Ivan Fallon: Gordon Brown foresaw the 2009 crisis that Deutsche bank is still paying for

European banks never did take the sub-prime fallout seriously, and nor did they deal with their capitalisation issues. The result, which is now playing out at Deutsche Bank, is potentially the biggest banking crisis, particularly in Germany, since the 1930s.

On October 4, 2008, exactly eight years ago today, the global financial crisis was approaching “a situation that risked becoming worse than 1929”, according to the then British prime minister, Gordon Brown. At his behest, the French president Nicolas Sarkozy called a mini-summit of European leaders in Paris to discuss joint action to pump new capital into their banks. Mr Brown had just come back from Washington, where he had urged George Bush to adopt similar measures, but failed to get the US president to take him seriously.

“I told him that the crisis was … a bank capital problem, and that nobody believed the protestations of the banks any more,” he said afterwards. This was a global problem, he told Mr Bush, which required a global solution, which meant recapitalising all the banks, but “without American buy-in it wouldn’t be enough”. Mr Bush politely laughed him off, saying he would “speak to Hank” [Paulson, the Treasury secretary].

In Paris the next day, Mr Brown urged action on his fellow EU leaders.

It was a high-powered meeting: Mr Sarkozy, a big fan of Mr Brown’s plans, chaired it and the others present were Ger­many’s chancellor, Angela Merkel, Italy’s prime minister, Silvio Berlusconi, Portugal’s prime minister, José Manuel Barroso and Jean-Claude Juncker, president of the Eurogroup. The meeting was, Mr Brown later reported, disappointing and inconclusive. “I could sense that most of Europe still considered the problem an essentially American one,” he wrote in his memoirs Beyond the Crash, and the leaders present “did not believe that they had as big a potential banking and financial fallout as the Americans and the British and that if European banks were under pressure it was not because of anything they had done wrong but because of contagion from the US”.

In fact the opposite was true. European banks, it emerged later, were in fact more highly leveraged than US banks and, we now know, half of the securitised US assets, particularly mortgage-backed securities, were held by foreign investors, most of them in Europe. Mr Paulsen eventually – and very effectively – dealt with the issue of undercapitalisation by calling in the top nine banks and brutally telling them they were all going to take US government money whether they wanted it or not. Mr Brown did the same in Britain, insisting that all the banks, without exception, raise £50 billion (Dh236.06bn) of new capital between them and if they couldn’t find it themselves, the government would provide it. In the end, Barclays found it from Qatar while RBS, Lloyds and HBOS were forced to take the “King’s Shilling”, as a Bank of England official jocularly referred to it. As part of the bailout, Lloyds and HBOS were forced to merge.

But the European banks never did take the sub-prime fallout seriously. The result, which is now playing out at Deutsche Bank, is potentially the biggest banking crisis, particularly in Germany, since the 1930s. Far from European banks being immune, the American authorities have slapped a US$14bn fine on Deutsche for mis-selling toxic products linked to US mortgage-backed securities. The fine, even if reduced, could sink the bank.

Last week, concerns about its capital buffers sent shares in Germany’s most totemic bank down to 33-year-old lows and threatened to spread across Europe, threatening EU stability.

Deutsche was once a paragon of staid and conservative banking but, as The Sunday Times commented this weekend, “the bank’s moral compass shifted” and it went on a buying spree, acquiring the City bank Morgan Grenfell and then Wall Street’s Bankers Trust. In the run-up to the 2008 crisis it created a huge $32bn of sub-prime mortgage-backed products whose value collapsed when the housing price bubble burst.

As if the latest fine imposed by the department of justice were not enough, US and UK authorities have already fined Deutsche $2.5bn for its role in fixing Libor – and it faces further fines for manipulating gold and silver prices, violating US sanctions against Iran and Syria and for misleading disclosures to the financial authorities. The IMF now describes it as the biggest contributor to risk among the world’s biggest banks.

Protestations by the German authorities and by its chief executive, John Cryan, a British banker who must be wishing he had stayed in London, that it has “an extremely comfortable buffer” against disaster only serve to highlight how dire its plight is. It won’t be allowed to go under of course.

I t’s just a pity Mrs Merkel didn’t think of that eight years ago. Gordon Brown, who hasn’t had many laughs since he lost the election in 2010, can be forgiven for enjoying a rare mom­ent of Schadenfreude.

Ivan Fallon is a former business editor of The Sunday Times and the author of Black Horse Ride: The Inside Story of Lloyds and the Financial Crisis

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