The collapse of the sub-prime mortgage market in the US has now made its way to Germany, as Streetinsider.com reports:
IKB Deutsche Industriebank AG (IKB.XE) has felt the impact of the crisis in the US sub-prime mortgage market, as spreads widened sharply during last week's violent fluctuations, causing massive uncertainty amongst institutional investors.
In this context, the ability of the Rhineland Funding conduit (managed by IKB) to access funding appeared to be threatened, in which case IKB would have been drawn upon liquidity facilities provided to Rhineland Funding.
Rhineland Funding - and, to a lesser extent, IKB itself - have invested in structured credit portfolios, which include exposures to US sub-prime real estate loans. Despite market discounts affecting the valuation of such assets, to date there have been few loan defaults, and only some rating downgrades affecting portfolio investments. Nevertheless, towards the end of last week IKB's creditworthiness was being questioned due to said exposures
IKB Deutsche Industriebank is a relatively small bank that specializes in making long-term loans to small-medium-size German companies (Mittelstand). In the US, this funding requirment is covered by the public equity markets, not commercial banks. What do IKB's problems have to do the with German taxpayers? It turns out that IKB is a quasi-government insitutiton that is 38% owned by the KfW Entwicklungsbank - a 100% German government-owned bank whose mission is to fund foreign aid projects. As reported in the Handelsblatt today in a good article, KfW has been forced to come to the aid of its minority investment and cover the losses at IKB's US conduit Rhineland Funding:
Am Wochenende wurde dann in Krisensitzungen die Entscheidung getroffen: Nicht die IKB springt ein, im Notfall tritt der mit 38 Prozent größte Anteilseigner KfW ein. Die Hoffnung: Mit einer AAA gerateten staatseigenen Bank im Rücken greifen die Investoren ohnehin eher wieder zu. Auch bei den sonstigen Risiken, die durch die forderungsbesicherten Wertpapiere in Höhe von 7 Mrd. Euro in den Büchern der IKB entstehen könnten, will die KfW einspringen. Dafür hat sie künftig das Sagen und stellt den Vorstandschef. Der 56 Jahre alte Stefan Ortseifen muss nach nicht einmal drei Jahren als Vorstandssprecher gehen.
Why did IKB use its capital to invest in the risky market for poor-quality US home mortgages, instead of funding German industry? Why do the German taxpayers now have to pay for such a disasterous decision? Good questions. I wonder if anyone will ask them.
UPDATE: This post was linked in the (pre-Murdoch) Wall Street Journal (online edition)