Review
Review
Podcast
30.6.2021
The carnival days in Cologne are exuberant. On Weiberfastnacht, people cavort in the city center, swaying, joking and singing. Liters of beer run down their necks and nobody knows any enemies. "Drink doch ene met" is a famous Cologne saying, and during the high season of carnival, Cologne tends to forget that the outside world exists. Then comes Ash Wednesday, the day when the hangover sets in and the time of austerity begins.
In 1974, however, Cologne's Ash Wednesday was not in spring, but in the middle of summer. The public prosecutor's office and the police moved into a noble bank in June to rudely interrupt Cologne's biggest party and plunge the city and cathedral into chaos. They had invaded Cologne's Herstatt Bank, which until then had been regarded as a dazzling gem of successful banking and whose success had made its boss Iwan David Herstatt a legend. He was regarded as an outstanding personality who did not shy away from parties and threw big ones himself. He is said to have invited 850 people to the opera house for his 60th birthday.
Then came Ash Wednesday in the summer, June 26, 1974, Germany played against the team from Yugoslavia in the World Cup. On that day, it became known that the Federal Banking Supervisory Office had closed down Herstatt Bank and that savers' money was presumed to be gone - a shock for Cologne and the whole of Germany. What was particularly surprising was how suddenly the bank collapsed. The bank had grown for years and was now the second largest private bank in the whole of Germany.
Thousands of investors, churches and local authorities had parked their money there and were now worried about the bills and coins that were long gone. The share traders around Danny Dattel, who was regarded as the star of the bank and whose team was known as the "gold boys", had gambled it away in foreign exchange transactions. The bank had accumulated 1.2 billion marks in debt when it went bust, a huge figure even by today's standards.
To this day, the collapse of the Cologne bank is considered one of the most spectacular since the reconstruction of Germany. Investors protested for days in front of the building, and in the aftermath, among other things, laws on lending and the obligation to report insolvencies were tightened, the banks founded the Deposit Protection Fund and the so-called "Herstatt risk" now exists in interbank trading. But how did it get this far?
"So I feel like I've let myself down." - Iwan David Herstatt
As the imposing 1.96-metre Iwan David Herstatt left the bank building, his face pale and marked by the past hours, a chapter of German banking history that had only begun in 1955 came to a close. "Ivan the Tall", as the people of Cologne jokingly called him because of his stature, had bought Bankhaus Hocker, which was to trade as Herstatt Bank in future, together with insurance entrepreneur Hans Gerling, whom he knew from his youth, and factory owner Emil Bührle.
Over the years, the bank grew strongly; so strongly that at some point it became the bank where many Cologne residents, as well as churches, local authorities and celebrities, had invested their money. 50 carnival societies had their wealth deposited with Herstatt, the Archdiocese of Cologne had 40 million Deutschmarks in the pot and publisher Neven Dumont was also a customer. They all hoped that "Ivan the Great" would bring them more interest than the staid savings banks. In 1974, nobody thought that the money could be gambled away, not even Ivan David Herstatt himself, as he later reported. Until June 10, he reported, he himself was unaware of the losses. "It's obviously the case that the foreign exchange department did more business than it admitted to the management. So I feel let down myself," Deutschlandradio later quoted him as saying.
He felt let down by the gold boys who worked in the "Orion space station". That's what they called the financial jugglers around the man with the cinematic name Danny Dattel, who made the big money in the foreign exchange department. Space Station Orion was the trading room in which Dattel and his troupe ended up gambling their way to huge profits. They bet many times their own capital (probably also with the help of straw men) on a rising dollar, which fell. They bet more and more money, and the gold boys lost more and more.
At the beginning of June, foreign exchange transactions resulted in a loss of almost 70 million Deutschmarks; just five days later, the reported loss was already around 500 million Deutschmarks and after negotiations for a rescue with Deutsche Bank, Dresdner Bank and Commerzbank failed at the last minute, the Federal Supervisory Office closed the bank. One day later, the people of Cologne stormed the noble bank and the police intervened.
