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The Fight to Save HRE: Bank Expropriation Bill Clears Parliament

The German Bundestag on Friday passed a law that gives Chancellor Merkel the power to expropriate shareholders in the ailing real-estate lender HRE. It could become the first such expropriation in Germany since the 1930s.

When it comes to financial problem children, the mortgage lender Hypo Real Estate has in recent months proven a particularly difficult case. Already, Berlin has provided the bank over €100 billion in aid, in the form of bailouts and guarantees. A further, and far more controversial, step was taken on Friday. Germany's parliament passed a law that would allow Berlin to expropriate HRE shareholders as a way to nationalize the bank.

Berlin is taking extreme measures to save Hypo Real Estate.
DPA

Berlin is taking extreme measures to save Hypo Real Estate.

The law, passed by a vote of 379 to 107 with 46 abstentions, allows Chancellor Angela Merkel's government to initiate expropriation proceedings only until June 30. Berlin is seeking to obtain over 90 percent of HRE shares as part of its plan to prevent the collapse of the bank, but has been hampered by the unwillingness of US private equity investor J.C. Flowers to sell its 25 percent stake in the ailing lender. Negotiations with J.C. Flowers will continue, but little progress has been made recently.

Despite widespread support for the bill from the Social Democrats, and reluctant support from much of Merkel's Christian Democrats, the bill is a controversial one. The Federation of German Industries has blasted the bill, calling it "completely wrong." And the opposition Free Democrats (FDP) are also opposed to the measure. Indeed, the FDP has even managed to attract some conservatives away from the CDU lately, partially as a result of its opposition to the expropriation measure and other state-heavy reactions to the financial crisis by the Merkel government.

Some have even said the law represents the breaking of a taboo in Germany given the country's experience with expropriations under the Nazis and, in East Germany, under the communists. Were Berlin to carry out an expropriation of HRE, it would be the first such move since the 1930s.

Still, the law is narrowly formulated in an effort to limit Berlin's reach. Furthermore, it expires at the end of June.

HRE was among the first of Germany's banks to be hit by the financial crisis. In early 2008, the bank wrote down €390 million before needing a €50 billion bailout last October. When Germany passed a €500 billion bank bailout bill later that same month, HRE was the first bank to take advantage. The bank has now tapped Berlin for €102 billion in aid and there has been speculation recently that more will be necessary.

cgh -- with wire reports

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