Normally when I am asked to write a reference for someone who was poor I simply state:

  <<Name>> worked at X from <<date>> to <<date>>. His/Her 
  role was that of <<position>> and had responsibility for 
  <<responsibilities>>. He/she led a team of <<number>>.

If the person was good, I'll state it explicitly. I expect the new potential employer to read from what I didn't say when it comes to someone that was not particularly good.

Does anyone else do the same?

I believe that's a "einfachen Arbeitszeugnis". But the employee has the right to a "qualifizierten Arbeitszeugnis" so one of these days someone might come back and ask you for a grading one.

As foreigner living in Germany I never understood this stupid law.

If someone is bad, just put it in written form instead of stupid formulations that sound nice to the unwary.

As the article says, because the letter it's supposed to be good for you, just the companies found their way to pass along the message they want.

But yeah, it's all a bit crazy.

I would scrap it altogether, people aren't "bad", there is just contextes where they don't fit. I think people are always trying to create new means of exclusion, a new nobility. Introductions, elite schools, recommendation letters, references etc. It's like nobody cares about substance anymore, it's all about your background, like it was about your name before.