Podcast Transcript: Former Deutsche Bank Chair/CEO Josef Ackermann On Running a Bank and the Future of Banking

This is an edited transcript of our podcast episode with Josef Ackermann, the former chairman of the management board and the group executive committee at Deutsche Bank. We discussed managing DB around the GFC, banker compensation, underperformance of European banks, the future of asset management and much more. While we have tried to make the transcript as accurate as possible, if you do notice any errors, let me know by email.

Josef’s Background and Career Path

Bilal Hafeez (04:07):

Now on to this episode’s guest Josef Ackermann. Joe is a former Chairman of the Management Board and Group Executive Committee at Deutsche Bank. Under his leadership in the 2000s, Deutsche Bank became one of the top investment banks in the world. He also managed Deutsche Bank through the Global Financial Crisis. After he stepped down from Deutsche Bank, Joe went on to become the Chairman of the Board of Directors of the Bank of Cyprus until 2019. Joe studied Economics, Social Sciences at the University of St. Gallen where he earned his Doctorate. Now onto our conversation.

Welcome Joe, it’s great to have you on the podcast show, we haven’t spoken in a long, long time. So it’s good to have you on.

Josef Ackermann (04:47):

Thank you. I feel honored to be on your podcast I have to say. Looking forward to your questions.

Bilal Hafeez (04:52):

Great. Now, one thing I always ask my guests is something about their background. I always like to learn about people’s origin stories. So, I know you studied economics at university and you did a doctorate as well. So, economics sounds like it was always a bit of a passion for you and also kind of inevitable that you were going to then go into finance after your academics?

Josef Ackermann (05:13):

No, actually my father was a medical doctor so it would have been actually natural to become a medical doctor as well, but I was a bit more interested in politics. Although in grammar school I studied Greek and Latin, I got a bit frustrated when I turned 18 or 19 that I couldn’t actually understand articles in the newspapers. I didn’t understand the technical terms or actually the content of whatever that has to do with economics. So, I felt that I should actually start studying economics. And I was fascinated by economics.

Although my professor of math at the grammar school was a bit disappointed because I liked math and he felt that’s a little bit too easy. He didn’t know about how mathematical economics became later. But I love that a lot. Then it was the question whether after the thesis, whether I would stay at the university or go into finance or banking. And I felt that I should understand a little bit better how the theory really works in practice. So, I started working in a bank and actually never really went back to university. Although I was always part-time lecturing for many, many years, but it was absolutely clear to me that banking is actually the place to be and what I liked very much.

Bilal Hafeez (06:33):

And then you started off at Credit Suisse, I suppose in the late ’70s. What was kind of the financial world like in the ’70s and early ’80s? Kind of when you first started.

Josef Ackermann (06:43):

Well, we were a little bit split into First Boston which is the investment banking arm and more the commercial banking, wealth management which was at the time the Credit Suisse bank. I started the Credit Suisse bank but then also spent some time at First Boston. It wasn’t more traditional, but I think we tried to combine investment banking skills with commercial banking skills a little bit the same way as we did later on. What was certainly different was that we didn’t know about derivatives at the time. So about not in the early ’90s, we were approached by actually people from Bankers Trust, whether we would be willing to invest into some sort of a joint venture with them for derivatives and no one really wanted to do that because people were afraid of it – it’s too risky and maybe something which will be a nightmare for the one who runs it. And I was pretty young and interested and curious. So I took that job and that was really the breakthrough within Credit Suisse and we were quite successful for many years. And then of course the First Boston and Credit Suisse got closer and closer.

Bilal Hafeez (07:57):

And then you moved over to Deutsche bank. I think it was in mid-1990s. You sort of moved over to Deutsche Bank and you eventually went on to become the CEO and Chairman for a long period there. And you kind of oversaw the dramatic growth of Deutsche Bank into kind of a global powerhouse. So there’s always been this thing about can a non-US bank ever take on the big US banks in fixed-income or equities. And you really helped propel Deutsche to that level. What was kind of the idea of trying to make Deutsche more for global institution rather than just a German focused institution?

