As the 20 members of Deutsche Bank AG’s supervisory board awaited the start of their April 27 meeting in Frankfurt, they were divided and up against a deadline. Josef Ackermann had informed them he wanted to step down as chief executive officer a year ahead of schedule, and they couldn’t agree on a successor.

The board had already decided that none of the internal candidates—Anshu Jain, cohead of the investment bank; chief risk officer Hugo Banziger; and retail chief Rainer Neske—was ready to become head of Germany’s largest bank in the midst of the worst financial crisis since the Great Depression, according to three people with knowledge of the matter.

That morning a board committee huddled in an office at the bank’s headquarters to debate whether to give the job to Clemens Boersig, chairman of the supervisory board, who offered himself as a replacement.

Boersig couldn’t get the support he needed, the people say.

After consulting other board members by phone, the committee decided it had only one alternative left. Shortly before noon, Boersig contacted Ackermann: Would the CEO agree to extend his term another three years? Ackermann, 61, who had gone to sleep the night before thinking his seven-year tenure was coming to an end, said yes.

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JOSEF ACKERMANN(top left), chief executive officer of Deutsche Bank AG, walks out of the Planalto Palace after a meeting with Brazilian President Luiz Inacio Lula da Silva in Brasília in this July 2007 file photo. ACKERMANN appears on a video screen as he speaks during their general meeting in Frankfurt, Germany, on May 26, 2009. Ackermann said he’s confident about future earnings because the bank has the correct strategy of combining investment and consumer banking. ADRIANO MACHADO & HANNELORE FOERSTER/BLOOMBERG NEWS

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Ackermann, a native of Switzerland who has run Deutsche Bank since 2002, the first non-German to hold the position in the bank’s 139-year history, was right about that. Joachim Poss, the finance spokesman for the left-leaning Social Democratic Party, called Ackermann’s reappointment “a horrible signal” and the banker’s pledge to stick to his 25-percent pretax return-on-equity target “a scandal” because it encouraged the industry’s penchant for risk taking.

For Ackermann, a former colonel in the Swiss Army who has ruffled German feathers in his quest to build a global banking colossus, the next four years will provide a chance to prove his critics wrong. They’ll also demonstrate whether he can navigate through a financial crisis he likens to “an earthquake”—one that resulted last year in the bank’s first annual loss in more than five decades—without having to take government aid or raise more capital.

Not taking state funds has become a line in the sand for Ackermann. Deutsche Bank is one of a handful of major European financial institutions—among them, Barclays Plc., Credit Suisse Group AG and HSBC Holdings Plc.—that hasn’t received government money.

Six of Deutsche Bank’s biggest German rivals, including Commerzbank AG, the country’s second-largest bank, requested help from regional or federal rescue funds. Ackermann says rejecting such support will enable his bank to remain global, keep paying dividends and set its own compensation policies.

“You should fight as long as you can not to take money from taxpayers,” says Ackermann, sitting in a 27th-floor conference room at the bank’s offices, not far from where the twin spires of Deutsche Bank’s headquarters, known locally as “Credit” and “Debit,” are being renovated. “If, five or 10 years from now, people at Deutsche Bank can say we survived the worst financial crisis in many decades without government support, that’s a sign of strength.”

Deutsche Bank has been central to the growth of the nation’s economy, bankrolling Germany’s engineering and steel industries for more than 100 years. It financed the Baghdad Railway in the early part of the last century and, when Adolf Hitler ruled, granted loans for the construction of the Auschwitz death camp, according to the bank’s Web site.

After World War II, Deutsche Bank and other lenders provided advice and financing to help rebuild German companies. The bank led the privatization of Volkswagen AG’s predecessor firm in the 1960s, and it acquired 29 percent of Daimler-Benz AG in the 1970s to keep the company out of foreign hands.

Now Ackermann is trying to restore profits against the backdrop of a German economy set to shrink by 6 percent this year, the most since World War II, according to a government forecast. Further writedowns, provisions and estimated capital requirements may force the bank to seek €5 billion ($6.9 billion) in additional funds, says Kian Abouhossein, a JPMorgan Chase & Co. analyst.

