The bankruptcy of the century – 3. Act
This article is the last part of a three-part Telepolis series on the finale of the committee of inquiry into Hypo Real Estate.
Part 1: A Munich bank turns the rough wheel Part 2: A system-relevant bank collapses
We write Sunday, the 28th. September 2008. Thirteen days have now passed since the collapse of Lehman Brothers. If HRE does not receive guarantees within one day, it will have to file for insolvency the next morning Link to ./30917_8.pdf – a second financial quake of the "Lehman Brothers" level, but this time in the middle of Germany. Since Thursday the HRE is now finally a matter for the boss in Berlin. After meeting with German banker Ackermann, Commerzbank boss Blessing and top banking supervisor Sanio, Finance Minister Steinbruck is fully in the picture. But Steinbruck shows no political leadership, instead letting three more valuable days pass by by delegating the problem solving to the banks. Weeks later, this displacement tactic will be sold as a tough poker game.
Steinbruck’s supposed bluff
If we stick to the analogy of a poker game, the crucial question is what information Steinbruck had at his disposal. If he was aware of HRE’s refinancing needs, he already knew beforehand that his tactics could not have worked at all. How could the banks have raised the necessary loans to stabilize HRE in the middle of the financial crisis?? If one also takes for granted that the federal government would not allow a second Lehman case by letting a systemically important bank go bankrupt, Steinbruck was bluffing with his cards on the table, with every player knowing full well that the finance minister had the worst hand at the table. Steinbruck’s bluff makes sense, however, if one considers that he really did not know about the dramatic dimensions of the difficulties at HRE. But if he really did not know anything, BaFin, Bundesbank and Steinbruck’s staff in the Ministry of Finance have to answer the question, why they did not pass on information of such paramount importance to the top management in the Ministry of Finance.
In the week of the crisis summit, the Ministry of Finance did just about everything wrong that could be done wrongly. Two private banks, Deutsche Bank and Commerzbank, have been appointed to audit the books of HRE. In the whole mission, however, the private banks were not the taxpayer’s allies, but its competitors. A catch-all solution that had saved the taxpayer money would inevitably have become expensive for the private banks. A rescue solution, which would be optimal for the private banks, would inevitably be suboptimal for the taxpayers. This conflict of interest, however, obviously played no role for Steinbruck and Asmussen.
The pinnacle of incompetence
The decisive crisis summit on Sunday was not attended by Steinbruck, but only by State Secretary Asmussen. He came too late, without legal counsel, without his own figures and without his own concept. The private banks appeared with a whole armada of lawyers and accountants, had the exact figures and a clear concept – the state would have to ame the risks. What was subsequently sold to the public as a tough negotiation poker game by Asmussen and Steinbruck was actually a sad example of government weakness, disorganization, inability to act and blind trust in the private banks. Apart from a somewhat higher liability for the private banks, which was already off the table a week later, the solution adopted did not differ in any respect from Ackermann’s original concept. Certainly, there was time prere – but without necessity.
On Monday at 2.00 o’clock the Tokyo stock exchange opened and there had probably been a quake of unprecedented magnitude, if no solution had been found in distant Frankfurt. Of course, it did not come to a borsequake. After a last telephone call between Ackermann and Chancellor Merkel at 1:00 a.m., a decision was made.05 o’clock the solution was ready. HRE was provided with an emergency loan of 35 billion euros, 15 billion of which came from the private banks – with excellent interest rates and, a short time later, a guarantee from the federal government. More important for the banks, however, was the fact that the state was now on board. Everyone involved knew that this was not the end, but only the beginning of an even more costly series of rescue aid measures.
