Financial Crisis Aftermath Bavarian Finance Minister Quits Over Bank Losses

Bavarian Finance Minister Erwin Huber resigned Wednesday after state bank BayernLB announced big losses. Meanwhile prosecutors searched the offices of development bank KfW in a probe relating to its transfer of €319 million to Lehman Brothers after the company had filed for insolvency.

Bavarian Finance Minister has resigned following bigger-than-expected losses at regional bank BayernLB, of which he is supervisory board chairman.

Bavarian Finance Minister has resigned following bigger-than-expected losses at regional bank BayernLB, of which he is supervisory board chairman.

The financial crisis has claimed its first political victim in Germany with the resignation on Wednesday of Bavarian Finance Minister Erwin Huber after Bavarian public-sector bank BayernLB reported bigger-than-expected losses.

Huber's future had been in doubt because of speculation that he may have known about the losses for some time, possibly even since before the Sept. 28 state elections in Bavaria.

A spokesman told SPIEGEL ONLINE that Huber, supervisory board chairman at BayernLB, didn't want to continue in the Bavarian cabinet in view of the losses at the bank.

BayernLB announced late on Tuesday it will seek €5.4 billion from the German government's bailout fund plus an additional €1 billion for a capital increase, making it the first lender to draw on Berlin's €500 billion rescue fund after being hit by third-quarter losses.

Michael Kemmer, the chief executive of Germany's second-biggest regional bank, said that BayernLB faced a loss of up to €3 billion by the end of the year. In the third quarter alone its pretax loss amounted to an estimated €1 billion, far exceeding expectations of €100 million.

The bank had run into problems in 2007 due to risky investments in the United States. Market turbulence following the collapse of Lehman Brothers last month had led to further write-downs and had disrupted business with institutional clients, BayernLB said.

'Fiscal Incompetence'

The news had put Huber, the outgoing chairman of Bavaria's Christian Social Union party, under intense pressure and had fuelled speculation that he would be left out of the new cabinet to be presented by his designated successor as CSU chairman, Horst Seehofer, this coming weekend, reports say.

The CSU's vote slumped in the election and it lost its absolute majority for the first time in half a century, which has forced it to share power with the liberal Free Democrat party whose regional leader Martin Zeil accused Huber of "fiscal incompetence" during the campaign.

While the €5.4 billion payment is coming straight from the government's rescue program, the additional €1 billion capital injection is being provided by BayernLB's public sector owners with the state of Bavaria contributing €700 million and the state's savings banks €300 million.

Analysts had predicted Germany's state-sector banks would be the first to tap the fund after the German cabinet laid out strict conditions for its use on Monday. These include limits on managers' salaries, bonuses and severance pay

No commercial bank has said it would use the fund yet. Now that BayernLB has broken the ice on using the government fund, other regional state-owned lenders may follow.

BayernLB said its board members will receive no bonuses while the financial aid is in effect and also that it would suspend dividend payments.

KfW Offices Searched in Probe

Meanwhile, German authorities searched the offices of development bank KfW on Wednesday in an investigation into the bank's transfer of €319 million ($410 million) to American investment bank Lehman Brothers on Sept. 15, after Lehman had filed for insolvency.

The Frankfurt prosecutor's office said it was investigating whether bank officials broke the law in failing to prevent the transfer of the money. The bank has said it hopes to recoup at least half of the funds.

"The aim of the investigation is to determine whether the responsible parties at KfW violated their legal obligations to safeguard assets by failing to block the transfer of funds on Sept. 15, 2008 despite knowledge of signs of liquidity problems at Lehman Brothers and against the background of an emerging international banking crisis," a statement said.

KfW has said it will cooperate with the probe. It said the transfer was an error that resulted from a "misjudgment" of the situation.

cro -- with wire reports


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