FOR GERMANY´S BANKS, A GRIM FUTURE / THE NEW YORK TIMES ( VERY HIGHLY RECOMMENDED READING )

February 16, 2011

For Germany’s Banks, a Grim Future

By JACK EWING

FRANKFURT — Want to buy a money-losing bank with a damaged business model in an overcrowded market? Neither, it seems, do many other people.


Germany may have Europe’s largest and most robust economy, but investors are not clamoring for a piece of its banking market. An auction for WestLB, a publicly owned institution in Düsseldorf that was once Germany’s third-largest lender, has attracted just two bidders, a lawyer hired to sell the bank said on Wednesday.


The woes of WestLB, which has received $11 billion in taxpayer support since 2009, are symptomatic of a larger problem in the German economy. Many of its biggest banks are still on government life support after making bad lending bets during the bubble years. And with their access to cheap capital long gone, their prospects of becoming profitable again are dubious.


“The fragility of the German banking sector poses a substantial threat to sustained economic recovery in Germany,” said Jörg Rocholl, a professor at the European School of Management and Technology in Berlin. “The excellent economic situation is not mirrored by the banking system.”


The European Union authorities, openly frustrated with the pace at which Germany has dealt with sick institutions, have warned that a day of reckoning is coming.


“We simply cannot afford to leave the issue for another day,” Joaquín Almunia, the vice president of the European Commission responsible for competition policy, said in a speech in Frankfurt this month.


Mr. Almunia, who must approve government aid for banks, added, “We will not approve subsidies that keep unviable businesses artificially on the market.”


The German banking market is notoriously difficult because commercial banks must compete with the landesbanks, banks typically owned by state governments and local savings banks, and sparkassen, quasi-public thrift institutions that dominate consumer banking.


The landesbanks lost their only clear competitive advantage in 2005 after European regulators banned the government guarantees that had allowed them to raise money cheaply.


Before their guarantees expired, the landesbanks raised far more money than they could deploy profitably, causing them to speculate in American real estate assets.


“This yield-chasing reflected the fact they didn’t have a business model,” said Mr. Rocholl, who has studied how the landesbanks got into trouble.


Now the question remains how the banks, which typically do not have branches to generate deposits, will raise money at reasonable rates that they can then lend to customers at a profit.


So far the European regulators have been focusing on WestLB. But Mr. Almunia has warned that other banks were under scrutiny, including two landesbanks, HSH Nordbank in Hamburg and BayernLB in Munich, as well as Hypo Real Estate, a commercial lender now owned by the German government after receiving a bailout.


There is also no sign that buyers are lining up for IKB Deutsche Industriebank, a commercial institution that specializes in lending to midsize companies.


Lone Star Funds, an American private equity company, announced in October that it was trying to sell IKB, which it acquired from the German government in 2008. But now Lone Star has gone quiet on the status of the sale, saying in an e-mail that it could not comment because some shares of IKB were still publicly traded.


IKB has the dubious distinction of being the first bank rescued by the German government, receiving a bailout of 9 billion euros, or about $12.2 billion at current exchange rates, before being sold to Lone Star. Like WestLB and most other German banks that got in trouble, IKB had loaded up on assets tied to the American real estate market.


WestLB, already forced to shrink by half after losses in 2009, faces a breakup unless a buyer can be found. The lender is in talks with two unidentified bidders interested in the whole bank, Friedrich Merz, a lawyer in Berlin representing the bank’s shareholders, said Wednesday.


“The divestment process continues to have sustainable momentum and offer concrete prospects for the future of WestLB,” Mr. Merz, a former leader of Chancellor Angela Merkel’s Christian Democratic party, said in a statement.


A third bidder often mentioned in the German press, the Blackstone Group, based in New York, is interested only in WestLB’s real estate subsidiary, according to a person close to the firm who was not authorized to speak publicly. The subsidiary, WestImmo, accounts for about one-tenth of the 5,000 jobs at stake at WestLB.


In a tacit acknowledgment that finding a buyer for the whole bank might be difficult, the German government said in a report to the European Commission on Tuesday that WestLB would further reduce the size of its financial activities and break into smaller units. The move will “structurally increase the possibility of transactions with possible partners,” WestLB said in a statement.


Still, the government expressed optimism that WestLB could survive in one form or another. “The stability of WestLB is secured,” Steffen Kampeter, an under secretary in the German Finance Ministry, said by e-mail on Wednesday. The ministry is acting as a go-between in negotiations with European regulators over WestLB’s fate.