Josef Ackermann (08:34):

It’s actually a very interesting point. When I worked at Credit Suisse I was covering multinational companies globally for a while. And a lot of big German companies told me the same thing all the time: yes, we have Deutsche Bank and Commerzbank and Dresdner Bank – they’re very good for payments and for our lending, borrowing operations, but they are happy to have American and Swiss banks for capital markets and so on. And when I joined Deutsche bank, for me it was absolutely clear that this is the area where we have to expand and we have to become better because there were big German companies who are actually eager to have us on board there.

And so, we went into Investment banking and we recruited many, many people from different places, which was quite difficult and challenging. The different cultures. And I must also say for me it was very difficult because we were culturally not ready then. We were technically not ready then, and from an accounting perspective, not really ready then. So sometimes I don’t know how many faxes or emails every morning from people saying we can no longer stand that and we are moving on to other places. And finally we had a team and we really worked together.

And then, I think Bankers Trust acquisition was a bit the breakthrough because I remember we had a senior management conference outside of Rome and a lot of people said, “If you don’t do anything in the United States, we are not here to stay.” And Bankers Trust, although it was a different culture and not easy to integrate, immediately gave us a platform in the United States, which was so important. And I remember when we went to campuses to present our case before we had maybe 20 students and probably not the best ones. And then suddenly we had hundreds of students who were interested in our story and were willing to join us.

So, that was really the breakthrough. And then I think we came into a very strong position. I always felt that Germany needs a global bank which can operate together with global German companies or European companies on a global scale. And for me it was also clear that in order to achieve that, we needed a profit of roughly four billion euros at the time. Today probably the number will be higher. But we achieved that within a very short period of time, actually went up to over six billion. And we came through the financial crisis without taxpayer support and all of that so we could operate out of sense and we were clearly, it’s arguable, but I would say, one of the top three, four investment banking franchises in the world.

Managing Deutsche Bank Around the Global Financial Crisis

Bilal Hafeez (11:21):

There’s kind of a lots of interesting kind of elements of what you’ve mentioned. One thing obviously the Global Financial Crisis. Obviously in time is elapsed now so you can kind of reflect back at it in a different way. But many people, I was around at the time as well. And it really did feel like the whole banking system was going to collapse. It really felt like it at the time. Now with time having elapsed since then, what’s your perspective of how extreme that moment was?

Josef Ackermann (11:47):

Well, in parallel or not in parallel, I was also Chairman of the Institute of International Financial Association of the big banks and insurance companies. And I was very much involved in solving the crisis at the time. And we talked to a lot of politicians around the globe. And I always said same, this is a systemic risk and even being a market economist, I think we need a systemic response. And the systemic response means that you need public’s or taxpayers support, the government support. That took a long time actually. I remember having discussed that with Hank Paulson, the US Secretary of Treasury, and many others – Christine Lagarde in France, and of course the heads of the central banks.

There was not the absolute willingness at time to do that. I remember that the Sandy Weill from Citigroup criticized me in the German press and saying, “Well, he’s still young and he thinks this is the worst crisis ever. But I have gone through bitter days and so.” He apologized later on because he was dead wrong. No, this was an unbelievable nightmare and we were really close to a collapse. We had several banks in Europe and of course – how many banks in the US disappeared? Wachovia, Lehman, Bear Sterns and many, many more. So, in that sense, the situation was absolutely critical. And to go through that with some sort of strength was really a tremendous demonstration of proper good risk management, but also ultra-luck. We had positions I would rather not to have seen.

But somehow early in the crisis and maybe as an economist, I felt this is not a temporary phenomenon. This is a trend. And it really gets worse and worse and so we got rid of positions. I remember how much I was criticized by a lot of especially investment bankers were saying, “You are destroying our bonuses year-end because it will all come back and others are holding on to the positions and they’re doing much better.” And I think there were those who did keep the positions and those who even bought positions from others because they felt this is now a tremendous opportunity, they were of course dead wrong. And I think really those who somehow understood that this is a trend which will go on for quite some time and will completely change financial markets, including the push later on the regulatory framework, including all the legal risk that we have of course not foreseen at the time.

