Bank insolvency and its consequences

16 long days countdown

On 26 June 1974, the bank closed its doors to the complete surprise of many. What had really happened and now followed is described in detail by Iwan D. Herstatt in his book “The Destruction”, on which the following statements are also based. His son Johann David Herstatt (1952) lived with his father under one roof for 16 years after the bankruptcy, partly for financial reasons. Since the bank issue and all the new information that came with it were discussed intensively between father and son on a daily basis, and the father’s point of view never led to contradictions, the story appears to be extremely credible. The book is available as a free download on this website.

On 10 June 1974, Iwan Herstatt was called out of a supervisory board meeting at Henkell in Wiesbaden by the general representative Bernhard Graf von der Goltz, who informed him by telephone that high losses had been incurred instead of the profits shown in the books. Iwan D. Herstatt then drove straight back to Cologne. During follow-up talks, the head of the foreign exchange department, Dany Dattel, confessed that the loss was DM 64 million and that this had been made possible by unrecorded foreign exchange transactions. The next day, Iwan D. Herstatt informed the main shareholder Hans Gerling, got a cover note for the amount and the order to stay in the day-to-day business and prevent any rumours. In the following days it came out that the loss would even be around DM 470 million. Mr Gerling tried to raise the necessary money against a guarantee from the Gerling Group. Iwan Herstatt never understood why he took the three big banks and the strongest competitors of the Herstatt Bank on board. Mr Poullain from the Westdeutsche Landesbank would certainly have helped.  The negotiations failed, so that on 26 June 1974 the bank’s banking licence was revoked and it ceased operations.

Settlement instead of bankruptcy

Iwan D. Herstatt was devastated. He only thought of suicide at that stage. Then he realised that the savers were left completely alone, and he did everything he could to reach a settlement. For this, he made his entire fortune available.  A group of creditors voted for bankruptcy because they hoped to get their hands on all Gerling’s assets through a so-called pass-through liability, which was justified by the dominant role of the main shareholder. In the end, the settlement was reached because the main shareholder Hans Gerling divested himself of a large part of the shares in his insurance group and thus an acceptable quota could be distributed to the creditors. (100% for customers with deposits up to DM 20,000, major customers 65%, municipalities 55% and banks between 45%-55%). Hans Gerling was so far-sighted and negotiated the point that he would receive half of the respective betterment quota back for each additional distribution to the creditors. This later enabled Hans Gerling to buy back the 51% of his group from the major banks. The liquidation of the bank lasted into the 1990s, consumed vast sums of money and despite all this, the creditors got all their money back, or at least around 80%, certainly an indication of how solid the bank was apart from foreign exchange trading. In the end, Iwan D. Herstatt and his family were the only ones who did not benefit from the flow of money.

Investigations by the public prosecutor’s office

After the settlement was reached, Iwan D. Herstatt put all his energy into helping the public prosecutor bring the real culprits to justice. The results of many years of analysis by the public prosecutor’s office opened Iwan D. Herstatt’s eyes to what had really happened in his bank. According to Iwan Herstatt, the real reason for the collapse was the fact that a small group of bank-internal and external persons had used fictitious transactions to make a lot of money for themselves at the expense of the Herstatt bank. To do this, they needed a so-called cancel button, which made it possible to make foreign exchange transactions invisible to the bank and to manipulate them afterwards. The partly fictitious profits were then paid out in cash via a bank in Switzerland, Econ Bank, through front men. Many millions have been pulled out within a few months. In order to keep the withdrawals of the Herstatt Bank hidden, the foreign exchange trade was expanded enormously, hoping to make profits that far exceeded the losses. This giant wheel that was required, however, could not be achieved with the clear guidelines for risk limitation that Iwan D. Herstatt and the management had established. For this, too, the cancel button was needed, which was commissioned from Nixtorf with two signatures from the head of the foreign exchange department (Dany Dattel) and his direct superior (Heinz Hedderich, head of the foreign department). Many foreign exchange transactions thus remained in the drawer, unaccounted for and invisible within the bank. This was not apparent in the day-to-day business. In spite of rumours that kept coming up, neither the internal audit nor the auditors could find anything, not even the cancel button. The many unrecorded transactions, the compulsion to compensate for emerging losses through unanticipated dollar fluctuations invisible to the bank, led to a Ponzi scheme, which was completely out of control by 10 June 1974 at the latest, when Dany Dattel confessed the losses to the management.

