Post by unlawflcombatnt on Aug 13, 2007 1:09:43 GMT -6
American Mortgage Crisis Rattles German Banking Sector
By Frank Hornig, Lothar Pauly and Christian Reiermann
8/10/07 (from Der Spiegel)
"Germany has bailed out one bank burdened with American "subprime" mortgage risks, but the fun may not be over -- as the earthquake in world markets this week demonstrates.
Cheap deals on American home loans are haunting investment banks in Europe. Average housing prices are falling across the United States, "for the first time since the 1930s."
The saviors of the German financial sector came together early this month in a sterile conference room at the Düsseldorf headquarters of the IKB commercial bank. The head of Germany's state development bank KfW, Ingrid Matthäus-Maier, looked anxious. Jörg Asmussen, a departmental head at the Finance Ministry, wrung his hands. His boss, Finance Minister Peer Steinbrück, called from his home in Bonn; other top leaders of German banks were also listening in.
Germany had been hit by a version of the crisis that surprised French investors on Thursday, sending stock markets from New York to Tokyo into unexpected dives. Debts arising from America's so-called subprime mortgage sector had just caused IKB to falter.
The most thankless job fell to Matthäus-Maier. She had to tell those in attendance that KfW's stake in IKB was in an unforeseen predicament. The niche bank specializes in the rather dull sector of financing mid-sized companies; but recently it had taken on risky investments in the United States. The bank's management made some bad bets, and lost. Now it was teetering on the edge of insolvency, unless other German financial institutions chipped in with emergency funding.
Jochen Sanio, president of Germany's banking supervisory agency BaFin, was pessimistic: If IKB folded, the failure might spread to other institutions, and maybe set off the biggest bank crisis since the Great Depression in the 1930s....
The gathering of bankers and government officials decided to undertake the biggest rescue operation for a single bank that Germany has ever seen....
The epicenter of this financial quake is the United States. Hardly a day passes now when an American mortgage lender or hedge fund doesn't go belly-up. The world's equity markets first plunged in response to the crisis in mid-July. Germany's leading stock index, the Dax, lost over 10% in a matter of days, and America's Dow Jones dropped 6%.
Another round of panic hit world markets this week after a French bank, BNP Paribas, had to freeze three investment funds worth €2.76 billion ($3.79 billion) because of American mortgage debts. The Down Jones fell three percent on Thursday, and central banks in the US, Europe and Japan have injected money markets with billions of dollars to ease credit jitters....
The crisis has even started to frighten US consumers, whose joy in spending has until recently the bedrock of the world economy. They're not just victims in this story, but also the cause of the mess. They've built and bought big new houses on easy credit without thinking about potential consequences. This was not a problem as long as real estate values climbed, allowing them to take out ever-larger housing equity loans. But the overheated US housing market started to crash this year, putting an end to the carefree days of American homeownership.
Rising house prices in America started a craze for "subprime" mortgages, or housing loans offered to homebuyers below the prime lending rate. Typically these loans involve a low-rate grace period before a higher rate comes into effect. And as long as housing prices boomed, debts associated with these mortgages could be packaged as attractive investment vehicles for big institutions. But now the market has stalled and abundant credit for such risky investments has dried up -- and anyone, apparently, can run into trouble.
One Bank's Quick Decline
In mid-February, the leadership of the Düsseldorf-based IKB was still boasting of "noticeable successes in the department for real estate customers." But IKB had jumped into the real-estate business long after many market players had cashed in and jumped out.
At the bank's last supervisory board meeting before the crisis went public, two supervisors asked the board whether IKB was properly covered for bad housing loans in the United States. How big were the potential risks? Participants at the meeting remember IKB Chairman Stefan Ortseifen saying: "There is no risk." Two special audits by the Auditing Association of German Banks -- the last one in spring -- also found nothing unusual.
But the house of cards was brought down two weeks ago by Deutsche Bank, which ended the line of credit for Rhineland Funding, an innocent-sounding investment vehicle based in the American state of Delaware. IKB had securities holdings there and in another fund worth more than €20 billion ($27.6 billion).
