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  Smokescreen at German State-Owned Bank: BayernLB Concealing True Extent of Subprime Losses

Smokescreen at German State-Owned Bank BayernLB Concealing True Extent of Subprime Losses

By Conny Neumann and Wolfgang Reuter

German state-owned bank BayernLB is concealing the true extent of its losses incurred as a result of the subprime crisis in the United States. Now the Bavarian savings banks are threatening to give up their 50-percent stake in the bank.

Erwin Huber's banishment lasted exactly nine years. When the Bavarian state cabinet was formed in 1998, Huber, a 61-year-old veteran Bavarian politician from the town of Reisbach, was forced to leave his beloved Bavarian Finance Ministry and switch first to the state Chancellery and later to the state Economics Ministry.

Huber, who is an expert on tax issues, suffered in silence. He has a cool head for figures, so much so that he could probably rattle off the individual items from the state's budget plan off the top of his head.

Huber was only allowed to return from exile last October. He was elected chairman of Bavaria's conservative Christian Social Union (CSU), the sister party to Angela Merkel's Christian Democratic Union. What may have actually been more important for him was the fact that he also regained the position of finance minister of the prosperous state of Bavaria.

His power seemed so endless, and the state's coffers so over-flowing, that Huber was already planning his next career move. In 2009, after nationwide parliamentary elections, he wanted to become more than just Bavaria's bean counter. Instead, he hoped to make the jump to Berlin and become the federal finance minister, so that he could finally show all of Germany what a numbers wizard he really is.

But Huber miscalculated on a grand scale. His over-ambitious calculations have caused a snowballing affair involving the Bavarian state-owned bank BayernLB that has seriously damaged the CSU -- in a Bavarian election year, of all times. Suddenly he runs the risk of stumbling over the very numbers that have been his constant companion throughout his political life.

Together with top BayernLB executives, Huber, who is the deputy head of the BayernLB executive board, attempted to cover up write-offs in the billions at the bank. The reason was to prevent Bavarian citizens from discovering, before municipal elections on March 2 and even before the state parliamentary election in late September, just how much their top bankers have gambled away on the US mortgage market.

The affair will put the party and the cabinet of Bavarian Governor Günther Beckstein under pressure for months, and not just because the opposition is preparing an investigation into the cover-up. Experts are convinced that Huber and the Bavarian bank are still concealing information. The bank's real losses are apparently far greater than the €1.9 billion ($2.8 billion) in write-offs it recently disclosed.

The events that have transpired since Feb. 12 are already enough to characterize Huber's second term as finance minister as a complete failure. To this day, the CSU leader told members of parliament, the bank's management has failed to provide any information on exactly how high its write-offs have been in the wake of the US subprime crisis. The bank allegedly told Huber that it hasn't managed to calculate the exact amount yet, citing 1,200 individual items that are still being examined. Bank officials said that this could take until mid-April. Huber and the BayernLB executives agreed not to mention any numbers for the time being.

On Feb. 12 the media reported, once again, that BayernLB had incurred billions in write-offs from its US investments. At a board meeting that morning, a furious Werner Schmidt, the bank's CEO, said that the numbers reported in the media were incorrect. He went on the offensive, suddenly managing to come up with a figure after all, one that he said was 95 percent accurate.

According to the new calculations, the bank's losses amounted to €1.89 billion ($2.79 billion). Schmidt drafted a press release including this figure at 4 p.m.

An hour earlier, however, Huber had just given the old official version to the state parliament's budget committee, claiming that the losses amounted to only €100 million ($148 million), and that there was no reliable estimate of the size of the write-off. When Huber left the meeting at 4:10 p.m., he read a text message on his mobile phone telling him that Schmidt was going to announce a reliable number.

The finance minister felt that he had been snubbed. He called Schmidt and snapped: "What's going on here? I thought there was no number?" Schmidt replied that he had calculated a portion of it and estimated the rest.