“Ackermann has to prove that it was the right decision to reject state aid,” says Johan Fastenakels, a Brussels-based analyst at KBC Asset Management NV, which owns Deutsche Bank stock. “If conditions worsen and he has to go to the government for capital, there’s a big chance he’ll have to step down.”

Ackermann’s stance has generated controversy. While he played a pivotal role in arranging the bailout of commercial property lender Hypo Real Estate Holding AG, pledging billions of euros in guarantees in an after-midnight phone call to German Chancellor Angela Merkel before markets opened on September 29, he was quoted on Der Spiegel magazine’s Web site saying he would be “ashamed” to take any money from the government.

He says his comments, made in English at a meeting of Deutsche Bank managers, were mistranslated and that the words he used were “a shame.”

Still, Thomas Steg, a spokesman for Merkel, called Ackermann’s remarks “extremely alarming.” Peter Sodann, the Left Party candidate for president, told a German newspaper that if he were a police commissioner he would arrest Ackermann. The comments also sparked reaction from Klaus-Peter Mueller, chairman of Commerzbank’s supervisory board, who said banks that participate in the bailout shouldn’t be “picked on.”

“Deutsche Bank helped shape the rescue package, so to then go around saying you would be ashamed to use it doesn’t earn you friends among bankers or politicians,” says Hans-Peter Burghof, a professor of banking at the University of Hohenheim in Stuttgart. “There’s a lot of pressure from Berlin on Ackermann to keep his mouth shut and not boast about his success.”

The outrage is nothing new for Ackermann. When he announced 5,200 job cuts in February 2005 after reporting a then record profit of €2.5 billion, German Vice Chancellor and Labor Minister Franz Muentefering criticized Ackermann for trying to bring “profit to the few at the expense of many.”

Ackermann was also vilified a year earlier for flashing a V sign during a trial to determine whether it was unlawful for him and five Mannesmann AG codefendants to help approve more than €57 million of bonuses for executives at the German mobile phone company following its €154-billion hostile takeover by Vodafone AirTouch Plc. It was the nation’s first criminal probe into excessive executive pay.

While Ackermann apologized for the gesture, and his mea culpa was carried on the front pages of major international newspapers, he criticized Germany as being “the only country where people who are successfully creating value have to go to court.”

Had Ackermann been convicted of criminal breach of trust, he would have faced a maximum sentence of 10 years in prison. Instead, after a six-month trial, he and his codefendants were acquitted. They were ordered to stand trial again after Germany’s highest court threw out the decision. The case was settled in November 2006 for €5.8 million. Ackermann, who wasn’t accused of making any personal gain, paid €3.2 million.

“Ackermann tends to make flawed appearances and gestures,” says Manuel Theisen, a professor of business and taxation at the University of Munich. “The victory sign and ‘ashamed’ quote will probably haunt him for the rest of his life.”

Ackermann earned €14 million in 2007, more than any other chief executive at Germany’s 30 largest companies. His compensation dropped to €1.4 million last year after he gave up his bonus. While those pay figures may not endear him to politicians, he has earned the respect of fellow bankers. He rejected an inquiry in November 2007 about whether he was interested in becoming CEO of Citigroup Inc. and rebuffed an overture from a Swiss official who wanted him to chair beleaguered UBS AG, according to people familiar with the discussions.

Since joining Deutsche Bank in 1996 as head of credit risks, Ackermann has helped transform a German-focused institution into a global banking franchise and raised its profile in debt underwriting and mergers and acquisitions advice. He became cohead of investment banking in 1998, taking sole responsibility for the unit a few months later, and was promoted to CEO in 2002.

Deutsche Bank derived two-thirds of its revenue from outside Germany in 2007 and ranked second among underwriters of international debt issues last year, ahead of New York-based Goldman Sachs Group Inc. It was the 10th-largest global underwriter for equity and equity-linked securities, according to data compiled by Bloomberg.

The bank won praise from analysts and investors in 2007 for avoiding significant losses on US subprime mortgages. As early as September 2005, when its analysts forecast rising defaults on the least-creditworthy home loans, traders at the bank started betting against subprime-related bonds.

