Just how bad is the subprime mess? When I was in banking we used to be envious of the Swiss giant UBS. UBS had the reputation of being extremely well-managed, and it was equally well-capitalized: It had that coveted AAA credit rating from Moody's. Well, the management of UBS was evidently asleep at the wheel and failed to grasp the extent of its exposure to the subprime mortgage crisis: on Monday UBS announced the write-off of $10 billion in bad loan positions as it sought fresh capital from the Singapore government and others.
UBS can still attract investment due to its market position and (now tarnished) reputation. But who will bail out the lowly Sachsen LB (Landesbank in Saxony)? If we can believe the reports in today's Sueddeutsche Zeitung, the exposure of this state-owned institution to the subprime mess is 47 billion euros!!
In der Expertengruppe wurde nun unbestätigten Berichten zufolge ein Risikopotential von 43 Milliarden Euro ausgemacht, das in einer Super-Zweckgesellschaft gebündelt werden könnte. Hierfür verlangt die LBBW eine Landesbürgschaft in Höhe von 4,3 Milliarden Euro, wie der SZ bestätigt wurde.
So the taxpayers of Saxony, who no doubt had no idea of the mismanagement of Sachsen LB, now have to bail out the failed institution with a guarantee that represents one quarter of the entire budget for the state. You can be sure that the leaders of the government in Berlin - which is pushing through "reforms" that cut back social programs for underprivileged German citizens - will endorse this massive welfare proposal for the mismanaged bank. Will the managers responsible for this disaster face criminal charges for reckless squandering of taxpayer resources? Don't hold your breath. More likely they will get sweet severence packages - "golden parachutes" - again at taxpayer expense.
UPDATE: Alan Greenspan explains why he bears no blame for the subprime mess; Felix Salmon explains why the subprime mess is Alan Greenspan's legacy.
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