HRE bailout probe
August 18, 2009
Launched in May, the parliamentary inquiry seeks to identify the roles of the government and banking supervisory bodies in the near-bankruptcy of the Munich-based mortgage lender.
German Chancellor Angela Merkel has come under strong criticism for the mammoth bailout package and the subsequent nationalization of HRE.
Merkel's government announced its bailout of HRE, the parent of Germany's main issuer of covered bonds, on September 29 2008, two weeks after New York-based investment bank Lehman Brothers filed for bankruptcy.
HRE was eventually nationalized and is being propped up with financial aid to the tune of 102 billion euros, of which 87 billion euros have been supplied by the state.
Did the government act irresponsibly?
The inquiry committee, consisting of opposition politicians from the Free Democrats (FDP), Greens and the Left party, contends that the government acted irresponsibly and wasted taxpayers' money.
Merkel’s advisor Jens Weidmann and deputy finance minister Joerg Asmussen have said there was no alternative to rescuing the mortgage lender.
Asmussen said the government’s aims had been to stabilize the financial markets and demand of the banking industry the highest possible contributions to the rescue of HRE. “I think we achieved that,” he told the inquiry.
The opposition believes Asmussen carries the bulk of the blame for the costly bailout. But the German Central Bank, industry supervisors and private banks have all defended Asmussen in front of the parliamentary panel.
The inquiry is expected to wrap up in September, and is due to present its report just prior to the country's general election on September 27.
Controversial takeover
The nationalization of HRE was implemented against the will of many of the bank’s shareholders.
Representatives from the finance and economics ministries now sit on HRE's supervisory board, with the state owning more than 90 per cent of the bank.
The German government plans a so-called squeeze-out to eject the remaining investors, in exchange for a compensation payment.
Among the remaining shareholders that the state is attempting to cast out is American private equity firm JC Flowers, which invested 1.1 billion euros in HRE as collapsing real estate markets battered the bank in the spring of 2008.
The US investor has fought the government's takeover attempts, arguing it would ruin Germany's reputation as a safe place for foreign investment. Flowers will likely receive about five percent of his investment back under the government's buyout plan.
Shareholders angered by buyout bid
Many other investors are up in arms over these plans. In mid-August, some 1,700 angry investors gathered for a meeting in Munich, where HRE has its headquarters.
"Shareholders are faced with expropriation following the state's involvement," one investor told other shareholders at the meeting.
HRE's chief executive, Axel Wieandt, defended the state's controversial takeover of the bank, also saying there had been no alternative.
Probe by special auditor
During the August meeting, shareholders decided to appoint a special auditor to find out what had brought the mortgage lender to the brink of collapse.
In particular, investors sought information about HRE's five-billion-euro takeover of Dublin-based state financer Depfa in 2007, which dragged the German bank down when it became unable to refinance long-term credits.
Many investors felt an audit would not go far enough.
"A special audit cannot be a short-term tranquilizer for shareholders," said Daniela Bergdolt of Germany's DSW association, which represents investors' interests.
Bergdold insisted that every final detail of developments at HRE needed to be researched and published.
Current and former HRE shareholders had already said they planned to sue the bank for withholding critical information about its financial health as it teetered on the brink.
One-off payment criticized
Investors also voiced criticism over a one-off 500,000-euro payment to Wieandt, after the state takeover had capped his salary significantly below his previous income.
The head of the supervisory board, Michael Endres, countered that the chief executive deserved the compensation, adding, "Mr. Wieandt turned down considerable funds."
Wieandt, who is now charged with restructuring the bank, said the process would take several years. "We are currently not expecting to return to profit before 2012," the chief executive said.
On the brink of bankruptcy
The Munich-based lender came close to bankruptcy last fall after the American investment bank Lehmann Brothers collapsed and the short-term lending markets froze. HRE was highly exposed to the real estate market and unable to roll over its short-term debt without government loan guarantees.
As a large portion of HRE's business involved providing short-term financing for German companies, the government of Chancellor Merkel was concerned that the bank's collapse would have a catastrophic impact on the economy.
"We will not allow the distress of one financial institution to distress the entire system. For that reason, we are working hard to secure Hypo Real Estate," Merkel said last October.
With the European and American banking sectors in crisis, only the government had the resources available to recapitalize the bank to prevent a collapse.
Controversial takeover
As the government's involvement in HRE deepened, political pressure mounted on Merkel's government to take over ownership of the bank in order to protect taxpayers' investment in the firm.
But with no bank failures in modern German history, there was no mechanism for the government to assume ownership other than offering to buy shares from investors.
Also, the fact the Nazi regime seized assets from Jews and political opponents in the 1930s has given the specter of government expropriation a different cast than in other countries, such as the United States, the United Kingdom and Iceland, which have also seized insolvent banks.
Throughout the winter and spring, Finance Minister Peer Steinbrueck and other members of government prepared a two-track plan to nationalize HRE. It offered voluntary buyouts to shareholders while lawmakers planned new legislation giving the government the power to take over HRE under very specific conditions.
No return to profitability till 2012
Meanwhile, HRE is in the process of negotiating the transfer hundreds of billions of euros worth of bad assets to a government-backed "bad bank," while also overhauling its business model so that in the future it undertakes less risky operations.
In early August, the bank announced it had lost over one billion euros in the first half of the year and did not expect to return to profitability before 2012.
Wieandt has said that the company would be dependent on extensive support for the foreseeable future.
Key dates for Hypo Real Estate
August 13, 2009
HRE shareholders gathered for the annual meeting in Munich where they were asked to vote on a resolution allowing the German government to buy out the remaining shareholders.
August 12, 2009
Germany’s Stern magazine reports that HRE head Axel Wieandt received a 500,000-euro bonus at the beginning of 2009, after the government bailout.
August 10, 2009
HRE says it plans to dispose of hundreds of billions of euros of bad assets by placing them in a government-backed "bad bank."
August 7, 2009
HRE announces over a billion euros of losses for the first half of 2009 and that it will not return to profitability before 2012.
July 2009
A group of disgruntled HRE shareholders announces plans to sue HRE for withholding information about the bank's financial health.
June 2009
HRE shareholders vote to allow government to buy a majority stake, the first bank nationalization in Germany since World War II.
April 2009
The German government announces its intent to take over HRE and passes a law giving it the power to seize the bank as a measure of last resort. Opposition members of parliament vote to investigate the government's handling of the HRE bailout.
February 2009
Berlin announces HRE will receive an additional 10 billion euros in credit guarantees to stabilize the company.
December 2008
HRE announces plans to slash half of its workforce.
October 2008
Axel Wieandt takes over HRE after the government rescues the bank.
September 29, 2008
The German government announces loan guarantees worth 35 billion euros for HRE, rescuing the bank from a likely collapse. Over time, the loan guarantees are extended to 102 billion euros.
rb/dpa/Brett Neely
Editor: Sam Edmonds