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Friday, March 28, 2008 3:10 AM

Germany Fears Global Meltdown

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Here is an interesting tale of central bankers working deep into the night last weekend, with Bundesbank President Axel Weber repeatedly in touch by telephone and via videoconferencing with Ben Bernanke in an attempt to orchestrate a bailout of Bear Stearns.

The issues are many: What constitutes too big to fail, who should pay the price for bank failures, what to do about the US dollar, and whether there should be a formal statement on the above.

The issues are still not resolved of course. Nor can they be. Too many banks are insolvent both in the US and abroad.

Let's pick up more of the story in Germans Fear Meltdown of Financial System.

Germany and other industrialized nations are desperately trying to brace themselves against the threat of a collapse of the global financial system. The crisis has now taken its toll on the German economy, where the weak dollar is putting jobs in jeopardy and the credit crunch is paralyzing many businesses.

For some time, there has been a tacit agreement among central bankers and the financial ministers of key economies not to allow any bank large enough to jeopardize the system to go under -- no matter what the cost. But, on Sunday, the question arose whether this agreement should be formalized and made public. The central bankers decided against the idea, reasoning that it would practically be an invitation to speculators and large hedge funds to take advantage of this government guarantee.

So, what does apply? Should the state use taxpayer money to help greedy bankers repair the damage caused by their unscrupulous speculation? Should it invest billions to save ailing financial institutions, thereby engendering new risks and side effects? And should the government, to use the words of a Frankfurt investment banker, "treat a drug addict with cocaine"?

How does one explain to honest taxpayers that they should pony up their hard-earned money for a bank like Bear Stearns, whose long-standing CEO forked out $28 million (€18 million) for a 600-square-meter (6,500 square-foot) duplex apartment on New York's Central Park shortly before the collapse of his company? Or that UBS, the crisis-ridden, major Swiss bank, fired three of its senior executives for poor performance only to turn around and pay them roughly 60 million Swiss francs (€38 million/$59.2 million) in golden parachutes?

The central banks and governments of the major industrialized nations are still dodging the answers to these questions.

"I no longer have faith in the ability of the markets to heal themselves," Deutsche Bank CEO Josef Ackermann confessed in a speech delivered last Monday in Frankfurt. Ackermann said that the American example shows that governments and central banks must now play a stronger role.

Even his counterpart at Commerzbank, Klaus-Peter Müller, agreed, saying that the current situation has the potential to develop into "the biggest financial crisis in postwar history" as long as "the markets are allowed to continue operating unchecked." According to Müller, "It would make sense to permit the banks -- retroactively to Jan. 1 -- to account for securities differently by eliminating the daily revaluation requirement." He argues that this would stop the downward spiral on the banks' financial statements.

The German Finance Ministry promptly rejected such calls, saying: "We see no need to become active at the national level." But this assertion is far from the truth. The ministry has become a place of nonstop crisis meetings, the chancellery is kept constantly apprised of the latest developments, and the Federal Financial Supervisory Authority (BaFin) has already set up a task force to address the issue. No one in the government has the slightest doubt that it will intervene the minute another bank begins to falter.

Germany's state-owned banks, which have been especially careless in recent years about investing in American securities backed by subprime loans, are considered greatly at risk. One of them, Bayerische Landesbank, is currently considering writing off €1 billion ($1.54 billion) -- or possibly even more -- in bad debt. In the first two months of 2008 alone, the Bavarian bank's troubled securities portfolio has lost €1 billion in value, and it has fallen even further since. "There could be another billion in losses on top of that," says one banker.

At another state-owned bank, Dusseldorf-based WestLB, €5 billion ($7.7 billions) in government bailout funds are apparently not enough. The bank is already losing its next billion.

If other banks run into trouble, Finance Minister Peer Steinbrück plans to come to their aid with fiscal tools, even if it gets expensive for the government. "Preventing a bank crash," say officials at the finance ministry, "takes precedence over budget consolidation."
US Subprime Market Sinks IKB Bank

Bloomberg is reporting IKB Supervisory Board Denies Fault for Near-Collapse.
The supervisory board of IKB Deutsche Industriebank AG, the first German casualty of the U.S. subprime market collapse, rebuffed shareholder allegations that it could have averted the near-collapse of the German bank.

"We had no chance to recognize the risks and to avoid the life-threatening crisis," Ulrich Hartmann, head of IKB's supervisory board, said today at the annual general meeting in Dusseldorf.

IKB received an emergency bailout last summer after a finance affiliate that invested in mortgage-backed securities couldn't raise funding amid the credit crunch. The German lender has received financial aid of more than 8 billion euros ($12.6 billion) from Germany's development bank KfW Group, the government and the country's banking associations to stave off insolvency and cover writedowns and losses.

"Apparently, there wasn't a soul in the entire bank who had a grasp of risk management," said Hans-Richard Schmitz of the DSW association, which represents German private investors including IKB shareholders. "Shareholders have been left with a shattered bank and no one wants to take responsibility."

IKB has lost about three-quarters of its market value since July 30, when it cut its full-year forecast and received emergency funding less than two weeks after saying the subprime crisis wouldn't affect it. The bank is currently worth 406 million euros. IKB rose 3 cents, or 0.7 percent, to 4.19 euros in Frankfurt trading after dropping 16 percent yesterday.

Chief Executive Officer Guenther Braeunig today called on shareholders to approve a 1.5 billion-euro stock sale that is "vital to continue running the bank."

"IKB should be shut down," said private investor Hans-Wilhelm Voeller at the congress center in Dusseldorf, where IKB is based and more than 1,000 shareholders were in attendance. "Better a miserable ending than misery without end."
Now there's the quote of the month: "Better a miserable ending than misery without end." We need to apply that thinking here in the US instead of attempting to make debt slaves out of homeowners and zombies out of banks.

Mike "Mish" Shedlock
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