At Harvard’s 368th Commencement this past Thursday, German Chancellor Angela Merkel spoke of her life experiences growing up during the Cold War in post World War II Europe.
On this cool and overcast day, she also gave advice to the graduates on how to live their lives. She obliquely mentioned the trade war and indirectly criticized President Donald Trump — which got a round of applause. She even quoted the German poet, Hermann Hesse, saying “in all beginnings dwells a magic force for guarding us and helping us to live.”
There was one topic, however, that Merkel didn’t broach, perhaps not surprising given the celebratory nature of the day. Merkel made no mention of the economic dysfunction and even decay that seems to be infecting Germany — particularly when it comes to Germany’s largest and most prominent companies. The simultaneous decline of Volkswagen, Deutsche Bank (DB), and Bayer has been nothing short of stunning. It raises the question as to whether it is merely coincidence, or if there is a larger systemic issue in play. Either way, something is rotten in the state of Germany.
Before we take a look at these companies, it makes sense to understand the backdrop in Germany and Europe because of course there’s a lot going on. First regarding Merkel, after leading Germany since 2005, she will step down by 2021 at the latest. She’s faced criticism from the left and right over her immigration policies, while guiding Germany’s tricky position as the leading economy of Europe at a time when forces are seeking to tear the European Union apart.
German GDP growth can be described as adequate, which is to say more or less matching that of the U.S.’s during her tenure, and stronger certainly than most other nations’ in Europe. Speaking of Europe, elections to the European Parliament last week, showed voter fragmentation, decreasing support for center parties and increased strength by both left and right wing candidates. And of course there is Trump and his ever-present threat of imposing tariffs on the EU, which could hit German automakers particularly hard. It has been reported that talks between European and U.S. negotiators are not going well.
The downfall of Germany’s mega-bank
That’s a complicated and fraught environment, but what’s so astonishing is that for the most part, none of these aforementioned problems have anything to do with the decline of Volkswagen, Deutsche Bank, and Bayer. The deep wounds these companies are suffering from are almost entirely self-inflicted.
Let’s go through them starting with Deutsche Bank. It’s difficult to overstate how central a role Deutsche Bank has in the German economy. It would be like if you wrapped up Bank of America, JPMorgan Chase, Citi, and Wells Fargo and combined them into one institution. Besides being the biggest bank in the country with thousands of branches and tens of thousands of employees, it has held huge stakes in most of the biggest companies in Germany — a quarter to a third of Daimler shares, for instance. The bank's senior managers and directors also sat on the boards of 400 companies around the country.
In May of 2007 Deutsche Bank’s stock hit an all time high, trading above $150. Then came the financial crisis, which hit the bank particularly hard. A U.S. Senate investigation identified Deutsche as a major contributor to the crisis by foisting billions of dollars of poor quality mortgage-backed securities on investors.
The stock tanked, falling all the way to the low $20s in early 2009. Soon enough though, the bank’s stock recovered — along with many of its peers — climbing to back to the high $70s later that year. But then instead of climbing higher in the decade-long bull market, or even just treading water, Deutsche Bank shares slowly, inexorably spiraled down, trading today at $6.
What happened? Well, pretty much everything — bad that is. Myriad bad decisions were made. The company expanded willy-nilly both in terms of lines of business — including a big, less-than-stellar investment banking group — and geographically. There was all manner of management turnover and a failed proposed merger with Commerzbank.
And more recently another significant problem for Deutsche Bank: It is at the center of a number of inquiries into Trump’s financial dealings. Here’s how The New York Times characterized the bank’s relationship with the president:
“Mr. Trump has a long history with Deutsche Bank, the only mainstream financial institution consistently willing to do business with him after a series of defaults left other lenders facing huge losses. Since 1998, the bank has lent him a total of more than $2 billion, and Mr. Trump owed Deutsche Bank more than $300 million at the time he was sworn in as president. The bank is by far his largest creditor, and it possesses a trove of financial records — including portions of his federal tax returns — that it is prepared to provide to congressional investigators.”
It would certainly be accurate to describe this current state of affairs as an overhang.
In 2016, Spiegel Online published a massive investigative story into what went wrong at the bank. The story begins: “Greed, provincialism, cowardice, unfocused aggression, mania, egoism, immaturity, mendacity, incompetence, weakness, pride, blundering, decadence, arrogance, a need for admiration, [and] naiveté…” explain the fall of the bank. Since then the stock has fallen another 50%.
Bottom line: Years of mismanagement at an epic scale.
The fall of an automotive icon
Let’s turn now to Exhibit B, Volkswagen. This high-profile automaker founded in 1937 quickly established itself after World War II as a global powerhouse and an icon of German industrialism. Its quirky Beetle was a big hit in the U.S. in the 1960s and 1970s and the company steadily built market share over the decades until 2015, when VW surpassed Toyota to become the biggest automaker in the world.
But that same year, investigators revealed that VW was intentionally deceiving emissions standards for some 11 million diesel vehicles worldwide in what can only be described as a stunningly sophisticated and systematic scheme to undermine public policy and law. The company has subsequently paid $33 billion to resolve criminal charges and lawsuits. Two company executives are serving prison terms in the U.S. Former CEO Martin Winterkorn faces criminal charges in the U.S. and Germany. And just last month, the company’s Porsche division was fined $599 million in connection with this Dieselgate scandal. Now in a separate probe, German investigators are looking into misuse of corporate funds by Porsche’s CEO. VW’s stock, which traded at more than $240 in 2015, now trades at $140.
Bottom line: One of the biggest ethical lapses by a major company in history.
‘The most hated company in the world’
And then there’s Bayer (BAYRY), the pharmaceutical and chemical giant, most famous of course for its aspirin. Bayer made a number of acquisitions in recent decades including Schering and Merck’s consumer business which included brands like Claritin, Coppertone, and Dr. Scholls. This dealmaking seemed to have served the company well until a year ago when it bought Monsanto for $63 billion. Along with Monsanto’s assets came a raft of outstanding litigation concerning alleged carcinogenic effects of that company’s Roundup weedkiller. Since early last June when the deal was made, Bayer stock has declined a remarkable 50%, sweeping away some $55 billion in market value.
What’s so astonishing is that Roundup’s problems were hardly a secret. Some 11,000 cases were pending against Monsanto when Bayer bought the company, which was called by some “the most hated company in the world.” (That might have been a tip-off.) Recently a Northern California jury ordered Bayer to pay $2 billion to a couple who say they were diagnosed with cancer after using Roundup.
This spring over 55% of Bayer shareholders essentially gave Bayer CEO and senior managers a no confidence vote, something that had never happened before to a German DAX-listed company.
Bottom line: A massive misunderstanding of the U.S. legal system has cost shareholders tens of billions of dollars.
The debacles at Deutsche Bank, Volkswagen and Bayer are all different, and yet there is one common underpinning: Staggering management incompetence sheltered by insularity and a lack of accountability. Is there something bad going on in Germany? Unclear. But one thing’s for sure, something good isn’t going on.
Right now there doesn’t appear to be an easy way out for these shareholders. Their best best might be to hope for some sort of new beginning with a little of Hermann Hesse’s magic.
Andy Serwer is editor-in-chief of Yahoo Finance.