Sunday, April 26, 2009

A weekend of German banking news

As we anxiously await the results of the infamous stress test, there are equally ominous goings-on across the Atlantic. First, on Friday, the Hypo Real Estate Group's Management Board and Supervisory Board announced a new German government push for a 90% controlling stake. According to the press release:
The Financial Markets Stabilisation Fund (SoFFin) intends to subscribe to new shares to the extent necessary to acquire a 90% majority stake in the Company's capital and voting rights. The new shares are proposed to be issued at the lowest price.
RW: The existing offer of € 1.39 per share expires on May 4, and through this offer the government acquired a roughly 10% stake in the company. Now, Hypo Real Estate is planning to increase the number of shares until the government owns a 90% stake, effectively nationalizing the firm, which is also subject to vote. What is the government going to do with its new financial company? Will it run the bank? Replace top executives? Break up the bank? There are still a lot of questions.

In a related event, a stress-test-like list was leaked to the press revealing the value of toxic assets being held on the books of the German banking system. From Deutsche Welle:
A German newspaper has published a leaked list from the BaFin financial oversight group that shows German banks are weighed down under 816 billion euros in toxic assets. The list from the federal financial supervisory authority BaFin, which details the scope of toxic assets held by German banks, was made public by the Sueddeutsche Zeitung daily.

According to the list, the banks with the worst credit and asset problems include Hypo Real Estate,
Commerzbank and several state banks. Commerzbank's share of the toxic assets amounts to 101 billion euros, with 49 billion of those coming from the recently acquired Dresdner Bank. Hypo Real Estate, which is looking at a likely 90-percent takeover by the German government, has 268 billion euros in toxic assets on its books.
At issue are two potential solutions for the toxic asset crisis. The first involves revaluing the bad assets through a neutral third party, and the other involves collecting the bad assets and giving banks a guarantee against the debt on their balance sheets.

These assets would be backed by the German government, and are reported to be favored by the state banks.
RW: Looks like the German government is weighing its options: guarantee, bad bank, nationalization, etc. Surely, there is more news to come on this front. 816 billion euros is roughly 33% of German GDP...ouch!

Update: Edward Harrison at Credit Writedowns has a nice article on this subject.

Rebecca Wilder

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