1. Janos Kornai, “The Affinity between Ownership Forms and Coordination Mechanisms: The Common Experience of Reform in Socialist Countries,”Journal of Economic Perspectives 4, no. 3 (1990): 131-47.

2. Oliver Hart, “An Economist's Perspective on the Theory of the Firm,”Columbia Law Review 89, no. 7 (1989): 1757-74. For a more formal model, see Oliver Hart and John Moore, “Property Rights and the Nature of the Firm,”Journal of Political Economy 98, no. 6 (1990): 1119-58.

3. Wendy Carlin and Colin Mayer, “Enterprise Restructuring,”Economic Policy 15, no. 2 (1992): 311-52.

4. David Lipton and Jefferey Sachs, “Privatization in Eastern Europe: The Case of Poland,”Brookings Papers on Economic Activity, no. 2 (1990): 293-341.

5. For the former viewpoint, see Michael Jensen, “Eclipse of the Public Corporation,”Harvard Business Review 67, no. 5 (1989): 61-74; John C. Coffee, Jr., “Liquidity versus Control: The Institutional Investor as Corporate Monitor,”Columbia Law Review 91 (1991): 1277-1330; and John Cable, “Capital Market Information and Industrial Performance: The Role of West German Banks,”Economic Journal 95, no. 377 (1985): 118-32. For the latter viewpoint, see David Soskice, “The Institutional Infrastructure for International Competitiveness: A Comparative Analysis of the UK and Germany,” in Economics for the New Europe: Proceedings of a Conference Held by the International Economics Association in Venice, Italy, November 1990, IEA Conference series, vol. 104, edited by Anthony Atkinson and Renato Brunetta (Houndmills: Macmillan, in association with the International Economics Association, 1991), 45-66.

6. Lipton and Sachs, “Privatization in Eastern Europe,” 319.

7. See, for instance, Jenny Corbett and Colin Mayer, “Financial Reform in Eastern Europe: Progress with the Wrong Model,” (CEPR discussion paper no. 603, September 1991).

8. Rudolf Hilferding, Finance Capital: A Study of the Latest Phase of Capitalist Development, ed. Tom Bottomore, trans. Morris Watnick and Sam Gordon (London: Routledge and Kegan Paul, 1981), 121-2, originally published as Rudolf Hilferding, Das Finanzkapital: Eine Studie über die jüngste Entwicklung des Kapitalismus, in Marx-Studien: Blätter zur Theorie und Politik des Wissenschaftlichen Sozialismus, vol. 3, edited by Max Adler and Rudolf Hilferding (Vienna: Verlag der Wiener Volksbuchhandlung Ignaz Brand & Co., 1910).

9. Hilferding, Finance Capital, 368.

10. Ibid., 180.

11. Alexander Gerschenkron, Economic Backwardness in Historical Perspective (Cambridge: Belknap Press of Harvard University Press, 1962), 15.

12. Thus Shonfield's variation of this thesis, like Hilferding's version, lies in his characterization of the state as a very interventionist player in the high politics of banking. For example, Shonfield stresses the importance of public development banks like the Kreditanstalt für Wiederaufbau and the Bundesaufsichtsamt für das Kreditwesen in funding development projects and influencing commercial banks' policies. See Andrew Shonfield, Modern Capitalism (London: Oxford University Press, 1967).

13. John Zysman, Governments, Markets, Growth (Oxford: Martin Robertson, 1983), 63-5.

14. Kenneth Dyson, “The State, Banks and Industry: The West German Case,” in State, Finance and Industry, edited by Andrew Cox (Brighton: Wheatsheaf, 1986), 118-41.

15. Garry J. Schinasi, Leslie Lipschitz, and Donogh McDonald, “Monetary and Financial Issues in German Unification,” in German Unification: Economic Issues, IMF occasional paper no. 75, edited by Leslie Lipschitz and Donogh Mcdonald (Washington, D.C.: IMF, 1990).

