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By Root 212 0

it didn’t matter. They were arguing about bonds that would collapse from one hundred [par] down to two or three [percent of par]. In a sense they were right: they bought the bonds that went to three, rather than to two.” As long as the bonds offered up by the Wall Street firms abided by the rules specified by IKB’s experts, they got hoovered into the Rhineland Funding portfolio without further inspection. Yet the bonds were becoming radically more risky, because the loans that underpinned them were becoming crazier and crazier. After he left, Röthig explains, IKB had only five investment officers, each in his late twenties, with a couple of years’ experience: these were the people on the other end of the bets being handcrafted by Goldman Sachs for its own proprietary trading book, and by other big Wall Street firms for extremely clever hedge funds that wanted to bet against the market for subprime bonds. The IKB portfolio went from $10 billion in 2005 to $20 billion in 2007, Röthig says, “and it would have gotten bigger if they had had more time to buy. They were still buying when the market crashed. They were on their way to thirty billion dollars.”

By the middle of 2007 every Wall Street firm, not just Goldman Sachs, realized that the subprime market was collapsing, and tried frantically to get out of their positions. The last buyers in the entire world, several people on Wall Street have told me, were these willfully oblivious Germans. That is, the only thing that stopped IKB from losing even more than $15 billion on U.S. subprime loans was that the market ceased to function. Nothing that happened—no fact, no piece of data—was going to alter their approach to investing money.

On the surface the IKB’s German bond traders resembled the reckless traders who made similarly stupid bets for Citigroup and Merrill Lynch and Morgan Stanley. Beneath it they were playing an entirely different game. The American bond traders may have sunk their firms by turning a blind eye to the risks in the subprime bond market, but they made a fortune for themselves in the bargain, and have for the most part never been called to account. They were paid to put their firms in jeopardy, and so it is hard to know whether they did it intentionally or not. The German bond traders, on the other hand, had been paid roughly one hundred thousand dollars a year, with, at most, another fifty-thousand-dollar bonus. In general, German bankers were paid peanuts to run the risk that sank their banks, which strongly suggests that they really didn’t know what they were doing. But—and here is the strange thing—unlike their American counterparts, they are being treated by the German public as crooks. The former CEO of IKB, Stefan Ortseifen, was given a jail term (since suspended) and has been asked by the bank to return his salary: 805 thousand euros.

Dirk Röthig had enjoyed a ringside seat not only to IKB but to the behavior of its imitators, the German state-backed banks, the Landesbanks. And in his view, the border created by modern finance between Anglo-American and German bankers was treacherous. “The intercultural misunderstandings were quite intense,” he says, as he tucks into his lobster. “The people in these banks were never spoiled by any Wall Street salesmen. Now there is someone with a platinum American Express credit card who can take them to the Grand Prix in Monaco, takes you to all these places. He has no limit. The Landesbanks were the most boring bankers in Germany so they never got attention like this. And all of a sudden a very smart guy from Merrill Lynch shows up and starts to pay a lot of attention to you. They thought, ‘Oh, he just likes me!’” He completes the thought. “The American salespeople are much smarter than the European ones. They play a role much better.”

At bottom, he says, the Germans were blind to the possibility that the Americans were playing the game by something other than the official rules. The Germans took the rules at their face value: they looked into the history of triple-A-rated bonds and accepted the official story