The World from Berlin German Banks Succumb to Temptation

Just what did a small, state-owned bank in Saxony think it was doing by investing billions in the risky American subprime market? German commentators on Monday say managers were looking for an easy buck at the taxpayers' expense.

German banks not proven immune to the global finance crisis.

German banks not proven immune to the global finance crisis.

The German bank Sachsen LB is in trouble. On Friday, it announced that a group of publicly owned banks was bailing it out to the tune of €17.3 billion ($23.3 billion) after it proved unable to provide the credit it had pledged. The guilty party turned out to be an affiliate in Ireland called Ormond Quay. The affiliate, known in the finance world as a conduit, did not appear on Sachsen LB's balance sheet and specialized in issuing short-term debts backed up by securities. Ormond Quay, it turned out, was heavily exposed on the US sub-prime mortgage market and nervous investors had turned away from the credits it offered. The result? Serious liquidity problems.

The announcement came just days after German banks had reassured the public that they weren't overly affected by the problems in the US mortgage market. And it was the second such liquidity crisis to hit a bank in Germany in weeks. Is the German banking sector facing a crisis? Commentators on Monday take a closer look.

Financial daily Handelsblatt on Monday writes:

"The German banking industry finds itself in a dramatic crisis, and one hardly wants to think of its possible escalation. But that is exactly what needs to happen: All bank boards, all controllers, auditors, analysts and control committees have to finally take a close look at the true state of risk in all their divisions and come up with a concrete plan of action. The time of minimizing the dangers and sitting around doing nothing has to come to an end."

"Risk management is the core duty of every banker. Traditionally, banks earn their money by evaluating risk. In recent years, many German bankers have taken unusually high risks because in times of low interest rates, they could hardly survive on the interest differentials between outlay and income, and between short and long-term investments. Those elevated risks included loans to finance investors and hedge funds, that promise unusually high returns... . There is hardly a bank in Germany that hasn't succumbed to the temptation of improving its bottom line through such investments. Which is why all of them need to examine just how deeply they are involved."

The left-leaning paper Die Tageszeitung writes:

"Too big to fail. German banks apparently rely completely on this status. Higher profits are possible with risky speculations than with classic bank deals and conservative investments. But so too are much larger losses. But who cares? When something goes wrong, the state and the other banks will jump in to help. Their interest in avoiding a financial crisis that will harm everyone is much too great. Such is the logic -- and it is a way of thinking which results in the general public being taken hostage by the gambling bankers."

"The state would be well advised to think long and hard about how to rein in the apparently out-of-control financial institutions so that their losses aren't one day so large that the public hand won't be able to ward off a financial crisis."

Center-left Süddeutsche Zeitung likewise takes a closer look at the issue:

"Of course one has to ask the question as to why a relatively small state bank like Sachsen LB, generally considered a financial weakling, is apparently heavily involved in the US and invested multi-billion euros in real-estate financing. Such deals surely don't belong to the core competency of a state-owned bank, even if they aren't explicitly forbidden. The bank -- owned by the state of Saxony -- should really concern itself more with the region and the local, publicly owned banks."

"Structural problems are the trigger for the worrisome difficulties Sachsen LB has run into. The standard business deals entered into by state banks are no longer profitable enough. ... Many institutions now attempt to improve their bottom lines with very risky deals that, if they succeed, also promise high profits. Their desperation apparently leads them to take such irresponsibly high risks that a worldwide credit crisis -- as we are now seeing -- can break their necks."

"One worries that more crises loom. Action must be taken. Those institutions that are completely or partly state owned should be privatized. It is irresponsible when the taxpayer has to vouch for the overly risky business practices followed by individual banks."

-- Charles Hawley, 3:00 p.m. CET


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