Banking Crisis

Merkel's cabinet is to debate plans this Wednesday to partly nationalize HRE, a mortgage lender which spiralled into disaster last October and obtained huge federal guarantees. Current rules only allow the state to take over one third of a troubled bank.

Speaking on ZDF television, Merkel said the government needed a voting majority at HRE to shape its future.

"Extraordinary crises require extraordinary solutions," she said.

On Sunday Feb. 15, Aareal Bank AG disclosed that the German state had granted it a non-voting capital injection and federal loan guarantees. However, Aareal insisted the move was purely precautionary and said it had ended 2008 in the black.

Other banks to receive German government backing in the ongoing crisis have included Commerzbank, which was one-quarter nationalized.

Aareal said it had obtained a capital injection of 525 million euros ($682 million), but the government would be a sleeping partner only. It also accessed up to 4 billion euros in cover for its bond issues via federal loan guarantees. In a statement from its head office in the city of Wiesbaden, it said the aid had been promised by Soffin, the German government's Frankfurt-based bank-bail-out agency.

Playing the role of icebreaker

"We are not applying to Soffin in desperation," said Aareal chief executive Wolf Schumacher in a statement. "Our bank is completely healthy and there is nothing to indicate that this may change in the foreseeable future."

"We intend to play icebreaker in Germany," he added, referring to mutual reluctance among other banks to apply for government assistance. "We have simply bought ourselves two insurance policies."

Schumacher said Aareal believed it was strong enough to cope unaided with serious challenges such as the international financial markets crisis, but said Aareal wanted the help because of stricter capital rules for banks. It would also avoid being at a competitive disadvantage against rivals who were benefitting from state aid, he said.

He said the capital injection was similar to buying bonds and did not mean the German state had become a shareholder.

"It's a difference of night and day," he said, adding that in the case of Commerzbank, the government held actual equity.

"Aareal remains a 100-percent private bank," he said.

The injection had increased the underlying capital ratio at Aareal from 8 to 10 percent. Aareal was to pay Soffin as sleeping partner a return of 9 percent annually.

Figures issued Sunday showed a pre-tax surplus at Aareal in 2008 of 117 million euros, down from 380 million euros in 2007. Aareal did not forecast its earnings this year.

Germany last year set aside 80 billion euros to inject into banks and authorized up to 400 billion euros in guarantees. So far a total of 196 billion euros, mainly guarantees, has been approved, but Soffin is dealing with dozens more applications.

Reports of insider trading at HRE

Commerzbank is the only bank to obtain a true equity injection, with Germany obtaining just over 25 per cent of its shares. HRE, also a mortgage lender, has obtained guarantees extending to 52 billion euros, but has not taken equity assistance.

Rejecting criticism that she was interfering with private enterprise, Merkel said the move to take control of HRE was aimed at getting Germany's welfare-oriented market economy back on track.

"The state can merely build bridges," she said.

The cabinet is expected to discuss ways of forcing HRE to accept state control.

In a separate development, a German newspaper is reporting that the country's Federal Financial Supervisory Authority (BaFin) was investigating several banks over alleged insider trading surrounding HRE's collapse in September.

"The investigation is ongoing," the federal watchdog confirmed in Monday's edition of the daily Sueddeutsche Zeitung.

The banks in question are suspected of having sold shares from Hypo Real Estate (HRE) shortly before the troubled German property financing group collapsed.

Reaching out to Opel

Merkel said she would also see to it that US car manufacturer General Motors' European unit Opel received help. She said there might be a discussion of guarantees to Opel, but Berlin would wait to see what aid Washington gave GM.

She added it would fall exclusively to the European Union to scrutinize French President Nicolas Sarkozy's insistence on funnelling state aid to French carmakers.

"It will all be looked at again in Brussels and tested to see if it is a distortion of competition," she said.