Germany is in shock as banks admit subprime hit has got worse

Resignation: Georg Milbradt, Premier of Saxony, quits on Monday after his state's bank, Sachsen LB, ran up huge subprime liabilities

Allan Hall|In Berlin

11 April 2012

Germany is mired so deep in the subprime crisis that its entire banking structure is under threat of collapse. As writedowns continue to mount and government guarantees wear thin, experts warn that losses could soon reach €30 billion (24 billion) - and possibly more.

It is the long-suffering German taxpayer who will be handed the final bill, just at a time when German industry and employment as a whole is on the up.

"The subprime meltdown has caused the deepest financial crisis in Germany in decades," wrote the influential news magazine Der Spiegel this week.

To a people with memories of another crash, that of 1929, helping to propel the Nazis to power and Germany to ruin, the spectre of a replay of those dark times is grim indeed. Throughout the crisis, banks and politicians have sought to downplay the scope of the losses, but the risks continued to mount. Just weeks ago the governor of the state of Bavaria, G¸nther Beckstein, put on a brave face about the state-owned bank BayernLB. He talked about the "unpleasant burdens" borne by the bank, which is half-owned by the state of Bavaria, and of the "painful downside".

Anyone who is active in the international capital market, Beckstein said, should expect "to lose money sometimes". The same day, the bank reported writedowns of nearly €2 billion. Days earlier WestLB in North Rhine-West-phalia restructured its portfoloio of subprime securities in a special-purpose vehicle which has been guaranteed by its shareholders.

Now BayernLB has exposed its true losses: €4.3 billion. Beckstein had to go cap in hand to his own parliament to ask for a loan. Saxony-based Sachsen LB has subprime debts to the tune of €2.8

billion while the governmentowned industrial lender IKB Deutschland is in the subprime hole to the tune of €7.2 billion.

Germany's Landesbanks were in trouble before the subprime earthquake hit: now they are in danger of imploding.

A cosy system of politicised banks putting profits before common sense led to their provincial bosses, in the words of Deutsche Bank chief Josef Ackermann, "taking risks beyond their capacity and competence".

The subprime crisis has revealed a wider truth about the Landesbanks: they're simply not very good. Originally founded to act as wholesale financiers alongside state-owned regional savings banks, when their state guarantee was abolished in 2005, under pressure from Brussels, they found it harder to obtain cheap new funding and had to scour for higher-yielding assets.

They plunged into the murky waters of collaterised debt obligations without bothering to check if they could see the bottom. Now they are drowning. Germany also has far too many banks, around 2200 in all, which has a depressing effect on the industry's profitability and has led to speculation that massive consolidation will have to come.

Germany's central bank and government have repeatedly called for calm over the credit spasms unleashed by the uproar. But as more and more losses mount up, and taxpayers are expected to help bail the banks out of the trouble they made for themselves, it is hard to see where or when the crisis will end - or what the final bill will be.

"Guarantees of certain amounts are being constructed like firewalls around the banks' bad portfolios. If one wall collapses, a new guarantor replaces the first guarantor. In almost all of these cases, the guarantors are publicly owned institutions," said one commentator.

This week the gloom claimed its first political scalp. Premier of Saxony, Georg Milbradt, resigned after the financial mess blew a hole in the budget of his eastern German state.

His state's bank, Sachsen LB, had to be sold to another bank after accumulating enormous liabilities from investing in so-called structured-finance products linked to the dodgy US home mortgages. One bank has actually gone under. The small private Weserbank in Bremerhaven has had its services suspended by federal financial authorities in Germany.

Founded in 1912 as a small, private bank, the institution recently launched an effort to grow into an investment bank with a presence in Frankfurt, Germany's financial capital. It only had €120.4 million on its balance sheets and that went when the first subprime bills began rolling in.

Where will it all end? They crystal balls are out but it is hard to say. The good news for ordinary Germans is that most of them are not homeowners. So they don't face the same kind of lending problems that are dogging the British mortgage market.

The great unknown is whether there is more bad news about subprime liabilities to come in Germany.

DZ Bank, the central bank for roughly 1100 co-operative banks which also links them to international capital markets, wrote down €1.36 billion in February - but still has a portfolio of risky debt investments of €26 billion, almost, €3 billion of which is in subprime mortgages.

"It is very difficult to make a prediction for the current year," said chief executive Wolfgang Kirsch.

That is the view in many German banks. It seems no-one really knows how toxic their portfolios really are.

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