Bilal Hafeez (14:33):

And you also sort of talked about before the Global Financial Crisis, when you building up Deutsche Bank, there was organic growth, there was acquisitions, you were hiring teams from other banks. How did you as a CEO, how did you go about trying to get everyone to work together and try to create culture, Deutsche Bank culture?

Josef Ackermann (14:53):

I think all those who joined us, some of them were also disappointed in other places, but also those who wanted to build on their own career, and I think we had, that’s why we tried to find a slogan for a long time. And we were really having all this tremendous endeavor to outperform. And this culture of performance. And people rallied behind that because year after a year we got better, we were more profitable, we won mandates in many places of the world. And of course I have to admit that compensation went up to in parallel. So, it was this kind of performance culture I think which made it.

And the fact that I think we were very open in respecting each other. Whether you are from Latin America, from the Middle East, from Asia, from wherever you come from, I think we were absolutely open. And sometimes I said a bit jokingly because I’m from Switzerland which is considered to be a neutral place, that helped to the build the firm as a neutral party. So, I was not part of one block or another block, I was really absolutely open to maintain a culture of meritocracy. So, whoever was better got the job. And I think people felt that then and we had almost the same team together for many, many years which was an important I think breakthrough.

Banker Compensation and Bonuses

Bilal Hafeez (16:22):

You mentioned that just after the Global Financial Crisis, some bankers across the industry were still concerned about the bonuses. What’s your kind of view on the bonus culture in banks? There’s one argument to say that if bonuses are structured correctly, are the correct incentive and so people should be rewarded. On the other hand, people argue that it leads to excessive risk taking and it leads to bankers promoting the interests of the bank over customers. So, it’s very heated topic. How do you see this?

Josef Ackermann (16:59):

You can imagine and how many political discussions I was in often about bonuses and I still am. It’s very difficult to explain that to the people who are not in the industry. By the way, talk about the European Championship in soccer. Many of these people make much more money, but no one discusses that. And even if they miss a penalty, that is somehow accepted. If CEOs who runs companies of 100,000 more people makes mistakes, that is very costly. It’s costly for the economy, it’s costly for the people, it’s costly for shareholders, for everyone. And so, I think whether you went through the crisis without major losses and no public support, or whether you lost billions and billions of dollars is a big difference, versus a few million up or down in compensation, which probably doesn’t make a difference in the end.

But having said that, I think the structure of compensation was not good at the time. They were too volume driven. Some areas, we had guarantees which are not good. Many of them not voluntarily but people said, “I only joined you and I got the guarantee for the first two years.” But all of that was probably not good. I think as we have seen, many of the positions became loss-making after several years and people had already cashed in.

So, in that sense we had to change the structure and that was a good thing. Politically, it was also not bad to have some sort of, I wouldn’t call it cap but some limitations on compensation. The Chairman of the IIF, The Institute of International Finance, a member of the Swiss government, a former member of Swiss government, and the Chairman of UBS at the time, called me and said, “Could we agree on a cap of let’s say 10 million?” And I said, “Okay, I take that up.” So, I went to the meeting I had in Washington and I started by saying there is a proposal or a cap of 10 million.

And I have to say that many of the US banks’ CEOs left the room and called me, the legal counsel called me and said, “Stop saying that because this is antitrust, we’re in a competitive environment. And if someone is capable of paying higher bonuses, he’s better off and gets the people.” So, in that sense, it’s a little bit more complicated the whole bonus discussion, but I think that over time, we have found a better structure and the political debate around it has a little bit slowed down. Not everywhere in the world but certainly in the United States or in Asia and other places.

In Europe, there’s always a special case of compensation. It’s primarily true for banks and to some extent, also for CEOs of industrial companies. Banks are primarily in the focus and we have to be self-critical. We messed it all up in 2007, 2008. So, you had a good argument of saying, well, you always said that your performance is outstanding that you deserve that kind of compensation. And now we have to support you and the whole world is falling apart just because of your incentive schemes and your hunger for higher compensation.

