BERLIN, GERMANY - In hundreds of cases, the money trail from foreclosed and abandoned homes in South Florida leads across the Atlantic to Germany and this country's largest investment bank.
Deutsche Bank was a heavyweight financial player during the American mortgage meltdown and its aftermath: empty and neglected properties that blight local neighborhoods. The bank and related companies currently hold title to more than 1,400 homes in Broward, Palm Beach and Miami-Dade counties alone.
In South Florida, municipalities have been struggling, often ineffectually, to force Deutsche Bank to care for properties it has title to, especially when the houses are worth very little. In its home country, the bank is the target of a vocal citizens movement pressuring it and other major financial institutions to end lucrative but controversial business practices, including speculating in farm commodities and funding weapons production.
"We demand a new business model from the banks. A business model with priority on humans, environmental issues and the common good over ambitious profitability targets," said Markus Dufner, manager of the German Association of Ethical Shareholders, an umbrella organization of 30 human rights and environmental groups. "We need again bankers with principles instead of unscrupulous bankers who only have bonuses in mind."
Deutsche Bank, one of the world's largest banks with total assets of $2.6 trillion, has also been the target of lawsuits and official investigations in the United States and Europe over its business dealings, including allegations this month that it was in cahoots with other global financial giants to rig lending rates between banks.
Deutsche Bank declined comment on the citizens' reform campaign and directed the Sun Sentinel to a statement in its first-quarter earnings report saying it is cooperating with official investigations into the bank rate affair.
Just how German bankers headquartered in gleaming twin office towers in Frankfurt came to be involved in the South Florida property market, and how ill equipped local authorities have proven to be in exercising much control over them, is a cautionary tale on how increasing economic globalization can affect faraway markets.
Deutsche Bank, as the name suggests, is nearly synonymous with German banking and finance. The 140-year-old bank has more than 1,000 branches in major cities and small towns in its home country and is Germany's only global investment banking firm.
Though without a street corner presence in the United States, and no local branches or ATMs there, it still has acquired plenty of clout. It serves U.S. corporate clients and manages the wealth of numerous affluent Americans. Its prestigious New York address: 60 Wall St.
Over the years, Deutsche Bank grew beyond its core business of taking deposits and making loans, placing greater importance on making money by charging fees for structuring business deals, advising investment clients, selling complex financial products and managing trusts for structured assets.
The firm rarely gave loans to prospective American home buyers. Instead, over the past decade, Deutsche Bank expanded its presence in the U.S. housing market by designing, marketing and selling securities that were backed by groups of mortgages.
A cornerstone of that effort was the bank's $429 million purchase in January 2007 of MortgageIT, a New York company that loaned money for residential mortgages nationwide, including in South Florida where the company offered subprime loans: loans made to borrowers with poor credit.
"For several months, Deutsche Bank has been executing on a strategy to gain a stronger foothold in the U.S. consumer markets and finding the right partner in MortgageIT is a testament to all the hard work and success we've achieved together since our founding," MortgageIT announced to its customers in July 2006.
The merger gave Deutsche Bank an "in-house" supply of U.S. mortgages to pool into securities for sale to investors.
But, according to the U.S. Attorney's Office in New York, MortgageIT made reckless loans to risky borrowers. When interest rates rose, the borrowers defaulted in large numbers, sending the value of the Deutsche Bank securities downhill.
In a 2011 civil mortgage fraud lawsuit against MortgageIT and Deutsche Bank, the U.S. government alleged that the companies lied about MortgageIT's internal controls in order to qualify for Federal Housing Administration insurance, which guaranteed the loans against default. The insurance made the related securities "highly marketable" to investors, resulting in "substantial profits" for the firms, the suit stated.
Deutsche Bank initially argued that it had inherited MortgageIT's problems and wasn't to blame, but settled the lawsuit in May of this year for $202.3 million. The two companies "admitted, acknowledged, and accepted responsibility for certain conduct," American officials said, including that MortgageIT did not
comply with the U.S. government's loan insurance regulations.
German media reported that Josef Ackermann, the bank's former chief, was quoted by the newspaper Financial Times Deutschland as saying that the purchase of MortgageIT had been "the biggest mistake of my time as CEO." Deutsche Bank denied those accounts to the Sun Sentinel.