16. “Zur Gewährleistung der in diesem Vertrag order in Ausführung diese Vertrags begründeten Rechte garantieren sie insbesondere die Vertragsfreihaeit, Gewerbe-, Niederlasungs- und Berufsfreiheit, die Freizuegigkeit von Deutschen in dem gesamten Währungsgebiet, die Freiheit, zur Wahrung und Förderung der Arbeits- und Wirtschaftsbedingungen Vereinigungen zu bilden, sowie nach Massgabe der Anlage IX das Eigentum privater Investoren and Grund und Boden sowie an Produktionsmitteln.”Vertrag über die Schaffung einer Währungs-, Wirtschafts- und Sozialunion zwischen der Budes-republik Deutschland und der Deutschen Demokratischen Republik, chap. 1, art. 2, 18 May 1990. In Vermögensgesetzt, edited by Gerhard Fieberg and Harald Reichenbach (Deutscher Taschenbuch Verlag C.H. Beck: Muenchen, 1992), 2.

17. See Deutscher Sparkassen- und Giroverband e. V., Ostdeutsche Wirtschaft im Wandel: Bestandsaufnahme und Perspektiven eines Aufholprozesses (Stuttgart: Deutscher Sparkassenverlag, 1992), 79, for these figures and others.

18. The savings banks of the former DDR also extended credits to craft producers.

19. The big three had separate sister organizations in Berlin, a remainder from the allies' postwar attempt to dissolve the large private banks into many smaller regional banks. In addition, West German development banks also were divided along the Berlin axis: the Kreditanstalt für Wiederaufbau is responsible for all of Germany except Berlin, for example, where the Berliner Industrie Bank is the active federal development bank. This structure mirrored the special political status of the city of West Berlin in the Federal Republic.

20. See, for example, Georg Assmann, Klaus Backhaus, and Joerg Hilder, eds., Deutsch—Deutsch Unternehmen: Ein Unternehmenskulturelles Anpassungsproblem (Stuttgart: C.E. Poeschel, 1991).

21. The point is argued well in Deutscher Sparkassen-und Giroverband e. V., Ostdeutsche Wirtschaft im Wandel, 77-88.

22. Deutsche Bank, for instance, invested over DM 9 billion, or over 50 percent of its consolidated capital and reserves. Commerzbank and Dresdner Bank have invested similar ratios in the East.

23. See Herbert Oberbeck and Martin Baethge, “Computer and Pinstripes: Financial Institutions,” in Industry and Politics in West Germany: Towards a Third Republic?, edited by Peter K. Katzenstein (Ithaca: Cornell University Press, 1989), 275-303.

24. The news media has not been slow to realize this. See “Strained Relations among West Germany's Big Banks,”The Economist 316, no. 7670 (1 September 1990): 67-8. “Breaking with Big Brother: Wherein the Famous German Ordnung has given Way to Chaos as East Meets West,”Finance Week 160, no. 5 (5 March 1991): 46-7.

25. See “Meeting of the Ways: With Reunification Now Seemingly Inevitable, German Banks Are Leading the Way in Transplanting the Market Economy to the East,”The Banker 140, no. 771 (May 1990), for provocative, self-glorifying quotes from economists and bankers from all three of Germany's big banks.

26. The Treuhand Anstalt's announced closing of its main operations by 1994 appears to be well on track. Already it has closed mot of its regional offices—several of which were shut down by mid-1992. See the June 1992 interviews with Birgit Breul in “Schlussverkauf” and “Nachruf total egal,”Wirtschaftswoche 46, no. 27 (19 June 1992): 21-4, 37-8.

27. I am indebted to Mark Jrolf and Hanno Schmidt for many of the details of the privatization of Chemie AG at Launa and Bitterfeld. See Mark Jrolf and Hanno Schmidt-Gothan, “Privatization in the Former German Democratic Republic: Changing Institutional Roles in the Governance and Sale of Industrial Assets,” M.S. thesis, Sloan School of Management, MIT, 1992. For a series of case studies of large privatizations, which includes the Bitterfeld example, see Die Wirtschaft, Kombinate: was aus ihnen geworden ist (Berlin: Verlag Die Wirschaft GmbH, 1993).