As a result, the bank has booked about $14.9 billion in writedowns and credit losses since the subprime-mortgage crisis began in the middle of 2007 compared with $101.8 billion at New York-based Citigroup and $53.1 billion at Zurich-based UBS, according to Bloomberg data. Less than $2 billion of Deutsche Bank’s writedowns were related to subprime.

“If you take writedowns as the standard for success, then Deutsche Bank made it through the financial crisis relatively unscathed, not to mention that it is one of the few global banks to survive without state aid,” says Konrad Becker, a Munich-based analyst at Merck Finck & Co.

Continuing to steer clear of Germany’s €480-billion bailout is a key to Deutsche Bank’s success, says Ackermann, who has a shock of gray hair and a persistent grin.

“If taxpayers feel they own your company, they will understandably ask for different setups and say, ‘You should lend more money to us here in the domestic market instead of growing internationally,’” he says.

Deutsche Bank executives say the company is gaining new business, including a dozen equity sales in North America in the first quarter, because corporate clients like that it is unencumbered by government ties.

Ackermann now begins client meetings by boasting that his is one of the few global banks that haven’t either accepted state aid, as all the big US financial firms have, or raised money from investors or sovereign wealth funds, as Barclays, Credit Suisse and HSBC have, those executives say. He doesn’t count the $11.8 billion Deutsche Bank received from American International Group Inc., courtesy of a US government bailout, to cover the insurer’s obligations on its credit-default swaps.

“The US government rescued AIG in the interest of financial stability, and, obviously, this was of particular importance to the counterparties,” Ackermann says.

“There’s an elite club of banks that say they do not want to be the ones to take the money because they understand it doesn’t come for free,” says Scott Moeller, a former Deutsche Bank banker who teaches finance at Cass Business School in London.

Staying in that club will require offsetting Deutsche Bank’s bad bets on leveraged buyouts and commercial real estate and trades that led to a loss of €3.8 billion last year, the first time in more than 50 years the bank didn’t report a profit.

The stock dropped 15 percent in the two days after the results were announced on January 14, partly on the bad news and partly on concerns about Ackermann’s health. He was rushed to a hospital in Berlin after becoming dizzy at a Deutsche Bank reception. It turned out to be a case of indigestion from eating sauerkraut and a couple of sausages, he says.

Ackermann and the stock price have since recovered: The bank’s shares gained 51 percent this year as of May 11 in Frankfurt trading, making it the 10th-biggest gainer in the 65-member Bloomberg Europe Banks and Financial Services Index.

Things were so bad at the end of last year that Ackermann says he stopped looking at daily earnings briefings because he didn’t want to ruin his Christmas holiday. The investment bank recorded a sales and trading deficit of €4.78 billion in the fourth quarter as the value of bonds and equity derivatives plunged. That included a loss of more than €1.4 billion on proprietary trades in the period.

He started looking at the updates again in January, when the bank returned to a profit, driven by record trading revenue.

The bank has since shuttered its credit proprietary trading desk, run by Boaz Weinstein, a Life Master in chess who lost about $1.3 billion betting the bank’s own capital on securities including corporate debt. The desk, known as Saba—Hebrew for grandfatherly wisdom—lost money after Weinstein, 35, bet on bonds from firms such as Ford Motor Co. and then hedged some of those bets with credit-default swaps, contracts to protect against or speculate on default, people familiar with the matter said.

Weinstein left the bank earlier this year with a dozen colleagues to start a hedge fund in New York. He declined to comment.

“The unprecedented market conditions revealed some weaknesses in our trading operations and in asset management,” Ackermann said in February at a press conference in Frankfurt. While Deutsche Bank targeted as much as €2 billion in revenue from proprietary trades—about 15 percent of its annual €13 billion of trading revenue—the amount of money it invested to get that return was €5 billion to €10 billion.

“This is certainly not an attractive risk-reward,” Ackermann says.

Deutsche Bank also booked €1.68 billion in writedowns tied to leveraged-buyout loans last year. Under Michael Cohrs, the cohead of investment banking who oversees corporate finance, the bank climbed to No. 3 among arrangers of leveraged loans in Europe, the Middle East and Africa in 2007 and No. 7 in the US, according to Bloomberg data, as it chased fees from private-equity firms in a record year for takeovers.