In addition to loans originated by MortgageIT, Deutsche Bank's business units took in bad mortgages originated by other lenders, including Fremont Loan & Investment, Long Beach Mortgage Corp. andNewCentury Financial Corp., according to a 2011 U.S. Senate subcommittee investigation.
Deutsche Bank, along with Goldman Sachs, "underwrote securities using loans from subprime lenders known for issuing high risk, poor-quality mortgages and sold risky securities to investors across the United States and the world," the Senate panel wrote in a report that found that investment banks, including Deutsche Bank, that had dealt in mortgage-related securities "were a major cause" of the U.S. financial crisis.
In addition to originating and selling such securities, Deutsche Bank served as administrator or "trustee" for securities packaged by other financial firms.
When eventually large numbers of home buyers defaulted, many foreclosures in Florida and elsewhere in the U.S. were filed on behalf of Deutsche Bank, which held title to the homes on behalf of owners of the mortgage-backed securities.
As a result, across Florida and elsewhere in the United States, a bank in Germany found itself in possession of home after home, which often quickly tumbled into ruin after the original owners decamped.
In an investigation published earlier this year, the Sun Sentinel found Deutsche Bank was one of several banks repeatedly cited by South Florida code enforcement officials for failing to mow lawns, clean and secure pools, remove trash and debris, replace broken windows and repair roofs and porches at properties they now own. The resulting squalor can depress neighborhood property values and pose health and safety problems as well, the newspaper found.
In just one instance, the city of Fort Lauderdale has fines of more than $6 million pending against Deutsche Bank for failure to maintain an 867-square foot dilapidated and boarded-up house at 1032 NW Fourth Avenue.
In Los Angeles, officials filed suit in May 2011 against two Deutsche Bank subsidiaries, calling them "slumlords." The suit is still pending.
In its defense, the bank argues that in its role as "trustee" for investors, it has no equity in the homes and is not responsible for home maintenance. Instead, that is supposed to be the job of other companies, known as loan servicers.
The position of affected South Florida municipalities: the legal paperwork identifies Deutsche Bank as the property owner, so it must take care of the homes.
In diplomatic circles, the bank's troubles in the United States are seen as bad for business and for bilateral relations.
Sandra Kaiser, acting press attache at the American Embassy in Berlin, told the Sun Sentinel: "The embassy has raised the issue with Deutsche Bank." She declined to provide details.
Duncan King, a Deutsche Bank spokesman in the United States, said the bank has explained to the embassy "the roles and responsibilities of a trustee and a servicer around foreclosures."
Ironically, the bank blamed for causing many code enforcement problems in South Florida hasn't created similar headaches in its home country.
That's because German banking rules are far stricter, and this country has experienced no real estate crash.
Borrowers usually must put much more money down toward the purchase of a house: between 20 to 40 percent. And their ability to repay is carefully screened.
Also, mortgages typically aren't pooled and sold to other banks as investment products, as they were in the United States before the market for such securities dried up.
"Thank God we did not have these transactions," Professor Thomas Hartmann-Wendels, head of the Department of Bank Management at the University of Cologne, said in an interview.
Still, dissatisfaction with Deutsche Bank here is considerable.
The German Association of Ethical Shareholders has condemned the bank for its worldwide business dealings involving weapon sales, agricultural commodity speculation and coal mining.
The association has gone so far as to call the bank: climate killer, gambler, hunger maker and even "kriegstreiber" or warmonger.
The demands for a change in corporate conduct has been noticed by Deutsche Bank. At a news conference in a February, Ackermann, still CEO, highlighted the bank's actions as a "responsible corporate citizen," including investment of the equivalent of about $102 million last year to benefit social programs involving education, the arts and the environment.
"Furthermore, we revised our Code of Business Conduct and Ethics, making them more precise," Ackermann said. "As the market leader in Germany and one of the
world's leading banks, we believe we have a special responsibility, not only to comply with all the applicable rules and regulations, but also to attain our financial targets in an honorable, i.e. an ethically responsible, manner. No business transaction is worth risking the bank's good reputation for."
In Lake Worth, Florida, however, city officials grappling with an abundance of neglected, abandoned homes titled to various banks, including Deutsche Bank, said last week they hadn't observed any difference in the bank's responsiveness to their concerns.
"We have not made much, if any, inroads with Deutsche Bank as of yet," said William Waters, city director for community sustainability."
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