Mon April 23, 2012
Germany Debates Fate Of State-Owned Banks
Originally published on Mon April 23, 2012 5:23 am
RENEE MONTAGNE, HOST:
Germany never had a housing bubble, partly because its mortgage market is too tightly regulated, and Germans are famous for their prudent investing. Still, some German banks did lose a lot of money in the financial crisis, and they're still paying a big price for it.
NPR's Jim Zarroli visited Munich. He has this report on what happened to the network of state-owned financial institutions known as landesbanks, which have become a kind of cautionary tale about risky investing.
JIM ZARROLI, BYLINE: If you want to see where money is made in Munich, you need to come to Brienner Strasse. It's a really busy street lined with well-maintained, really solid neoclassical buildings filled with banks, lawyer's offices. Even the Munich stock market is here. But the biggest building of all is Bayern LB, the state bank of Bavaria. Bayern is a landesbank, which is a kind of weird hybrid German financial institution. It doesn't do retail business. You can't come here and open an account. Instead, landesbanks are what you might call banks for other banks. They take deposits from the many smaller banks in Germany, and they invest the money. They're supposed to make a profit, but Bayern is also partly owned by the Bavarian government, and over the past few years, that has been the source of a lot of trouble.
EIKE HALLITSKY: The problem was they had no idea about the market they acted on. And in the end, the losses are several billion euro.
ZARROLI: That is Eike Hallitsky, a member of the Bavarian parliament. Hallitsky says in the years leading up to the financial crisis, Bayern and the other landesbanks went around the world looking for places to put their money. And Yalman Onaran, a senior writer at Bloomberg, says the investments they made turned out to be a litany of disasters.
YALMAN ONARAN: Icelandic banks - you know what happened to them. Irish banks - you know what happened to them. Spanish banks - you know what - I mean, so, anywhere where there's something that's bust, German banks were lending to those, and landesbanks are the worst, of course.
ZARROLI: And Onaran, the author of the book "Zombie Banks," says landesbanks were, not surprisingly, big investors in the U.S. subprime mortgage market. Ester Faia of Goethe University says landesbanks could do this in part because they could raise money easily. Like certain government-sponsored enterprises in the United States, they had an advantage over other banks.
ESTER FAIA: The landesbank were very much similar to Fannie and Freddie. They were government-sponsored banks, so there was an implicit government guarantee. It was easier for them to raise capital, and they could invest in riskier assets.
ZARROLI: And there was another problem with the landesbanks. Onaran says because they were partly state-owned, they were especially susceptible to political pressure. In 2001, the well-connected media mogul Leo Kirch wanted to borrow money to buy the rights to Formula One racing.
ONARAN: He went to the local landesbank in Bavaria, the BayernLB, and asked for the money, and they said no. Your finances don't look good. We're not going to lend to you. Then he went to the president of the state of Bavaria, and said: Look, I need this money. It's going to be wonderful, and will you help me get it?
ZARROLI: It's not completely clear what happened, but phone calls were made, Kirsch got his loan, and a few months later, he declared bankruptcy. Eike Hallitsky says with investments like that these, BayernLB amassed a huge portfolio of bad debts, and Bavaria was forced to bail out the bank, absorbing losses of five billion euros.
HALLITSKY: It's not the money of the Bavarian government. It's the money of the Bavarian people. And so every Bavarian paid 800 euros - everyone. So, the small child, the old man, everyone.
ZARROLI: BayernLB wouldn't comment for this story, because it's still in the bailout process. Today, Germany is debating what to do about its landesbanks. One of them based in Dusseldorf is being broken up. And the European Union is strongly pressuring Berlin to consolidate the remaining banks. But nearly four years after the financial crisis, no one has come up with an acceptable plan for doing that. Jim Zarroli, NPR News. Transcript provided by NPR, Copyright NPR.