So, in that sense, we were in a quite a difficult position. And as Chairman at the time, I spent many, many hours with a lot of people explaining and then also saying that we made mistakes. I remember I made in Washington, in the Press Club, a speech shortly after the crisis started. I explained self critically, what went wrong in the industry and I think we learned the lessons we gave out at the time, a booklet of lessons from the crisis, and many banks started to follow those advice?

Why European Banks Have Underperformed US Banks

Bilal Hafeez (21:05):

And if we kind of fast forward to today, how do you see the banking landscape? Because right now, you see the US banks generally doing quite well while European banks aren’t doing as well. The perennial undervaluation – if you look at price-to-book, European banks are still are trading at discount and that never kind of converged. Why do you think that is?

Josef Ackermann (21:26):

Well, let me give you two numbers or four numbers which I always like to quote. In the first quarter 2011, Deutsche Bank had a net profit of $3 billion, and JP Morgan was at $5.6 billion, so not even twice as much. In the first quarter of this year, Deutsche Bank was at $1 billion and that was the best quarter after, I think, seven years. And JP Morgan’s is at $14.3bn, or almost 15 times higher. Similar developments also occurred in the market cap and the global presence and capital base and so on. Now there are a lot of reasons for that.

One is which people especially in the United States and in Asia seem to underestimate. The European banks went from the Financial Crisis into the [European] Debt Crisis. And the Debt Crisis was for many of us, actually worse than the Financial Crisis. The Greek exposure, we had to write down by I think 70% or 72%, and there are uncertainties about other sovereign risks and many other things. So that was one. The second was the US economy have grown faster than Europe for many years actually and continued. Thirdly, and I have to say, the TARP program and how they did it in the United States was excellent. They supported banks with capital but no one actually talks about that anymore.

I was, as you know, very much of the opinion that we should not take capital from the governments or from taxpayers for Deutsche Bank for a simple reason. First of all, we didn’t need that, and of course it was a sign of strength to demonstrate that. But secondly, and maybe even more importantly, people would have said that for decades that we had to rescue this proud bank, and thanks to our taxpayers’ money, they survived then. And you have seen how much governments had intervened in terms of compensation, in terms of decision making in terms of supervisory board compensation. We would have suffered for decades reputationally.

Now you have a similar case in Switzerland – that’s UBS. But I have to say that in Switzerland, although it comes up from time to time, but it’s not as strict as it would have been probably in other parts of Europe. People talk about it but they gave a lot of credit to new management and they are not putting any blame on UBS for the past. And they don’t talk about it anymore. I think the emotional side and the political side was completely different. And in the US, they just allocated capital and people whether they needed it or not and shortly thereafter, they gave it back. It stabilized the banking system.

And the last point of course, was that we rescued or bailed out so many banks in Europe, but we kept them alive and they are still competitors in the market. Whereas in the US there was a tremendous consolidation which made the strong banks much stronger and also gave them government support. I think governments and central banks learned the lesson. And the pandemic, it’s different. The way central banks are supporting banks with long-term funding at very attractive rates and governments are supporting the companies, SMEs and others. Of course, it’s also helping them primarily, but indirectly it helps banks because instead of having huge bankruptcies and huge risk provisions, people could even release provisions they set aside at the beginning of the pandemic. So, I think the reaction has been completely different this time from what we had seen in the Financial Crisis.

The Need for European Bank Consolidation

Bilal Hafeez (25:22):

And even I think about when I compare the European banks to the US banks is that the US has, obviously a very large domestic capital market while Europe has a fragmented domestic capital market. Although they’re supposed to be capital markets union, but in reality, it’s the German capital markets, French capital markets, Italian capital markets etc. So, although there’s a Euro area economy, there isn’t really as strong kind of domestic set of banking opportunities are really at the supra-national level. How much of an issue do you think that is? And do you think there’s a possibility of ever having a proper banking union, capital market union?

Josef Ackermann (25:53):

Oh, that’s exactly was very important point. We need consolidation. Europe has been said for four years, nothing new. But very little has happened. I asked myself very often why? And there are certainly many arguments. One is, I think that we did not fully realize the banking union, because we do not have a deposit insurance scheme on a European level. In Germany, it’s completely different because of the savings banks and cooperative banks have an extremely luxury deposit scheme for private banks. That had actually helped some of the foreign banks to tap funding in the German market, like Lehman did, because there was the protection of the private banks’ deposit insurance scheme. So, it actually costs us a lot of money. And this is still the case.