After credit markets froze in the summer of 2007, the bank was saddled with €44 billion of the loans, including the £1.67 billion ($2.56 billion) it put up as part of a £9-billion syndicate to finance KKR & Co.’s takeover of UK drugstore chain Alliance Boots Ltd.

Cohrs, 52, called leveraged finance a “market sweet spot” in a June 2007 investor presentation, saying the bank’s competitive position in a sector experiencing “explosive growth” would help it join the top five globally in corporate finance by fees and profitability. Less than a year later, he told investors in New York that the LBO business was “effectively closed.” The bank slashed its exposure to leveraged loans to €525 million at the end of last year from €33.6 billion a year earlier.

“If there’s one area in particular where the bank was at the forefront in terms of risk, it was LBOs,” Merck Finck’s Becker says.

Another distress zone is commercial real estate. In the past two years, the bank booked €1.34 billion of writedowns on €16 billion of commercial real-estate loans, the largest share of which were in North America, according to its 2008 annual report. It cut its property investments to €3.2 billion by the end of last year.

Deutsche Bank took control of seven New York office towers in 2008 after developer Harry Macklowe defaulted on about $7 billion in loans the bank helped arrange to enable him to buy the buildings from New York-based LBO firm Blackstone Group LP in 2007. It has since sold all but one of the properties and would lose as much as $600 million in all if the remaining property, Worldwide Plaza, were sold today, according to estimates by Dan Fasulo, managing director at real-estate research firm Real Capital Analytics.

Deutsche Bank also foreclosed on a Las Vegas property, the $3.5-billion Cosmopolitan Resort & Casino, after developer Ian Bruce Eichner defaulted on a $760-million loan. The bank is moving forward to complete the project and is in talks to hire a company to manage the complex, whose two glass towers house 3,000 condos and hotel rooms. With the Las Vegas Strip experiencing its worst annual decline on record, Deutsche Bank booked a €500-million impairment charge on the Cosmopolitan in the first quarter.

The continuing market turmoil may have played a role in the board’s decision to ask Ackermann to stay on.

“There was a big debate whether you should have a change of captains in the middle of the storm,” chief financial officer Stefan Krause said on a conference call on April 28, a day after the announcement. “The preferred solution for Deutsche Bank was to keep the captain.”

Ackermann forced the issue to prevent prolonged speculation about his successor, he says. Each time a story appeared about one candidate others would spend time trying to figure out who planted it, distracting top management and those underneath them, according to three people at the bank who asked not to be identified.

When Ackermann informed Boersig of his plan to step down a year early, Boersig, 60, put himself forward as a replacement, the people say. The offer was rebuffed by labor representatives on the board who were unhappy that Boersig didn’t appoint them to key committee positions last fall, one of the people says.

Ackermann says he accepted the request to stay on “out of duty to the bank” and that he called his wife right away to tell her to shorten the lengthy summer vacation they had planned.

Before it considered whether to make Boersig CEO, the board passed over three internal candidates appointed to the management board in March.

Jain, 46, the Indian-born banker who joined Deutsche Bank in 1995 from Merrill Lynch & Co., was the biggest earnings driver in 2007 as global head of the foreign exchange, fixed-income and equity departments, which helped the securities unit generate more than half of the bank’s revenue.

His reputation was tarnished last year when the investment banking unit reported a record loss of €8.48 billion. While his division has since experienced a rebound, some of the debate about Jain focused on whether it would be wise to appoint him CEO at a time when investment bankers have been targeted for selling risky securities, the people familiar with the matter say. Jain also has the handicap of not speaking German.

Neske, 44, the head of consumer banking who has a degree in computer science and races go-karts, wasn’t a shoo-in because he wasn’t familiar with the investment banking side of the business, the people say.

Chief risk officer Banziger, 53, a Swiss national hired from Credit Suisse in 1996, hasn’t had operational oversight for any of the bank’s key divisions in recent years, they say.

Jain, Neske and Banziger all declined to comment. Boersig couldn’t be reached for comment.