In for a penny, in for a pound, but not in for a pound
That the 35 billion were not going to last long was apparently not really clear to only one person involved – Peer Steinbruck. In the following days, the Finance Minister preferred to blather on about an orderly liquidation of HRE and thus ensured that the people of Munich would no longer be able to get any money on the capital markets. Did he seriously believe that the 35 billion euros would be enough?? One week before the crisis summit, a BaFin paper estimated HRE’s refinancing needs at a total of 104.6 billion euros by the end of 2008. This paper was sent to the responsible persons at BaFin, the Bundesbank and also to the banking department of the Ministry of Finance. State Secretary Asmussen, Axel Weber, head of the Bundesbank, and Jochen Sanio, head of the BaFin, must have known that the 35 billion would not be enough. Why did Steinbruck not know this?
How did they come up with the 35 billion figure in the first place?? Man link to ./30917_17.pdf simply that the interbank market would return to normal in the next few days and HRE would be able to get fresh credit for itself again. This assessment can also be described as naive at best. However, it enabled the banks to bring the state on board. The assessment, by the way, came from Deutsche Bank’s accountants.
Disaster on the horizon
The inevitable happened – just four days later, the 35 billion euros in emergency loans had been used up and a second crisis summit was held. This time, the state did not even try to involve the banks in the rescue costs, and added an additional 15 billion euros in emergency loans and guarantees. Worse, now that the state was involved with gigantic sums, it did not take an active role in the management of the bankrupt bank, but left this task to Deutsche Bank. Funke was now allowed to take his hat off and two men from Deutsche Bank, Axel Wieandt and Michael Endres, took over the chairmanship of the Management Board and the Supervisory Board. The financing requirement rose to 90 billion euros in the following months and the state had no choice but to gradually nationalize HRE.
The banks are the winners of the crisis
The game was up for the private banks. The state not only secured their loans to the Munich bankruptcy bank with taxpayers’ money, it also provided them with a first-class business opportunity through first-class interest rates and first-class guarantees. This year, the private banks alone will earn around 300 million euros in interest profits from the state-backed emergency loans, as the Tagesspiegel has learned. This year, Deutsche Bank alone has booked interest profits of 100 million euros on its – not exactly altruistic – emergency loans to the Munich bank. Profits are privatized, losses are socialized – but now the banks are even earning from the socialization of losses.
After long discussions, the government finally decided to nationalize HRE. After the taxpayer already had to pay almost 100 billion euros for the losses, this was not only necessary, but in fact without alternative. HRE is now called Deutsche Pfandbriefbank AG and is to be restructured and slimmed down. Until that time, several billion euros will be transferred to Munich. HRE will continue to make losses for the next three years, which will have to be borne by the state as the new owner, as the new HRE CEO Wieandt was keen to point out last week. As the new owner, the state must also pay for the promising class action lawsuits of the old shareholders. HRE is a bottomless pit that will continue to burden public budgets for a very long time.
PUA2 – the opposition goes to the barricades
Was there really no alternative to stabilizing HRE that would have been more favorable to the taxpayer?? Why did banking supervision fail so blatantly in the HRE case?? What did the lead government members and officials know?? Did they let themselves be pulled over the table by the banks?? In order to clarify all these questions, the three opposition parties FDP, Grune and Linke have set up a parliamentary investigative committee. Until the summer break, and thus until the end of the legislative period, witnesses must now be heard in Berlin under the greatest time prere. This is not easy, as the Grand Coalition not only has twice as much speaking time due to the power arithmetic, but also holds the committee chair and is the lead government in the final report.
The distribution of roles in the investigative committee is predetermined. On the one hand, a strange coalition of the FDP, the Greens and the Left has been formed. The leaders of these groups, Volker Wissing, Gerhard Schick and Axel Troost, are trying hard to shed some light into the fog and to reveal the systematics of the crisis. The representatives of the CDU/CSU, who at best present themselves as moderately interested, and above all the SPD, are not interested in clarification. Especially Nina Hauer, the chairwoman of the SPD, contributes more to obfuscation than to enlightenment. For the first time, she is doing everything possible to keep any damage away from her party colleagues Steinbruck and Asmussen. Sometimes she seems like a prompter who wants to put the myths into the witnesses’ mouths that HRE was actually rock solid, that the financial crisis was an American phenomenon and that without the unforeseeable collapse of Lehman there would still be peace, joy and happiness in the German financial system today.