Secondly, a dramatic nexus of sovereign risk and banking risk. The sovereign risk (and this gotten worse) on the balance sheets of many European banks is dramatic now. We can say for the time being, the ECB may buy all these assets, but for how long? By the way, that’s why I was always very much in favor of helping Greece because I felt if this domino effect moves on to Italy, or Spain, or Portugal, or even France at the end, we would have been all dead in the water. That’s why we had to stop the fire in Greece even at the cost.

Thirdly, there was what you mentioned, in regards to capital market union, there’s no real level playing field. There’s no real single market for retail; every country has different retail products, retail structure. To get the economies of scale out of that is quite the challenge and probably almost impossible. Another point is certainly the asset quality and risks, legal risk and other risk at the horizon. Regulatory uncertainty was an issue which is less so now but still a little bit in the minds of people. And of course, the acquisition currency with the low valuation which we had. If you take the market cap of Deutsche Bank is, although tax is 2.5x higher now than it used to be 10 years ago, the market cap is still below the level we had 10 years ago.

And last but not least, and this is for me quite an important and probably underestimated point, is the political-emotional side. When I was running Deutsche Bank, I was approached by four or five different banks and they all wanted to merge with us. But they all wanted to be incorporated outside of Germany. So, it’s very difficult for a French bank to move to Germany, or for a German bank to move to Spain or to wherever. I think we’ll see rather more in-market consolidation, but that’s very difficult especially now in the pandemic situation to lay off 10,000 people, is challenging. But after it will be, the more we go back to more nationalistic thinking again, the more difficult that will be.

That’s contrary to the United States right? Moving from, Los Angeles to New York is also challenge, but it’s somehow manageable. Whereas moving with the head office in Europe might be, especially for the big bank for the, let’s say those who are the jewels of a country in the perception of people, that is not easy. And that’s probably a more psychological point, but which played a role in my personal case several times as I said.

How Will Fintech Disrupt Banking

Bilal Hafeez (30:03):

One big topic at the moment in the banking sector and finance in general is the whole rise of FinTech. As we all know, the cost structure of banks is very large, and if revenue opportunities and level of yields are quite low, banks have to focus more on the cost side. So, you hear all these stories about FinTech coming in, disrupting banks and so on. What are your thoughts on the FinTech side of things? And will that somehow disrupt banks and unbundle banks in some way?

Josef Ackermann (30:28):

It is here. About 30 years ago I was asked by the World Economic Forum to make a presentation on the future of banking. And that was in 1990 for the first time and I said I think in 15 years banking will not be as different as it is today. And although we talked about GE Capital as being probably the outperformer in our industry. And we talked about other entities who were clearly challenging banks. But I think I was right. And today I would say everything will be completely different. Well, it starts with consolidation, but also that the competitive environment has changed. FinTechs are clearly disrupters but also other areas which will operate in a different environment.

Having said that, I’m not so sure whether FinTechs will grow into a situation where they can really challenge the big banks. On the cost side absolutely, yes. But in terms of product, and there’re different areas which are a little bit protected for banks. One is the regulatory environment. People have seen that some of the FinTechs were not safe havens. And clearly, they look a bit more into how a bank is regulated and supervised. Secondly, banks are not standing still of course, they are also taking stakes in FinTechs, acquiring FinTech, they are moving into the same areas.

And FinTechs so far are primarily on the credit supply side, on the payment side on transaction banking. And to some extent, on the asset management side or the private wealth management side. And of course, to give more transparency on over different banking relationships. But overall, banks at the end is a relationship business. And I don’t think that can be replaced so easily. And you need a global setup. Look at even in private banking, if you don’t have global research somewhat available, it’s very difficult to offer the same quality products as someone who can offer that.

