German Government: Please Sue Deutsche Bank

Recently I wrote about how Deutsche Bank is intricately involved in the US housing crisis since it acts as trustee for tens of thousands of foreclosed properties here.  Early on, according to its CEO Josef Ackermann, Deutsche Bank realized that the American mortgage securities in its portfolio were quickly becoming worthless, so they were sold to the state-owned German banks at a profit.  Now these banks are rapidly failing from the bad investment in the securities they bought from Deutsche Bank and the German taxpayers must pay the tab for a multi-billion euro bailout.

This week the German government in Berlin is stepping in to the mess and requesting that the IKB Deutsche Industriebank AG - one of the insolvent state-owned institutions - sue Deutsche Bank for deliberate fraud:

FRANKFURT, Mar. 10, 2008 (Thomson Financial delivered by Newstex) -- The German government wants IKB Deutsche Industriebank AG to sue Deutsche Bank (NYSE:DB) AG for selling it 'badly' collateralized US mortgage loans at a point in time when their values were already deteriorating,

Here is the report from the German news channel n-tv:

Die Bundesregierung erwägt offenbar eine Klage gegen die Deutsche Bank wegen des Verkaufs von US-Hypothekenkrediten. "Wir ermuntern KfW und IKB, entsprechende Klagen gegen die Deutsche Bank sowie die anderen Verkäufer von Subprime-Anleihen anzustreben", zitierte der "Spiegel" in einem Vorabbericht vom Samstag einen namentlich nicht genannten Vertrauten von Bundeswirtschaftsminister Michael Glos (CSU).

And the crisis is getting worse thanks to the continuing deterioration of the credit markets.  Robert von Heusinger warns of a liquidity crisis in Die Zeit:

Die Banken werden kräftige Verluste erleiden. Denn nichts passt mehr in einer Welt, die Staatsanleihen illiquide werden lässt. Kein Hedge, kein Swap, erst recht kein Credit Default Swap (CDS)...Der Staat muss wohl ran, um die gesunden Nicht-Banken-Teile der Volkswirtschaft zu retten. Große Konjunkturprogramme werden schon bald vonnöten sein, sollte die Krise nicht bald halt machen.

It is above all the Landesbanken in Germany that have been badly damaged by this global financial meltdown.  Their viability is now being questioned, but political considerations may well prevent comprehensive banking reform in Germany.  Die Zeit also has an excellent article that examines the current precarious state of Germany's Landesbanken. I agree with Wolfgang Münchau of Eurointelligence on the German Landesbanken:

Through their subprime adventures, these insitutions now stand discredited. It is time to reduce the public sector involvement in the financial industry, and to allow these institutions to merge and regroup within the private sector. With the strictures of monetary union and the single European market, such a concentration process should not happen at national level, but across Europe. Here I see German banks not as predators, but as prey. The best thing the German public entities could do now is to extract the highest possible price for the badly managed banks they own.