28. See Ingo Kitzmann, “Industriepark Oderbrücke: Arbeitsvorschlag der Wirtschaftsministerium Brandenburg,” internal memo, Economics Ministry of the State of Brandenburg, Potsdam, 18 April 1992.

29. In the new Länder, three important institutions were developed to cover loan risk with guarantees in situations where the banks remain unwilling to carry this risk themselves: the Länder Burgschaftsbanken (for loans up to DM 1 million), the Berliner Industrie Bank (for loans from DM 1 million to 20 million), and the Treuarbeit AG (for loans over DM 20 million). In all three cases, the government carries between 80 percent and 100 percent of the credit risk with guarantees.

30. Deutsche Bank AG's 1990 profit rise, for example, was about 10 percent in 1990 and 20 percent in 1991; 1991 net income rose over 32 percent and net income per share rose by 29 percent—a record high. See the Deutsche Bank's Annual Reports for 1990, 1991, and 1992.

31. Ulrich Schroeder, “The Relationship between Banks and Industry in Germany—A Model for Privatization in Eastern Europe?” (Paper presented at the seminar “Privatization in Eastern Europe,” World Institute for Development Economics Research, Helsinki, May 1991). Schroeder, a manager at Deutsche Bank, concludes that it is “not very likely that West German banks will become major and permanent shareholders of East German companies. An appropriate instrument that can be used are the so-called company participation corporations.”

32. “Bei der Lösung der anstehenden Vermögensfragen gehen beide Regierungen davon aus, daß ein sozial verträglicher Ausgleich unterschiedlicher Interessen zu schaffen ist. Rechtssicherheit und Rechtseindeutigkeit sowie das Recht auf Eigentum sind Grundsätze, von denen sich die Regierungen der Deutschen Demokratischen Republik und der Bundesrepublik Deutschland bei der Lösung der anstehenden Vermögensfragen leiten lassen. Nur so kann der Rechtfriede in einem kuenftigen Deutschland dauerhaft gesichert werden.” In Gemeinsame Erklärung der Regierungen der Bundesrepublik Deutschland und der Deutschen Demokratischen Republik zur Regelung offener Vermögensfragen vom 15. Juni 1990, in Gerhard Fieberg and Harald Reichenbach, Vermögensgesetzt, 567.

33. For a complete collection of all related laws and treaties governing the restoration of property from 15 June 1990 through 1991 as well as a detailed legal discussion of the same, see Gerhard Fieberg and Harald Reichenbach, Vermögensgesetzt. For a discussion of the history behind such laws, see Dieter Feddersen, “GDR Emigres and Property Rights,”Politics & Society 23, no. 1 (1991): 47-61.

34. Zhiyuan Cui, “Market Incompleteness, Innovation, and Reform: Commentary on Adam Przeworski's Article,”Politics & Society 19, no. 1 (1991): 59-69.

35. Jrolf and Schmidt-Gothan, “Privatization in the Former German Democratic Republic,” 30-45.

36. Some scholars, including myself, have indeed begun to question whether the organized capitalism model is still applicable in the West. See Charles F. Sabel, John R. Griffin, and Richard E. Deeg, “Making Money Talk: Towards a New Debtor-Creditor Relation in German Banking,” in Relational Investing, edited by John C. Coffee, Ronald J. Gilson, and Louis Lowenstein (Oxford University Press, forthcoming). See also J. S. S. Edwards and Klaus Fischer, “Banks, Finance and Investment in West Germany since 1970” (CEPR discussion paper no. 497, January 1991); Joseph Esser, “Bank Power in West Germany Revised,”West European Politics 13, no. 4 (1990); Uwe Rossbach, “Die Hilferding-Shonfield-These und der Wandel der Gesellschaftlichen Funktionen der Banken: Am Beispiel der Deutschen Entwicklung,” (diplomarbeit, University of Goettingen, 1990).

Investment and Ownership in a Volatile Economy: Big Banks and the Case of the East German Economic Transition

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