank. Before Ackermann's arrival, Deutsche had made several attempts to stake its claim as a global player, acquiring British merchant bank Morgan Grenfell in 1989, hiring a slew of former Merrill executives, led by the charismatic Edson Mitchell, in 1995, and buying Bankers Trust for $10 billion. But its investment bankers in London and New York were constantly at war with headquarters, which didn't understand why the top guns insisted on huge IT resources or multimillion-dollar pay packages. Deutsche needed Ackermann--a politically savvy German-speaking Swiss who understands the German mentality--to bridge the gap between the new world of international finance and the bank's prosaic retail and commercial banking business.

By the end of 2000, Ackermann was poised to put Mitchell in charge of sales and trading and begin a one-year apprenticeship before succeeding Breuer as CEO. But Mitchell perished in a small-plane crash in Maine in December 2000, forcing Ackermann to stay on at the investment bank. A year later Ackermann pushed through a reorganization that created a group executive committee, which gave him the authority of a U.S.-style CEO and was yet another signal of Deutsche's adoption of American capitalist values. Ackermann put a cadre of young non-Germans on the executive committee, including Indian-born Anshu Jain, 40, who runs Deutsche's biggest business, the trading and sale of debt instruments out of London, and two Americans--Kevin Parker, who runs equities out of New York, and Michael Cohrs, head of corporate finance in London. Each has built his own team of bankers. Jain says the 19 who report to him are from 11 countries. Most are under 40. "We aren't just hired guns," says Jain, who came from Merrill. "We get to participate in the asset-allocation discussions instead of just being told to produce adequate returns."

This polyglot collection of U.S.-trained investment bankers has turned Deutsche from a laughingstock into a global power. Under Jain the bank's debt-sales and trading operations, called Global Markets, have continued to thrive, accounting for about 30% of Deutsche's revenue and 50% of its $5.5 billion of projected 2003 pretax profit. Jain has moved the division deeper into derivatives, particularly credit derivatives. The German bank is now No. 2 in the market, behind J.P. Morgan. He has also pushed into emerging markets. "Mumbai is not a daunting place to me," notes Jain.

Parker, 44, who joined in 1997 from Morgan Stanley, has built Deutsche's equity division into the world's largest, as measured by revenue from sales and trading. In the first half of 2003, equities revenue totaled nearly $2 billion. Parker has taken a contrarian approach, eschewing the temptations of the dot-com era and expanding in Japan and other parts of Asia while competitors retrenched. Deutsche is now the biggest foreign dealer on the Tokyo exchange. Most of the bank's equity revenue is still generated in Europe; the U.S., says Parker, is "unfinished business."

The most controversial change in the way Deutsche does business came nine months ago, when it began to reconsider how it makes corporate loans. Deutsche had a history of lending to big companies with which it had longstanding relationships, without regard to how the credit of those companies traded in the secondary markets. "We were lending and hoping," says Jain. The practice led to embarrassingly large loan losses, including $2.2 billion in 2002 from loans to telecom and industrial companies.

In April, Deutsche hired Betsy Gile, an American who had spent 24 years evaluating corporate credit at J.P. Morgan, to head a new loan-exposure management team based in New York. Her group evaluates whether new corporate loans are being offered at market rates. If Deutsche believes it won't get other business, such as an equity or debt underwriting, by lending below cost, it doesn't make the loan. The result is that "we have reduced the loan portfolio dramatically," says Ackermann, "but more important, we have exited relationships." Problem loans at Deutsche have dropped by 43% since 2001.

All this has given Deutsche the gloss of a modern institution. There are two distinctly German problems left. First, though operations have been tightened, retail banking is still overstaffed and not as profitable as it should be. Second, 20% of Deutsche's capital ($6.9 billion) is tied up in money-losing investments, such as an 11.8% stake in DaimlerChrysler.

The retail problem rests with the structure of Germany's fragmented banking industry. The four big private banks--Deutsche, Commerzbank, Dresdner, and HVB--control 20% of the market. (In most countries the top five banks have 60%.) Under Rainer Neske, 39, who heads retail and private banking, Deutsche has instilled a sales culture, measuring staff on how many investment products they sell. Ackermann says he expects the division to make more than $1 billion in pretax profits next year.

Still, because Deutsche's market share is low, it can't make the returns generated by its big rivals in the U.S. or Britain. Deutsche could address that problem by buying another retail bank in Germany, Italy, or Spain. "If we had a chance to increase our retail operations and increase economies of scale, yes, I would be interested--within the European market," says Ackermann. Consolidation in Germany is likely to begin soon, because state banks lose their government backing in 2005.

Fixing the second problem is trickier. By selling stakes in its German industrial holdings, Deutsche jeopardizes long-standing relationships that it wants to preserve. "It's not just a question of whether we do it--it is also important how we do it," says Axel Wieandt, head of corporate investments. "We don't want to burn territory." German banks have traditionally held big chunks of German companies, acting as in-house advisors and as blocks against foreign or hostile takeovers. Because old German accounting rules understated their value, those stakes also served as a hedge against bad times for the bank.

Last year Ackermann sold $5.3 billion worth of industrial holdings that weren't making money for the bank. "People said, 'He is selling the family silver,' " says the Deutsche CEO. "That is not quite the way we see it." When Deutsche sold its Munich Re stake for $215 a share a year ago, "I was criticized for selling so cheaply," he says. "A few months later the shares were at $52. If we hadn't sold it, we would not have realized this capital gain that paid for restructuring costs. But it is very difficult to explain to some people."

It may also prove difficult to explain why Esser, the former Mannesmann CEO, deserved a $15 million payout when he was leaving the company. Prosecutors reacted to the issue after two Stuttgart law partners, Martin Sorg and Mark Binz, filed a complaint, exercising a German citizen's legal right to have alleged violations of criminal law examined. "I see no argument that such a payment was in the interest of the company," says Sorg.

The untreue charge had never been used in a corporate setting before, nor had directors of a German company ever been prosecuted for paying their executives too much. (Until a few years ago executive pay in Germany wasn't even disclosed. Ackermann himself earned $4.5 million from Deutsche Bank in 2002.) Sorg believes the charges will be settled with a fine after the trial begins. "Many politicians say that this will damage one of Germany's leading institutions," says Mocken, the prosecutors' spokesman, "but it is our duty to bring people to court if we find things that should be punished."

Still, a guilty verdict could do irreparable harm, not just to Deutsche but to Germany's ability to create and attract global players. It's one thing for routine business decisions to be subject to shareholder lawsuits or regulatory sanctions. It's quite another when they're subject to criminal prosecution. "The sanctions of criminal law cannot be applied to all business decisions," Reinhard Marsch-Barner, Deutsche's senior counsel, argued in court in July. "Without broad discretionary leeway in the management of a company ... business activity is simply not conceivable." Unfortunately for Deutsche Bank, and for Ackermann, a German court will have the last word.