And in M&A or capital market you need capital to support that. Even in SPACs now, you need the liquidity and capital to support certain transactions, all of that. And you need the network on a global scale. So yes, it is changing, the cost culture is changing on the supply side, but I don’t think it is really going to marginalize banks in any time. The famous saying of, banking is necessary, banks are not. I still don’t think that’s the imminent future of the banking industry.

The Importance of Capital Markets in Europe

Bilal Hafeez (33:24):

And then how about, the terms of the structure of banks having commercial banking operations and investment bank operations under the same holding company. Should you separate investment banking from commercial banking or not? So, obviously you joined Deutsche you were kind of pushing on all fronts. Since the Global Financial Crisis there’s been this whole kind of ring-fencing type arguments and so on. Do you think that’s the right setup? Or do you think that’s just a phase we’re in and we could move back to a different environment later?

Josef Ackermann (33:54):

Well, what about you should not do is using the funding base of retail, cheap money, and transferring it into riskier investment banking activity. You should actually add the risk premium to the funding constant. I think that’s very important. For smaller or mid-sized commercial banks, this is a tremendously difficult topic. On one side, SMEs and larger corporations, they need more and more investment banking skills and investment banking products because they want to tap the capital market, M&A activities, hedging, IPOs, etc.

And just to be in the lending and paying and receiving basis and transaction banking (so trade finance) is a challenge. When I was Chairman of a smaller bank in Cyprus, in order to help them to survive for a while, we had this discussion all the time. How far can you go? On one side, yes you should be capable of offering this kind of services but certainly not moving into a situation where you have to take your own risk. So, sales and trading is almost impossible on that scale. But you should have some advisory capabilities or otherwise companies will just move on to the bigger banks.

And that is difficult and probably also shows that the size matters and smaller commercial banks in my view, will have a tough time to survive. And when I was in the ’70s, I attended a seminar with JP Morgan in New York. And we talked a lot about disintermediation. 80% of funding in the United States was through capital market, money market, and in Europe was almost the other way around. And I was a strong believer that disintermediation will become more and more important. That’s by the way, one of the reasons I felt that going into investment banking is the only future.

And in today’s world, this is even more so. Now we talk more and more about the capital market union in Europe and we are making some progress. And we have to move on because big funding needs can only be satisfied with capital market activities. And that means that you need those banks who can broker between investors and companies or other borrowers.

Bilal Hafeez (36:39):

Absolutely. And I also kind of wonder whether the fact that the US has such large capital markets. Whether that’s helps the whole VC environment, the Venture Capital environment in the US in tech startups. And Europe has always lagged behind. And it kind of seems it’s partly at least to do with the fact that you do need capital markets to be able to support startups.

Josef Ackermann (37:01):

That’s a very important point. They’ve complained about that now decades. And that, why are some of the innovative IPs being developed in Europe, but then moved to the United States in order to be maintained. And that’s one of them, there are several reasons, but one of the major reasons of course is the capital market. That’s why we are all bombarded by people, whether we are willing to allocate some money to them. And this is not really working, a bit better in some countries but not on a European scale.

The Future of Asset Management and Active vs. Passive Investments

Bilal Hafeez (37:38):

Now, we’ve talked a lot about the banking side, what about the asset management side? You’re in Switzerland, obviously the home of private banking. There’s lots of different layers of the asset management community. There’s kind of institutional asset managers private banking, private asset management. There’s lots of challenges to that sector. One is been the rise of passive and all these index trackers, has been kind of one big thing that’s really affected the industry. Do you have a kind of a view on the active versus passive debate? And then more generally, your view on kind of the future of asset management.

Josef Ackermann (38:11):

Let me quickly start with asset management. I think most European players are just too small. And that’s why a lot of much discussions go on in Europe, in the asset management field. That there is a concrete case right now as you know. And we are hovering around the similar revenue or profitability base in the last almost 15 to 20 years. It’s amazing if you think some of the big suppliers of mutual funds, maybe it’s 100 million up or down. But it’s not the real breakthrough, it’s quite amazing. So, we need consolidation there, that’s absolutely clear.

Bilal Hafeez (38:50):

And the benefit of consolidation would be to do with cost advantages and distribution advantages. Why is the size important?