Imprisonment on remand

When Iwan D. Herstatt was unexpectedly placed in pre-trial detention alongside many other people in 1976, he later felt screwed by the public prosecutor. While in pre-trial detention, Iwan Herstatt suffered a heart attack, which was not recognised and accordingly not treated. His health deteriorated rapidly, so he was released and the case against him was dropped. Six other defendants were partly acquitted or received lenient sentences, in the most serious case up to seven years imprisonment. Dany Dattel was declared incapacitated and unable to stand trial because he suffered from a so-called concentration camp syndrome. As a four-year-old, Dany Dattel spent several months in the Auschwitz concentration camp together with his mother. He was therefore no longer able to bear the sight of uniforms. His lawyer, Erich Schmidt-Leichner, who had already worked as a lawyer at the Nuremberg Trials, convinced the judge with extremely graphic descriptions of little Dany’s experiences during his time in Auschwitz. Dany Dattel was released from pre-trial detention and the proceedings against him were dropped. His assets remained untouched.

Court proceedings

This put the public prosecutor’s office under considerable pressure and the focus was on the general representative Bernhard Graf von der Goltz, who was also responsible for the foreign department and thus also the foreign exchange department, and the person who gave the name to the company, Iwan Herstatt. After a long period of pre-trial detention, Graf von der Goltz was worn down and ready to make any kind of confession. After a short trial, he was able to leave everything behind and emigrate to his relatives in Argentina. He never got over it, fell into deep depression and died early.

Since the statute of limitations was imminent, an judge of honour in the Merheim hospital in Cologne reopened the proceedings at Iwan D. Herstatt’s bedside and the trial was held in the absence of the accused.  It was not until the day of the pronouncement of the verdict that Iwan Herstatt was somewhat in better health again to come to court. Since he was urged to admit something in order to get a lighter sentence, he said after the prosecutor’s closing argument that he had already been lost his property, his health and his honour. However, he did not want them to take away his self-respect and he could not admit to something he had not done only to get a lighter sentence. On 16 February 1984, Iwan Herstatt was initially sentenced to four and a half years imprisonment by the Cologne Regional Court. He was accused of various offences such as embezzlement, falsification of the balance sheet and aiding and abetting a particularly serious bankruptcy.

Rehabilitation

Iwan D. Herstatt could not let this sit on his hands. Despite his poor health, he bundled all his energy and worked on his rehabilitation together with his lawyer Helge Millinger from Essen. After two instances, the sentence was reduced to two years’ imprisonment with probation in 1987. The accusation of falsifying the balance sheet initially remained because he was not believed to have known anything about the unrecorded forward exchange transactions and would thus have signed an incorrect balance sheet for the year.  Prosecutor Wilms said that if a DM 10 note was missing from his wallet, he would notice it and he did not believe that Mr. Herstatt would not notice amounts in the millions. In 1991, Herstatt was finally declared unfit to stand trial because of the rare Pickwick’s syndrome, which led to concentration disorders and fatigue attacks, ultimately consequences of the untreated heart attack during his time in pre-trial detention. Despite everything, his lawyer continued to fight for him.  When finally the European Court of Justice ordered the Cologne Regional Court to reopen the proceedings and the Gerling Group also paid him a small pension again, he saw his innocence confirmed and was able to find peace.  The proceedings would not be retried because of his poor state of health. Iwan D. Herstatt died on 9 June 1995. May 9 June be a coincidence or did Iwan D. Herstatt not want to experience another 10 June, when his misfortune began, we do not know.