The result was sobering. In the end, 2.2 billion Deutschmarks in debts stood against around one billion Deutschmarks in assets and for a short time it looked as if the people of Cologne would never see their money again. The only thing greater than the anger of many was the hope for December 13, 1974, the day of the creditors' meeting. 4,000 people were there and filled the Cologne sports hall to the rafters. The decisive question for the savings was: bankruptcy or composition?
Whether a settlement would be reached now depended on one man: Hans Gerling, Herstatt's former school friend and co-owner. Under intense public pressure, he caved in and injected more than 200 million Deutschmarks to secure a settlement. He could only afford this because he sold 51 percent of his shares in the insurance company of the same name. The people of Cologne will have thanked him. Private customers were able to save 80 percent of their deposits, and if they had saved less than DM 20,000, it was even 100 percent.
But the settlement was only the beginning of the end. Various lawsuits were fought out in court, both criminal and civil. At the end, Iwan David Herstatt, who testified until the end that he had known nothing about all of this, was sentenced to more than four years in prison, which was later overturned by the Federal Supreme Court. In a second trial, he was declared unfit to stand trial because the heavily overweight banker suffered from Pickwick syndrome and therefore kept falling asleep.
Danny Dattel was never convicted because he was also considered unfit to stand trial. He suffered from concentration camp syndrome because he had spent several months in a concentration camp at the age of four. Concentration camp syndrome is also known as survivor guilt syndrome because those affected suffer greatly from having survived a catastrophic event such as the Holocaust.
Although the excitement surrounding the bank eventually died down, it took decades to wind up the bank. It was not until 2006 that the then insolvency administrator paid out the last sums to the creditors.
Review
30.6.2021
Nils Wischmeyer
The bankruptcy of Cologne-based Herstatt Bank was one of the most devastating in the history of the Federal Republic of Germany. Thousands of investors were affected, and the gold boys from the space station were to blame. Sounds strange, but it happened.
The carnival days in Cologne are exuberant. On Weiberfastnacht, people cavort in the city center, swaying, joking and singing. Liters of beer run down their necks and nobody knows any enemies. "Drink doch ene met" is a famous Cologne saying, and during the high season of carnival, Cologne tends to forget that the outside world exists. Then comes Ash Wednesday, the day when the hangover sets in and the time of austerity begins.
In 1974, however, Cologne's Ash Wednesday was not in spring, but in the middle of summer. The public prosecutor's office and the police moved into a noble bank in June to rudely interrupt Cologne's biggest party and plunge the city and cathedral into chaos. They had invaded Cologne's Herstatt Bank, which until then had been regarded as a dazzling gem of successful banking and whose success had made its boss Iwan David Herstatt a legend. He was regarded as an outstanding personality who did not shy away from parties and threw big ones himself. He is said to have invited 850 people to the opera house for his 60th birthday.
Then came Ash Wednesday in the summer, June 26, 1974, Germany played against the team from Yugoslavia in the World Cup. On that day, it became known that the Federal Banking Supervisory Office had closed down Herstatt Bank and that savers' money was presumed to be gone - a shock for Cologne and the whole of Germany. What was particularly surprising was how suddenly the bank collapsed. The bank had grown for years and was now the second largest private bank in the whole of Germany.
Thousands of investors, churches and local authorities had parked their money there and were now worried about the bills and coins that were long gone. The share traders around Danny Dattel, who was regarded as the star of the bank and whose team was known as the "gold boys", had gambled it away in foreign exchange transactions. The bank had accumulated 1.2 billion marks in debt when it went bust, a huge figure even by today's standards.
To this day, the collapse of the Cologne bank is considered one of the most spectacular since the reconstruction of Germany. Investors protested for days in front of the building, and in the aftermath, among other things, laws on lending and the obligation to report insolvencies were tightened, the banks founded the Deposit Protection Fund and the so-called "Herstatt risk" now exists in interbank trading. But how did it get this far?