Ackermann’s contract extension may buy time for the three executives to polish their images and improve their chances, people close to the matter say. It will also make Ackermann, who grew up in Mels, a village in eastern Switzerland overlooking the mountain where the novel Heidi is set, the bank’s longest-serving postwar CEO.

Ackermann’s management style involves speaking to many people before settling on a decision. He doesn’t like to use e-mail or text messages, preferring phone calls or face-to-face meetings instead, those who work with him say. And precision is important. He once asked Jain what the bank’s subprime positions were and then five minutes later called Banziger to ask him the same question to ensure the figures were the same. They were.

Ackermann was recruited to Deutsche Bank in 1996 by Hilmar Kopper, then CEO of the German bank, after Ackermann had a falling out with Rainer Gut, chairman of Credit Suisse, where Ackermann had worked for almost two decades. The two disagreed about the structure of the company, with Ackermann favoring an integrated banking model.

After less than a year as head of credit risks at Deutsche Bank, Ackermann was given expanded responsibility, including oversight of the company’s treasury. In 1999, Ackermann used Deutsche Bank’s $9-billion takeover of New York-based Bankers Trust Corp., orchestrated by then global markets chief Edson Mitchell, to give the bank an international platform from which it could expand in the US and Asia.

Ackermann, who oversaw the integration, earned a reputation as a cost cutter, slashing 8,500 jobs within months of the purchase.

Mitchell, who was expected to succeed Ackermann as head of investment banking, died in a plane crash in December 2000 en route to his vacation home in Maine.

“Ackermann never had the advantage of a powerful, profitable home base from which he could benefit, so he expanded internationally and he had to go into investment banking,” says Markus Granziol, a former head of UBS’s investment bank who runs a wealth management firm in Zug, Switzerland.

When he became CEO in 2002, Ackermann began selling Deutsche Bank’s stakes in German companies, including insurer Allianz AG and Daimler, to raise money for investment banking. He cut the bank’s equity holdings to €1.1 billion in market value last year from €15 billion in 2001. He also slashed expenses and staff by almost a third in his first four years as CEO and boosted the bank’s capital ratio to about 10 percent from 8.1 percent.

While Ackermann has increased head count by 4 percent since the end of 2002, almost two-thirds of the bank’s current 80,000 employees work outside Germany, in markets from India to Peru.

Ackermann’s aggressive profit targets still rankle German politicians. Even Jochen-Konrad Fromme of the Christian Democratic Union, Merkel’s pro-business party, was critical of his 25-percent target for return on equity, a measure of profitability.

“I can only describe it as sick,” Fromme said in a newspaper interview in April. “A bank that wants to achieve that needs to take on extreme amounts of debt or take part in very risky businesses.”

Ackermann, who once took singing lessons at the Metropolitan Opera in New York, says taking risks is the only way to grow.

“As the saying goes: If you avoid all the risks, you soon have no risks left to avoid,” he says. “Good judgment comes from expertise, and expertise also comes from making mistakes.”

The mistakes Ackermann and Deutsche Bank made last year won’t prevent the bank from returning to profit this year, the CEO says. In February, he said profit at the investment bank would resemble what it was in 2005 and 2006, when earnings were €3.88 billion and €5.38 billion.

At the company’s annual shareholders meeting in Frankfurt last May, he said that the bank’s strong first-quarter performance, when it reported net income of €1.19 billion, was continuing in the second quarter. Much of that can be attributed to the investment bank, which is benefiting from foreign-exchange, money-market and interest-rate products, he said.

“Investment banking remains our most important core business,” Ackermann said.

Overall, Deutsche Bank is set to report a full-year profit of €2.99 billion, according to the median estimate of 11 analysts polled by Bloomberg News.

“Deutsche Bank has a good chance of being profitable this year,” says Fastenakels, the KBC analyst. “Still, these are critical times, and the risk remains that conditions could worsen again.”

For Ackermann, who chose not to become a doctor like his father and says he has an aversion to the sight of blood, steering Deutsche Bank back to profitability and health in the worst recession in 60 years without government assistance will secure his legacy. If he doesn’t, he may regret not having seized the opportunity to step down when he could.