However, the committee’s work is also being torpedoed by the banking supervisory authority and the Ministry of Finance. BaFin and Bundesbank refer to the obligation of secrecy, which is defined in Â§9 of the German Banking Act (KWG), and refuse to give information when it comes to naming horses and riders. The evening meetings are somewhat more informative, but they are not open to the public. However, information from these "secret meetings" may not be mentioned in the final report.
The work of the committee is also hampered by excessive secrecy. Committee staff are allowed to look at sensitive files only in special rooms – these files remain completely hidden from the public. The Ministry of Finance, meanwhile, is using the pretext of data protection to delay the release of relevant files. When files are finally released, they are often "blackened" to the hilt – "blackening" files has the negatively charged image of censorship, whereas in democratic Germany, files are "blackened". But this hardly makes a difference – there is no increased interest on the part of the government and the bank supervisors in clearing up the bankruptcy of the century.
Questions for Asmussen and Steinbruck
Even the high-caliber witnesses who will be questioned this week have no interest in shedding light on the matter. Today, State Secretary Asmussen has been summoned and he has some interesting questions to answer:
- At what point did he know about HRE’s dramatic imbalance??
- Why didn’t he love to develop an alternative concept in time, which had saved the taxpayer a lot of money?
- Why did he come to the crucial bailout summit without a concept, without legal counsel and without his own figures??
- What has priority for him – the "competitiveness" of the German financial system or the responsible handling of taxpayers’ money?
It should be noted that Asmussen is appearing as a witness before the investigative committee and not as a defendant. In a better world, he would have been allowed to vacate his post long ago. Asmussen, however, is considered a man of finance and certainly has a steep career ahead of him in the real existing world.
Peer Steinbruck will once again tell the story of the unforeseeable collapse of Lehman Brothers before the investigative committee tomorrow. Critical questions will roll off him like Teflon – especially since the evidence against him is more than mabig. Perhaps, however, the Finance Minister will answer the question of why he is burdening the taxpayer with the follow-up costs of the HRE rescue and letting the banks off scot-free. After all, it was not the taxpayer who was saved in the fall of 2008, but rather the German financial system.
T.I.N.A. – There was really no alternative to the actions of policymakers
When you look at the whole story, the familiar myths around the collapse of HRE that have been put forward time and time again seem wan and implausible. Of course the financial crisis was never a purely American problem. Also, the financial crisis has not only something to do with subprime real estate – they were only triggers of the crisis, but the reasons for the crisis are deeper and they are homemade. Politicians were not content to play the role of inactive spectators; they were taken over by the bankers and sowed the seeds that later grew into a financial crisis. The highest priority of politics is not the interest of the citizen, but the interest of the financial sector. The reasoning of politics is always – there is no alternative to our actions. Is it really?
For example, what was the argument against a solution in which the private banks took over the costs from the taxpayer via a special levy?? It was possible to levy this special tax in the form of a preferred dividend, the size of which corresponds to the regular dividend. Thus, the banks were not able to excuse themselves by saying that they could not shoulder this participation. Those who pay dividends to their shareholders have previously made profits, and it would only be fair for the banking system to contribute its share to the bailout costs with which it itself was rescued.
What was the argument against a compulsory participation of the private banks in HRE?? Instead of the federal government, private banks could have taken over HRE in the form of a trust company with the purpose of winding up HRE in an orderly manner. In return for this commitment, the federal government could have given the banks guarantees for a transitional period.
There were plenty of alternatives, but they could not be implemented in an overnight operation. But if one had not closed one’s eyes to the inevitable, there would have been enough time to save the taxpayer a lot of money.