Extreme Measures Berlin Paves the Way for HRE Expropriation

German mortgage bank Hypo Real Estate has already taken on €102 billion in state aid. Now, Chancellor Merkel's cabinet has agreed on a draft law that would give Berlin the option of seizing control of the wobbling bank.

Chancellor Angela Merkel's cabinet agreed on Wednesday morning to changes in the country's bank bailout law that would allow the country to expropriate shareholders of the crisis-ridden Munich-based mortgage lender Hypo Real Estate. The news comes just a week after total government aid to HRE -- in the form of bailouts and guarantees -- topped €102 billion.

The German government has agreed on a law that would allow it to expropriate Hypo Real Estate shares.

The German government has agreed on a law that would allow it to expropriate Hypo Real Estate shares.

The draft law would allow the federal government to initiate expropriation proceedings until June 30. "The deadline makes it clear that the option of nationalization as a step toward stability is one which will not be available in the long term and is only conceived as a contribution to meeting the challenges presented by the financial crisis," the bill reads.

Sources within the Social Democrats -- junior partner in Merkel's governing coalition -- were more direct in their assessment of the bill. "For us it was clear," an SPD official told SPIEGEL ONLINE. "Expropriations must be possible so that one isn't open to blackmail by the locusts," he said, using SPD zoological shorthand for financial speculators.

The agreement makes it clear that expropriation remains a step of last resort, an effort to silence critics worried about what may become Germany's first forced bank nationalization since the 1930s. Berlin seeks to gain control of 95 percent of HRE stock in an effort to prevent the lender from failing -- a collapse that would be comparable to the bankruptcy of Lehman Brothers in the US. The draft law would most directly affect the New York-based private equity group JC Flowers & Co., which owns 24 percent of HRE's shares.

HRE was among the first of Germany's financial institutions to be dragged down by the financial crisis as liquidity problems leapt across the Atlantic Ocean from the US. As early as Jan. 2008, the bank had to write down €390 million. The situation only got worse from there, with leading German banks together with the federal government agreeing to a €50 billion bailout package for the bank last October. Once Germany's €500 billion bank bailout bill was passed later that month, HRE was the first to take advantage, to the tune of an additional €15 billion.

As state help has risen, the value of HRE stock has plunged. Since the end of September, share prices have dropped by 92 percent and on Tuesday stood at a paltry €1.13 per share. JC Flowers bought its 24 percent stake in the bank last April for €1.1 billion -- when shares were going for €22.50.

Senior Berlin officials spent last week meeting with JC Flowers representatives about a buyout, but the two sides could not agree on a share price. Now, opponents of the expropriation bill are weighing a constitutional challenge should it become law. DSW, a German shareholders advocacy group, said it was already looking into filing a complaint. The expropriation bill, DSW's Klaus Nieding told Reuters on Wednesday, "is a fatal signal for investors in Germany and worldwide."

Critical voices have also come from the business-friendly Free Democratic Party and from German industry, both of which agree with Nieding that Germany's image will suffer.

"That is complete nonsense," said Merkel of the critique on Tuesday. Her government, she pledged, will not allow HRE to fail.

cgh -- with wire reports


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