The Subprime Crisis Leads to Mad Mergers in Germany

You have to ask: what are they smoking in Munich? First the BayernLB announces it lost $3billion through its exposure to the US subprime mortgage market.  Then the bank announced its interest in acquiring the bankrupt IKB Deutsche Industriebank AG.  IKB had collapsed from its worthless portfolio of US mortgage-backed securities. Two badly-managed public-sector banks, both reeling from the subprime meltdown in the US, want to merge. Where is the logic? And who is representing the interests of the German taxpayers who have to fund the massive bailouts of these institutions and their excellent adventures on Wall Street?

This global financial crisis exposes the flaws of the German banking system, and raises serious questions about the role of the public Landesbanken.  Americans have some difficulties understanding what Landesbanken are, since we don't have comparable institutions here. There is an excellent discussion of Landesbanken and the current crisis in the Atlantic Times by the business journalist Hans-Peter Canibol.  He provides a brief history for American readers, and then quickly gets to the heart of the problem:

"Politicians just love their regional banks; they provide posts and perks. BayernLB’s 10-member supervisory board includes three ministers of the Bavarian state government, one deputy minister, a “ministerialdirigent” (a deputy section chief), one mayor and four representatives of the Bavarian Sparkassen. The same goes for the supervisory bodies of the other Landesbanken. The reason is simple: the Landesbanken finance infrastructure projects, provide subsidies to attract new industry and hold shares in major companies all the way up to DAX concerns. In short, they are the ideal playing field for anyone who wants to pursue an active industrial policy.

But Landesbanken have one major flaw. They lack the bread-and-butter business that is the lifeblood of the commercial banks and the Sparkassen: since they do not lend money to private borrowers, they have no revenue from interest payments. So they look for opportunities in other areas. Unfortunately, they often lack sufficient expertise in those areas, and are forced to withdraw after suffering losses. Over the past few decades, there have been a number of sensational scandals involving the public banks of North Rhine-Westphalia, Berlin and Hesse. Each costed taxpayers billions of euros."

Rather than allowing the merger of BayernLB and IKB, the German government should force Deutsche Bank to purchase IKB, and refund the German taxpayers the €8 billion they have paid for the bailout so far.  After all, it was Deutsche Bank who packaged and sold the junk mortgages to its German rivals, earning handsome profits in the process.  Deutsche Bank's chief Joe Ackermann was rewarded with a €14 million pay pay package - making him Germany's highest paid manager - courtesy of the German taxpayer.