Josef Ackermann (38:57):

Well, costs are clearly obvious, but distribution are more important. People have maybe tried very hard to sell mutual funds out of Germany into France, into Switzerland and with some success. But the people are actually buying their own funds in their own country. And of course, you need these international distribution networks in order to gain market share in that respect.

Now to active and passive, well, there are many studies saying that passive are normally outperforming active. And I have here just based on my own experience, of course for those who don’t have the knowledge and don’t have the time to study markets and companies on a larger scale for them I think is the passive side or, or discretion side where you give a mandate to banks, probably it’s a good way forward.

And I use that too, passive asset management, but passive private banking. But I’m also a strong believer that if you have some conviction on certain areas that the active private banking is quite attractive. And if I look at the last 10 years, I think I always outperformed, well mostly outperformed passive products by some conviction trades, where I felt this is now good time to invest, or where I saw advantages in many years without any insight or knowledge, of course. But it requires a lot of work and as a retired person, I have a bit more time now to go into some depths into different structure products or companies or regions.

But from a banking perspective, although it’s not cheap, it’s to have this kind of advice service where a bank calls you and based on their own analysis, and gives you some good advice. So, the mix of passives ETFs, especially in certain themes, like batteries or fintech as we’ve mentioned before. And then you have the more active where you think, okay these are companies I know, I trust, I know the people there, and you pick them. And this combination for me is the best.

I would argue that yes, passive normally is outperforming, but it depends a bit on the investor. And if you have time, and hopefully the expertise to do some sort of stock picking, you’re probably better off, but as a combination of all of them. Now, of course on top of that, there are now new challenges for banks and robo-advisor is one word which I would like to mention. And of course, digitization is very important. As a client of a bank, what I like is to have digital access, where I can have my portfolio on the screen all the time, as accurate as possible. And at the same time to have some human touch, relationships with one or two bankers who are not just the relationship people, but also the analysts, or those who are more on the portfolio side of the bank. And maybe even the trading side. And I think this is adding additional value to a client. But of course, this is not true for retail, or be difficult for retail, or the mass affluent clients who can invest a little bit mor. This is for me the ideal combination. And banks who can offer this kind of service, I think, are extremely well positioned.

How Western Financials Can Benefit from China

Bilal Hafeez (43:00):

Now, your one thing we haven’t talked about so far is actually China. And there’s always been this thing how China’s the next big market for everybody including banks. And the question there is, is it really possible for western financials to meaningfully have a presence in China or not? Do you think?

Josef Ackermann (43:18):

Depends on where the presence is. As you probably remember we were in the lead management group of all four IPOs of the large Chinese banks at the time and those were very attractive transactions. Together with Goldman and Morgan Stanley and probably JP Morgan at the time (I don’t remember all the names) but in investment banking, and in asset and wealth management, it’s absolutely possible. And it will happen more and more so. Look at how American banks are critical of what the new administration and previous administration are doing in terms of this China confrontation.

Because they all see that China is slowly but surely opening up and inviting foreign financial institutions to participate in their economy. And that is absolutely the case and it’s very attractive going forward. In retail and in pure lending commercial banking, I think that will be very difficult. We had at the time a 20% stake in one of the mid-size banks, which was quite attractive as an investment. But of course, we had no possibility of playing role in the retail or commercial banking market. And I think that will not change because the Chinese banks are very big, very profitable, very strong, and also politically, that will not be the case that they open up.

But where they see innovations, where they see products where they can benefit from, absolutely you have a chance to increase market share and that’s why I think, but that’s now a more political remark, it’s very important that we try to have cooperation with China and not confrontation. Because those who will have confrontation will probably end up losing that market and that will be not very attractive for banks, or insurance companies.

Bilal Hafeez (45:27):

I could definitely tell that your Swiss side is coming out again in terms of the neutrality.

Josef Ackermann (45:36):

I understand there is of course a big rivalry between those countries who were dominating the world, and those who are now becoming serious competitors. What I’m saying is for Europe, we should not be put into one block or the other, we should have our own clear view. And I’m not talking about Switzerland we are too small for that. But Europe as a whole, because we should have our own strategy, and our opposition vis-à-vis China. Because China, whether we like it or not, will be a very, very important factor in decades to come. And we should not lose sight of that.