Deutsche Bank had handled Rhineland's payment transactions and some of its financing. After canceling the line of credit, the bank alerted regulators at BaFin, the German supervisory agency. It became clear during subsequent crisis meetings examining IKB's credit liabilities that the humble bank had losses totaling between €2.3 billion to €2.5 billion at current market conditions....
Expecting further liabilities to surface, regulatory boss Sanio went around the summit meeting in Düsseldorf with his proverbial hat in his hand. In the end, the state-backed development bank KfW, as principal shareholder in IKB, would have to cover the €2.5 billion in potential losses. Germany's private banks offered €500 million. The nation's credit unions and public savings banks are expected to pony up another €500 million....
The bad news coming from the United States -- where mortgage lenders had been outdoing each other doling out easy credit -- isn't likely to slow down....
From 2002 to 2006, the US mortgage market grew on average 15 percent annually. American regulators shut their eyes and hoped for the best. Nouriel Roubini, an economics professor at New York University, accused government watchdogs of "falling asleep at the wheel while a reckless credit bubble occurs."
So is the bubble popping? In October, higher interest rates for some $50 billion in housing loans will go into effect. Through September 2008, mortgages totalling around $1 trillion will be hit by higher interest rates. "The worst isn't over yet," warns the investment bank J.P. Morgan Chase....
Only a few months ago, many hoped the crisis would be limited to the subprime lending sector -- that is, to borrowers with bad or no credit -- but that wishful thinking is gone. Now everyone tied to American homebuyers who wanted lives built on easy credit are facing the consequences.
The first to get hit are hedge funds that hoped to make fast money with the loans. Next in line are the banks -- and not just in America. And in Germany, it's not just IKB.
But how could a small German bank with only 1,700 employees and a mere €1.4 billion in equity capital make such huge bets in the United States without someone noticing? IKB bought €12.7 billion in special securities via Rhineland Funding that failed to show up on the bank's ledgers. These securities consist of loans bundled together by banks wishing to unload their real estate and corporate debt risks. The various packages were then categorized according to credit ratings by agencies such as Moody's and Standard & Poor's -- enabling the mortgage of a welfare recipient in Alabama, say, to be traded on global financial markets.
IKB could at least show that most of its special holdings had higher credit ratings. However, it now seems that during a housing market slump, nobody wants to buy these prettily packaged parcels of debt. "It could be full of rat poison," says one banker, shrugging his shoulders. Indeed, as the market has gone south, credit agencies have started to become more realistic and ratchet down their ratings.....
Part of the rescue plan for IKB is for the state-backed KfW to keep the bank liquid with € 8.1 billion. When the new chairman -- installed by KfW -- has overhauled the bank, it will be sold. The German government, which owns an 80-percent stake in KfW, approved the plan last week. It's a radical solution, and it's already clear that the next insolvent bank won't get off so easily.
Besides IKB, some of Germany's regional state banks have run into trouble with risky US real estate debt. WestLB allegedly has liabilities in the range of € 300 million to € 400 million, according to a banker familiar with the situation, noting "toxic elements" found at the bank's Brightwater fund. The fund has $35 billion in structured debt spread across several special-purpose vehicles....More than half of the funds managed by Brightwater are for foreign clients...
regional public banks in Germany have been oddly zealous to jump into the Asset Backed Securities (ABS) markets. Landesbank Sachsen, partially owned by the German state of Saxony, has led the financing for a totally unknown company named Ormond Quay Funding. Outfitted with $16.75 billion at the end of 2006, Ormond Quay is slightly larger than IKB's Rhineland Funding....
"There's no way to sugarcoat the situation," said David Rosenberg, Merrill Lynch's chief economist for North America, even before the recent market drops. Investment bank Bear Stearns had been forced to close two hedge funds because of the crisis; a third was in trouble. Private-equity takeover titans were also forced to rethink their business plans....In the past five weeks alone, more than 35 loans to finance takeovers have been rejected or restructured....
