Subprime Bailouts in Germany Taxpayers Forced to Cover Risk of Banks' Folly

The talk is still of government guarantees, but huge subprime-related losses at several German state-owned banks could soon start hitting taxpayers where it hurts: the pocketbook. The writedowns continue to mount and, in a worst case scenario, could leave taxpayers with a bill as high as €30 billion.

By Wolfgang Reuter


The lion's roar becomes a whimper: The state of Bavaria is likely to ask taxpayers to bail out BayernLB.
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The lion's roar becomes a whimper: The state of Bavaria is likely to ask taxpayers to bail out BayernLB.

Writedowns from the global financial crisis spurred by the American subprime meltdown are mounting in Germany, causing the deepest financial crisis seen here in decades. The fact that some of the banks that have proven most vulnerable to the crisis are partly owned by the federal government and German states, has meant that taxpayers are being forced to dig into their pockets as the banks plead for bailouts. And the guarantees the government is being forced to provide, to ensure the banks don't go bankrupt, are exposing the German people to even greater risks.

Throughout the crisis, banks and politicians have sought to downplay the scope of the losses, but the risks continue to mount.

Only seven weeks ago, the governor of the state of Bavaria, Günther Beckstein, was painting a rosy picture of 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."

That was on Feb. 13, the day BayernLB reported writedowns of €1.9 billion ($3 billion) as a result of the financial crisis. The bank made it clear that "everything has been digested," and Beckstein emphasized: "This is not WestLB."

The governor's message was clear: In our state, the taxpayer will not be made to suffer for the failures of bank executives. After all, WestLB, based in the state of North Rhine-Westphalia, was only saved a few days earlier with the help of an additional government guarantee of €3 billion ($4.7 billion).

Irresponsible Business Dealings

Last week, Beckstein found himself asking his state parliament to approve a loan guarantee of its own. BayernLB's writedowns had ballooned to a total of €4.3 billion by late March.

This means that taxpayers are now being forced to assume the risks for the fourth state-owned bank in Germany. Three of the banks, WestLB, Saxony-based Sachsen LB and BayernLB, are publicly owned. The federal government is the most important shareholder in a fourth troubled bank, IKB Deutsche Industriebank.

Government Backed Bailouts

IKB €7.2 billion
WestLB €3.8 billion
Sachsen LB €2.8 billion
Bayern LB €2.4 billion

Just how much taxpayers will end up paying for the banks' irresponsible business dealings still remains completely unclear, especially as the bill contains a diversity of items.

In IKB's case, KfW, another state-owned institution and the bank's majority shareholder, has already made more than €6 billion available. This has resulted in a financial loss for the state, and therefore the German people -- one whose full extent is still unknown. The federal government has provided another €1.2 billion ($1.9 billion), using taxpayers' money, in the form of a capital increase. In other words, this money is lost to taxpayers. Earlier this week, KfW's controversial chief executive, Ingrid Matthäus-Maier, resigned after months of criticism over her handling of the global credit crisis.

In the case of BayernLB, risks totalling €4.3 billion also initially consisted "only" of so-called writedowns. The money would in fact be lost if the bank had sold its bad loans on March 31, which it did not do.

If the values of the securities increase again, the anticipated loss will go down. But things could also get worse. The bank estimates its risks at no more than €6 billion ($9.5 billion).

The Bavarian state government now wants to protect BayernLB against such losses. If worse comes to worst, BayernLB would be responsible for €1.2 billion ($1.9 billion), while its two owners, the regional savings bank association Sparkassenverband Bayern and the state of Bavaria itself, would each have to come up with €2.4 billion ($3.8 billion).

In the case of WestLB, taxpayers are also being asked to pony up for potential losses of close to €4 billion ($6.3 billion). Of that, €1 billion will be paid in the form of a capital increase. As co-owners, the regional banks would normally be expected to participate in the guarantee, but they are currently incapable of doing so.

In the case of Sachsen LB, the state of Saxony, along with its taxpayers, is liable for potential losses of €2.75 billion ($4.3 billion), while the Landesbank Baden Württemberg (LBBW), another state-owned bank, is responsible for guaranteeing another €6 billion ($9.5 billion). But LBBW is facing its own difficulties and it is questionable just how much the bank will be able to shoulder without the help of the state government.

The remaining potential losses at Sachsen LB, estimated at about €8 billion ($12.6 billion), are now being covered by the other state-owned banks. But these banks, too, will not be able to come up with the entire amount without the aid of their respective owners and, therefore, of taxpayers.

The various bailout scenarios are all structured in similar ways. 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.

In other words: In the end, the taxpayers always get stuck with the bill.

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