If five Wisconsin school boards jeopardized their pension funds by acting more like a hedge fund, the Irish bank they dealt with got in trouble by turning itself from a small institution making local loans into a major global enterprise intertwined with the finances of cities from Duluth to Dubai.
Depfa has its headquarters in Dublin, an ancient city with a gleaming financial district.
"It's all new," says Colm McCarthy, who teaches finance at University College Dublin. "There was nothing down in that area of the city, except old cattle yards, where they used to export live cattle to Liverpool. And stuff like that."
The glass-and-steel towers rose when Ireland decided, in the 1980s, to become a global banking center. That meant persuading banks in other places to move there. So, officials offered really low corporate tax and lighter regulation.
Reversed Migration Trends
The strategy worked. For the first time in centuries, people and businesses were moving to Ireland, not away from it. McCarthy describes "a big inflow of people from Central and Eastern Europe, and from many other parts of the world. You know, the economy was booming, and there were jobs for everybody."
Depfa was one of those immigrants, arriving six years ago. Before that, Depfa was a German bank — a really German bank. It was owned by the German government. Its core business was German government bonds.
Then, in 1992, along came Gerhard Bruckermann as the bank's new CEO. One country wasn't big enough for him. He wanted the world. So, he moved the headquarters to Dublin that year and opened offices all over Europe and Asia, including Turkey and India, as well as Brazil. It found huge success.
In 2000, Depfa made the move that brought the bank in contact with the Wisconsin school boards. It opened an office in New York with a ridiculously audacious goal: to dominate American municipal finance.
"We went from not being a player to being one of the top five" banks in a particular municipal-finance specialty, recalls Herb Jacobs, who ran Depfa's U.S. operation. "It was a wonderful moment."
That specialty was collateralized debt obligations, or CDOs: complex portfolios of diverse fixed-income assets in which buyers can invest.
A Sudden Downturn
As recently as February, when Jacobs retired, Depfa was doing amazingly well. "I don't think any of us envisioned that this would become the wholesale slaughter that eventually it did become," he says.
Depfa's wholesale slaughter was a lot like other wholesale slaughters that have made news lately, such as that of Bear Stearns or insurance giant American International Group. Because of chaos in the financial markets, the bank suddenly couldn't borrow money fast enough to pay its debts. And its debts kept getting bigger.
By September, it was about to collapse — right when the government of Ireland promised to bail out any troubled Irish banks. But Depfa learned that even a bank could get treated as harshly as an immigrant. The government told bank officers Depfa was too big to save.
It "may have had a balance sheet bigger than all the Irish banks put together," McCarthy says. "The Irish taxpayers couldn't realistically be asked to guarantee the balance sheets of great big international banks that happened to be located here."
In the end, Depfa was saved — sort of — in a blanket bailout by the German government. Bruckermann had persuaded Hypo Real Estate, one of Germany's largest lenders, to buy the bank in 2007.
But Depfa is a very different bank from what it was before. And the whole saga has had unintended consequences for cities and towns all across America.