So much for the "no risks" propaganda.
By Frank Hornig, Lothar Pauly and Christian Reiermann
8/10/07 (from Der Spiegel)
"Germany has bailed out one bank burdened with American "subprime" mortgage risks, but the fun may not be over -- as the earthquake in world markets this week demonstrates.
Cheap deals on American home loans are haunting investment banks in Europe. Average housing prices are falling across the United States, "for the first time since the 1930s."
The saviors of the German financial sector came together early this month in a sterile conference room at the Düsseldorf headquarters of the IKB commercial bank. The head of Germany's state development bank KfW, Ingrid Matthäus-Maier, looked anxious. Jörg Asmussen, a departmental head at the Finance Ministry, wrung his hands. His boss, Finance Minister Peer Steinbrück, called from his home in Bonn; other top leaders of German banks were also listening in.
Germany had been hit by a version of the crisis that surprised French investors on Thursday, sending stock markets from New York to Tokyo into unexpected dives. Debts arising from America's so-called subprime mortgage sector had just caused IKB to falter.
The most thankless job fell to Matthäus-Maier. She had to tell those in attendance that KfW's stake in IKB was in an unforeseen predicament. The niche bank specializes in the rather dull sector of financing mid-sized companies; but recently it had taken on risky investments in the United States. The bank's management made some bad bets, and lost. Now it was teetering on the edge of insolvency, unless other German financial institutions chipped in with emergency funding.
Jochen Sanio, president of Germany's banking supervisory agency BaFin, was pessimistic: If IKB folded, the failure might spread to other institutions, and maybe set off the biggest bank crisis since the Great Depression in the 1930s....
The gathering of bankers and government officials decided to undertake the biggest rescue operation for a single bank that Germany has ever seen....
The epicenter of this financial quake is the United States. Hardly a day passes now when an American mortgage lender or hedge fund doesn't go belly-up. The world's equity markets first plunged in response to the crisis in mid-July. Germany's leading stock index, the Dax, lost over 10% in a matter of days, and America's Dow Jones dropped 6%.
Another round of panic hit world markets this week after a French bank, BNP Paribas, had to freeze three investment funds worth €2.76 billion ($3.79 billion) because of American mortgage debts. The Down Jones fell three percent on Thursday, and central banks in the US, Europe and Japan have injected money markets with billions of dollars to ease credit jitters....
The crisis has even started to frighten US consumers, whose joy in spending has until recently the bedrock of the world economy. They're not just victims in this story, but also the cause of the mess. They've built and bought big new houses on easy credit without thinking about potential consequences. This was not a problem as long as real estate values climbed, allowing them to take out ever-larger housing equity loans. But the overheated US housing market started to crash this year, putting an end to the carefree days of American homeownership.
Rising house prices in America started a craze for "subprime" mortgages, or housing loans offered to homebuyers below the prime lending rate. Typically these loans involve a low-rate grace period before a higher rate comes into effect. And as long as housing prices boomed, debts associated with these mortgages could be packaged as attractive investment vehicles for big institutions. But now the market has stalled and abundant credit for such risky investments has dried up -- and anyone, apparently, can run into trouble.
One Bank's Quick Decline
In mid-February, the leadership of the Düsseldorf-based IKB was still boasting of "noticeable successes in the department for real estate customers." But IKB had jumped into the real-estate business long after many market players had cashed in and jumped out.
At the bank's last supervisory board meeting before the crisis went public, two supervisors asked the board whether IKB was properly covered for bad housing loans in the United States. How big were the potential risks? Participants at the meeting remember IKB Chairman Stefan Ortseifen saying: "There is no risk." Two special audits by the Auditing Association of German Banks -- the last one in spring -- also found nothing unusual.
But the house of cards was brought down two weeks ago by Deutsche Bank, which ended the line of credit for Rhineland Funding, an innocent-sounding investment vehicle based in the American state of Delaware. IKB had securities holdings there and in another fund worth more than €20 billion ($27.6 billion).