Josef’s Productivity Hacks and Book Picks

Bilal Hafeez (46:15):

And, we talked a lot about big picture stuff. I wanted now to ask some more personal questions. One is, this is kind of a new question I’ve started to ask recently to my guess, which is what’s the best investment advice that you’ve ever received?

Josef Ackermann (46:28):

I think what Warren Buffett said is probably a very good one. And I normally try to stick to that. Only invest in assets which one can really understand. And that is very important. I made a mistake in investing in a FinTech because I really didn’t understand quite what they wanted to offer. I understood the product, but I didn’t ask sufficiently the question how we are going to monetize that. And that is more challenging in many cases. But really what you understand.

The second one, sometimes people tend to be too greedy and to stay in too long, the trend will continue. And I learned the lesson that if you have a nice profit and you think the trend is coming to an end, better sell. Because even if it goes on a little bit more, and I always say the opportunity cost just doesn’t outweigh the losses. I think that’s true in many areas of life, opportunity costs, you may regret, but this is something you can accept, but losses are a bit more difficult.

Bilal Hafeez (47:41):

And then another question was just about how you manage your research and information flows. Because it’s so easy to be overwhelmed by information and so on. Do you have a routine in terms of filtering good information or research from bad? And to know what you should focus on.

Josef Ackermann (48:02):

Whether you like it or not, you’re probably forced to read a lot. And of course, today we are having access to all kinds of information, left and right. But probably you’ll learn after a while how to differentiate between good research and bad research, and then we stop reading it. I print certain things and then I read it in the plane or over the weekend. And that you differentiate what is important, what is less important and of course what is urgent, less urgent.

What I see also of course something which is, a cost or a burden you’ll have to accept, that of course the media coverage. The former Prime Minister of Italy, Berlusconi once gave me, or passed on an advice he got from Baroness Thatcher, who said, “Ask your people to show you only the positive articles and then you’ll have very little to read.” And I have to say I did it the same way. Now, of course from time to time, you have to read the critical as well to get to know a bit what’s being criticized. But hour after hour, to read all these articles about you, about your company is actually, probably not very healthy, and not very helpful either, because there’s not much you get out of it. But from time to time maybe you read a positive article is quite encouraging.

Bilal Hafeez (49:29):

And then the final question I wanted to ask was, what books have really influenced you over your career? Or it could be work related or could be personal.

Josef Ackermann (49:40):

It’s on a personal level, maybe a bit official, but I must say a book which I still read from time to time, and had probably big impact on me in many areas, some of the wisdom of the book, is probably The Faust from Goethe, which I still find one of the greatest books. And of course, there was more on work. Unfortunately, this is no longer the case, the same way. But whenever I went to New York I spent hours over the weekend in bookstores just going through all the management books, and banking books and product groups.

If I had to mention three or four which probably had an impact is probably, the books about team building. Probably, certainly In Search of Excellence at the time, probably Built To Last was one. And I read with great interest and quite often, Peter Drucker’s books on management. I actually liked the book, The One Minute Manager, which gave some input into how to manage yourself, how to manage a company or a division. So, these are certainly a few books which had an impact.

Bilal Hafeez (51:01):

And that’s great. And just on The Faust, presumably you read it in the original German, I assume?

Josef Ackermann (51:07):

Yes.

Bilal Hafeez (51:07):

And out of interest, how many languages are you competent in?

Josef Ackermann (51:11):

Well, of course in Switzerland you should speak three languages, that’s German, French, and Italian. And then of course if you’re traveling the world, you have to know English. And I also studied a little bit Spanish, but I must say I confuse it quite easily with Italian. I would say I speak for four languages, English, German, well Swiss German and good German of course, and French and English.

Bilal Hafeez (51:43):

That’s great, it’s good to know. Well, it was excellent speaking to you. I’ve really enjoyed our conversation. And so, I just wanted to give you a big thank you for taking part in our podcast.

Josef Ackermann (51:53):

Thank you and excellent questions which really made me think hard, so congratulations.