"So I feel like I've let myself down." - Iwan David Herstatt
As the imposing 1.96-metre Iwan David Herstatt left the bank building, his face pale and marked by the past hours, a chapter of German banking history that had only begun in 1955 came to a close. "Ivan the Tall", as the people of Cologne jokingly called him because of his stature, had bought Bankhaus Hocker, which was to trade as Herstatt Bank in future, together with insurance entrepreneur Hans Gerling, whom he knew from his youth, and factory owner Emil Bührle.
Over the years, the bank grew strongly; so strongly that at some point it became the bank where many Cologne residents, as well as churches, local authorities and celebrities, had invested their money. 50 carnival societies had their wealth deposited with Herstatt, the Archdiocese of Cologne had 40 million Deutschmarks in the pot and publisher Neven Dumont was also a customer. They all hoped that "Ivan the Great" would bring them more interest than the staid savings banks. In 1974, nobody thought that the money could be gambled away, not even Ivan David Herstatt himself, as he later reported. Until June 10, he reported, he himself was unaware of the losses. "It's obviously the case that the foreign exchange department did more business than it admitted to the management. So I feel let down myself," Deutschlandradio later quoted him as saying.
He felt let down by the gold boys who worked in the "Orion space station". That's what they called the financial jugglers around the man with the cinematic name Danny Dattel, who made the big money in the foreign exchange department. Space Station Orion was the trading room in which Dattel and his troupe ended up gambling their way to huge profits. They bet many times their own capital (probably also with the help of straw men) on a rising dollar, which fell. They bet more and more money, and the gold boys lost more and more.
At the beginning of June, foreign exchange transactions resulted in a loss of almost 70 million Deutschmarks; just five days later, the reported loss was already around 500 million Deutschmarks and after negotiations for a rescue with Deutsche Bank, Dresdner Bank and Commerzbank failed at the last minute, the Federal Supervisory Office closed the bank. One day later, the people of Cologne stormed the noble bank and the police intervened.
The result was sobering. In the end, 2.2 billion Deutschmarks in debts stood against around one billion Deutschmarks in assets and for a short time it looked as if the people of Cologne would never see their money again. The only thing greater than the anger of many was the hope for December 13, 1974, the day of the creditors' meeting. 4,000 people were there and filled the Cologne sports hall to the rafters. The decisive question for the savings was: bankruptcy or composition?
Whether a settlement would be reached now depended on one man: Hans Gerling, Herstatt's former school friend and co-owner. Under intense public pressure, he caved in and injected more than 200 million Deutschmarks to secure a settlement. He could only afford this because he sold 51 percent of his shares in the insurance company of the same name. The people of Cologne will have thanked him. Private customers were able to save 80 percent of their deposits, and if they had saved less than DM 20,000, it was even 100 percent.
But the settlement was only the beginning of the end. Various lawsuits were fought out in court, both criminal and civil. At the end, Iwan David Herstatt, who testified until the end that he had known nothing about all of this, was sentenced to more than four years in prison, which was later overturned by the Federal Supreme Court. In a second trial, he was declared unfit to stand trial because the heavily overweight banker suffered from Pickwick syndrome and therefore kept falling asleep.
Danny Dattel was never convicted because he was also considered unfit to stand trial. He suffered from concentration camp syndrome because he had spent several months in a concentration camp at the age of four. Concentration camp syndrome is also known as survivor guilt syndrome because those affected suffer greatly from having survived a catastrophic event such as the Holocaust.
Although the excitement surrounding the bank eventually died down, it took decades to wind up the bank. It was not until 2006 that the then insolvency administrator paid out the last sums to the creditors.
About the author
Nils Wischmeyer
Nils Wischmeyer writes about financial markets, investments, banks, banking regulation and white-collar crime.
