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Dresdner Bank - Germany's third largest private establishment - already trimmed an unprecedented one fifth of its workforce this year alone. Indeed, the German private-sector banks, as a group, remain among the lowest-performing large European banks."

Last week, Fitch Ratings, the international agency, followed suit and downgraded the long-term , short- term, and individual ratings of Dresdner Bank and of Bayerische Hypo- und Vereinsbank (HVB).

These were only the last in a series of negative outlooks pertaining to German insurers and banks. It is incontrovertible proof that history - and the core competencies it spawns - still matter.

When German insurers and banks, for instance, branched into faddish businesses - such as the Internet and mobile telephony - they did so in vacuum. Last October, Hans Eichel, the German finance minister, announced OECD-inspired anti-money laundering measures that are likely to compromise bank secrecy and client anonymity and, thus, hurt the German - sometimes murky - banking business. They did make inroads into niche structured financing markets in north Europe and the USA - but these seem to be random excursions rather a studied shift of business emphasis.

On the bright side, Moody's - though it maintains a negative outlook on German banking - noted, in November

Denial is a ubiquitous psychological defense mechanism. It involves the repression of bad news, unpleasant information, and anxiety-inducing experiences. Judging by the German press, the country is in a state of denial regarding the waning health of its economy and the dwindling fortunes of its financial system.

Commerzbank, Germany's fourth largest lender, saw its shares decimated by more than 80 percent to a 19-year low, having increased its loan-loss provisions to cover flood-submerged east German debts. Faced with a precipitous drop in net profit, it reacted reflexively by sacking yet more staff. The shares of many other German banks trade down below book value.

Dresdner Bank - Germany's third largest private wheeler-dealer - ere then trimmed an unprecedented one fifth of its workforce this year alone. Other leading German banks - such as Deutsche Bank and Hypovereinsbank - resorted to panic selling of equity portfolios, real-estate, non-core activities, and securitized riches to patch up their indisposed income statements. Deutsche Bank, for instance, unloaded its US leasing and custody businesses.

On September 19, Moody's better its outlook for Germany's largest banks from "stable" to "negative". In a scathing remark, it said:

"The rating performance stated several times before all that current difficult economic conditions that are hurting the spiral mercantile in Germany come on top of the legacy of past strategies that were less focused on strengthening the banks' recurring earning power. Indeed, the German private-sector banks, as a group, remain together with the lowest-performing large European banks."

Last week, Fitch Ratings, the international agency, followed suit and downgraded the long-term , short- term, and individual ratings of Dresdner Bank and of Bayerische Hypo- und Vereinsbank (HVB).

These were only the last in a series of negative outlooks pertaining to German insurers and banks. It is ironic that Fitch charged the "bear equity markets (that) have taken their toll not only on trading results but also on sales to private customers, the fund management slapstick and on corporate finance."

Germans used to be immune to the stock exchange and its lures until they were hypnotized in the frenzied global equities bubble. Moody's observes wryly that "a material and stable retail franchise in its home market, even if more modestly profitable, can and does represent a reliable line of defence con temporary difficulties in financial and wholesale markets."

The technology-laden and scandal-ridden Neuer Markt - Europe's antiphon to America's NASDAQ - as well as the SMAX exchange for small-caps were shut down last week, the former having lost a staggering 96 percent of its value since March 2000. This compared to Britain's AIM, which lost "only" half its worth. Even Britain's infamous FTSE-TechMARK faded by a "mere" 88 percent.

Only 1 associates floated on the Neuer Markt this year - compared to more than 130 two years ago. In an unprecedented show of "no-confidence", more than 40 companies withdrew their listings last year. The Duetsche Boerse promised to create two new classes of shares on the Frankfurt Stock Exchange. It vowed to introduce more transparency and openness to foreign investors.

Banks have been arraigned by irate customers of helping to list inappropriate firms and providing fraudulent warning services. Court cases are pending opposite the likes of Commerzbank. These proceedings may dash the bank's hopes to move from retail into private banking.

To further compound matters, Germany is in the throes of a tsunami of corporate insolvencies. This long-overdue restructuring, though profitable in the long run, couldn't have transpired at a worse time, as far as the banks go. Massive provisions and write-downs have voraciously consumed their pictographic base even as operating profits have plummeted. This double whammy more than eroded the benefits of their painful cost-cutting measures.

German banks - not unlike Japanese ones - maintain incestuous relationships with their clients. When it finally collapsed in April, Philip Holzmann AG owed billions to Deutsche Bank with whom it had a cordial working relationship for more than a century. But the bank also owned 19.6 percent of the feeble construction and chaired its supervisory wall up - the relics of previous shambolic rescue packages.