Deutsche Bank had handled Rhineland's payment transactions and some of its financing. After canceling the line of credit, the bank alerted regulators at BaFin, the German supervisory agency. It became clear during subsequent crisis meetings examining IKB's credit liabilities that the humble bank had losses totaling between €2.3 billion to €2.5 billion at current market conditions....
Expecting further liabilities to surface, regulatory boss Sanio went around the summit meeting in Düsseldorf with his proverbial hat in his hand. In the end, the state-backed development bank KfW, as principal shareholder in IKB, would have to cover the €2.5 billion in potential losses. Germany's private banks offered €500 million. The nation's credit unions and public savings banks are expected to pony up another €500 million....
The bad news coming from the United States -- where mortgage lenders had been outdoing each other doling out easy credit -- isn't likely to slow down....
From 2002 to 2006, the US mortgage market grew on average 15 percent annually. American regulators shut their eyes and hoped for the best. Nouriel Roubini, an economics professor at New York University, accused government watchdogs of "falling asleep at the wheel while a reckless credit bubble occurs."
So is the bubble popping? In October, higher interest rates for some $50 billion in housing loans will go into effect. Through September 2008, mortgages totalling around $1 trillion will be hit by higher interest rates. "The worst isn't over yet," warns the investment bank J.P. Morgan Chase....
Only a few months ago, many hoped the crisis would be limited to the subprime lending sector -- that is, to borrowers with bad or no credit -- but that wishful thinking is gone. Now everyone tied to American homebuyers who wanted lives built on easy credit are facing the consequences.
The first to get hit are hedge funds that hoped to make fast money with the loans. Next in line are the banks -- and not just in America. And in Germany, it's not just IKB.
But how could a small German bank with only 1,700 employees and a mere €1.4 billion in equity capital make such huge bets in the United States without someone noticing? IKB bought €12.7 billion in special securities via Rhineland Funding that failed to show up on the bank's ledgers. These securities consist of loans bundled together by banks wishing to unload their real estate and corporate debt risks. The various packages were then categorized according to credit ratings by agencies such as Moody's and Standard & Poor's -- enabling the mortgage of a welfare recipient in Alabama, say, to be traded on global financial markets.
IKB could at least show that most of its special holdings had higher credit ratings. However, it now seems that during a housing market slump, nobody wants to buy these prettily packaged parcels of debt. "It could be full of rat poison," says one banker, shrugging his shoulders. Indeed, as the market has gone south, credit agencies have started to become more realistic and ratchet down their ratings.....
Part of the rescue plan for IKB is for the state-backed KfW to keep the bank liquid with € 8.1 billion. When the new chairman -- installed by KfW -- has overhauled the bank, it will be sold. The German government, which owns an 80-percent stake in KfW, approved the plan last week. It's a radical solution, and it's already clear that the next insolvent bank won't get off so easily.
Besides IKB, some of Germany's regional state banks have run into trouble with risky US real estate debt. WestLB allegedly has liabilities in the range of € 300 million to € 400 million, according to a banker familiar with the situation, noting "toxic elements" found at the bank's Brightwater fund. The fund has $35 billion in structured debt spread across several special-purpose vehicles....More than half of the funds managed by Brightwater are for foreign clients...
regional public banks in Germany have been oddly zealous to jump into the Asset Backed Securities (ABS) markets. Landesbank Sachsen, partially owned by the German state of Saxony, has led the financing for a totally unknown company named Ormond Quay Funding. Outfitted with $16.75 billion at the end of 2006, Ormond Quay is slightly larger than IKB's Rhineland Funding....
"There's no way to sugarcoat the situation," said David Rosenberg, Merrill Lynch's chief economist for North America, even before the recent market drops. Investment bank Bear Stearns had been forced to close two hedge funds because of the crisis; a third was in trouble. Private-equity takeover titans were also forced to rethink their business plans....In the past five weeks alone, more than 35 loans to finance takeovers have been rejected or restructured....
So much for the "no risks" propaganda.