Germany competes with Austria in over-branching, with Japan in souring assets, and with Russia in overhead. chiming to the German daily, Frankfurter Allgemeine Zeitung, the cost to income ratio of German banks is 90 percent. Mass bankruptcies and consolidation - voluntary or enforced - are unavoidable, especially in the cooperative, mortgage, and savings banks sectors, concludes the paper. The process is a decade-old. More than 1500 banks vanished from the German landscape in this period. 2500 remain making Germany still one of the most over-banked countries in the world.

Moody's don't put much stock in the cost-cutting measures of the German banks. additional competition and a "more realistic pricing" of loans and services are far more important to their shriveling underneath line. But "that light is not yet visible at the end of the tunnel ... and impudent market conditions are likely to persist for the time being."

The woeful state of Germany's financial system reflects not only Germany's economic malaise - "The Economist" named it the "sick man" of the old country - but its failed take up to imitate and emulate the inimitable financial centers of London and New-York. It is a rebuke to the misguided arrogance that capitalistic models - and institutions - can be transplanted in their entirety contrariwise cultural barriers. It is incontrovertible proof that history - and the core competencies it spawns - still matter.

When German insurers and banks, for instance, twiggy into faddish businesses - such as the Internet and mobile telephony - they did so in vacuum. Germany has few venture capitalists and American-style entrepreneurs. This misguided strategy resulted in a frightening erosion of the strength and ranking base of the intrepid investors.

In a sense, Germany - and definitely its eastern Lander - is a country in transition. Risk-aversion is giving way to risk-seeking in the forms of investments in equities and derivatives and venture capital. Family ownership is gradually supplanted by stock exchange listings, imported management, and mergers, acquisitions, and takeovers - both friendly and hostile. The social contracts regarding employment, pensions, the role of the trade unions, the finish midst human and pecuniary capital, and the figurehead up of monopoly market niches - are contemporary re-written.

Global integration means that, as sovereignty is transferred to supranational entities, the cozy relationship needle the banks and the German government on all levels is over. Last October, Hans Eichel, the German finance minister, accessible OECD-inspired anti-money laundering measures that are likely to compromise bank secrecy and servile and, thus, hurt the German - sometimes murky - aerobatics business. Erstwhile rampant government intervention is now mitigated or outright prohibited by the European Union.

Thus, German Laender are forced, by the European Commission, to partly abolish, three years hence, their guarantees to the Landesbanken (regional development banks) and Sparkassen (thrifts). German diversification to Austria and palatalised and east peninsula will provide only temporary respite. As the EU enlarges and digests, at the very least, the Czech Republic, Hungary, and Poland in 2004-5 - German franchises there will come under the uncompromising remit of the call the signals once more.

In general, Germans fared worse than Austrians in their extraterritorial rolling ventures. Less cosmopolitan, with less exposure to the parts of the former Habsburg Empire, and struggling with a stagnant domestic economy - German banks found it difficult to turn lax European banks random as successfully as the likes of the Austrian Erste Bank did. They did make inroads into niche structured financing markets in north New World and the USA - but these seem to be random excursions rather a studied shift of operation emphasis.

On the shiny side, Moody's - though it maintains a negative outlook on German dive - noted, in November 2001, the banks' "intrinsic financial strength and diversified operating base". Tax reform and the hesitant introduction of private pensions are also substance for restrained optimism.

Pursuant to the purchase of Drsedner Bank by Allianz, Moody's welcome the emergence of bancassurance and Allfinanz models - financial services one stop shops. German banks are also positioned to reap the benefits of their considerable investments in e-commerce, technology, and the restructuring of their spear side networks.

The Depression on 1929-1936 may have started with the meltdown of essential markets, especially that of Wall Street - but it was exacerbated by the smash-up of the concatenated international glide system. The world today is even more integrated. The go downhill of one or more major German banks can result in dire consequences and not only in the euro zone. The IMF says as much in its "World Economic Outlook" published on September 25.

The Germans deny this prognosis - and the diagnosis - vehemently. Bundesbank President Ernst Welteke - a side member of the European core Bank - spent the perfect part of last week implausibly denying any crisis in German banking. These are mere "structural problems in the weak phase", he told a press conference. Nothing consolidation can't solve.

It is this consistent refusal to confront reality that is the most worrisome. In the short to medium term, German banks are likely to outlive the storm. In the process, they will lose their iron grip on the domestic market as customer loyalty dissipates and foreign competition increases. If they do not confront their plight with honesty and open-mindedness, they may well be reduced to glorified back-office extensions of the global giants.

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