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Bailout of Germany's Hypo Real Estate: A bottomless pit
By Ludwig Weller
23 February 2009

Hypo Real Estate (HRE) is an international property lender and the second
largest mortgage lender in Germany. The firm has repeatedly applied for
and received state support and guaranties, which have now reached over 100
billion euros.

An initial bailout-package of over 35 billion euros was authorised at the
end of September last year, and this was then topped with a further 50
billion at the beginning of October. Since then, HRE has reported new
"holes" in its balance sheet every month, and the German government has
repeatedly propped the bank up.

Despite all these measures, the HRE continues to report an urgent need for
financial help. According to a report in the Frankfurter Allgemeine
Zeitung, further state guaranties in the sum of 20 billion euros will be
necessary in the coming week. When the HRE presents its annual statement
of accounts on 31st March, it is expected to show the need for a further
10 billion euros just to fulfill the statutory minimum equity capital
requirements.

No one seems to be able to say exactly how high HRE's mountain of debt
actually is at the moment. While up to now speculation pegged the sum at
about 400 billion euros, on Wednesday, the Hannoversche Allgemeine
reported insiders and experts from the Federal Parliament's Lower House as
saying that the Munich-based concern in reality has credit and derivates
debt amounting to a trillion euros, of which a large part derives from
businesses that do not appear in the official balance sheet.

German Finance Minister Peer Steinbrück (Social Democratic Party--SPD) and
Chancellor Angela Merkel (Christian Democratic Union--CDU) have justified
state help for the HRE by saying that the property lender is a
"systemically relevant" institution that cannot be allowed to fail,
because its demise would undermine the entire German economy. Any collapse
of the HRE would have the equivalent international impact of the
bankruptcy last September of Lehman Brothers.

For years securities have been seen as safe investments. For that reason,
they often have been used to underpin life insurance and pension funds.
With a market share of about 20 percent--an estimated total of 900 billion
euros--HRE is one of the leading players in the German securities market.
The German government fears that the collapse of HRE could bring the
entire securities market crashing down with it, with unforeseeable
consequences. However, the Consortium of Securities Bankers deny that such
a danger exists.

Steinbrück and Merkel have also emphasised that state assistance for HRE
consists solely of securities that would only be used in the case of
actual insolvency, and of capital investment, that could perhaps later be
sold again at a profit. However, it is becoming more and more obvious that
the federal treasury is actually taking on full liability.

To understand the extent of the sums involved one can compare them to
Germany's domestic budget. The guaranties that have already been given to
HRE represent one third of the annual state expenditure of 290 billion
euros. These subsidies are nearly as big as the largest single item of
state expenditure- -unemployment and social welfare, which amounts to 124
billion euros.

If HRE goes bankrupt, the federal government will be liable for its cash
infusions and guarantees. In order to pay off the liability for more than
100 billion euros, it would have to drastically increase government
borrowing and at the same time make further cuts in public spending on
social support and welfare.

On the other hand, if the government continues to feed HRE with
ever-greater sums of money, in order to stop it from going insolvent, it
will end up being hostage to the bank. "Unfortunately, no-one knows what
is more dangerous: letting the HRE go bust, or keeping it half-alive with
constant money transfusions, " commented the Süddeutsche Zeitung.

The government is proceeding along the latter path. The Cabinet has put
forward an "emergency takeover bill" which will facilitate further cash
infusions into HRE. This bill is expected to be approved by the Bundestag
(Federal Parliament) and Bundesrat (Federal Assembly) no later than April
3 this year.

Finance Minister Steinbrück justified these measures by saying that the
expropriation of the shareholders had nothing to do with nationalisation
as such, but with the safeguarding of public funds. "We are guaranteeing a
huge sum of money, but we are not taking over a single share. If the
government becomes the owner, the bank's refinancing and capital options
will considerably improve. They will then profit from the high
creditworthiness of the federal government," he said. The aim was to
promote a "viable business model", so that the HRE bank could quickly be
sold into private hands again. Chancellor Merkel justified the need for
such an expropriation by declaring "it is internationally agreed that a
bank cannot be allowed to fail if it will bring others down with it."

The expropriation plan was immediately greeted with protests from the
parliamentary opposition parties, the media, and from within the ranks of
the grand coalition itself, who all contested the state takeover of a bank
as unthinkable in Germany.

From the Union itself, a number of top politicians reacted immediately
with words of warning. The new minister for Economic Affairs, Karl-Theodor
zu Guttenberg, said last weekend: "Ludwig Erhard would be turning in his
grave." For the Christian Social Union (CSU) leader, Horst Seehofer, the
idea is "very difficult to stomach." And the free market Free Democratic
Party, (FDP) leader Guido Westerwelle exclaimed: "We live in a free trade
economy, not a socialist state!" Scarcely any of them were prepared to use
the term "expropriation" without connecting it to the phrase "as a measure
of last resort".

The reality is that the temporary state takeover of the HRE has absolutely
nothing to do with socialist nationalisation. Its aim is not the abolition
of capitalism, but its salvation.

The nationalisation will not serve to "secure public funds," but will
burden the working class with additional financial sacrifices. The
massively indebted bank is to be temporarily nationalized, in order to
revive it with taxpayers' money before returning it to the private sector.

The majority of commentators are well aware of this. Dorothea Schäfer from
the German Institute for Economic Research (DIW) has described the
criticisms of the planned nationalisation as "perverse". She declared that
the state was simply taking over shares in a "virtually insolvent company"
because, in this particular case, state intervention was the only possible
way to rescue the "systemically important" institution. She compared the
government involvement to the emergency actions of firefighters. "Whoever
complains that firefighters have to break down front doors as part of
their job just hasn't understood the urgency of the situation", she said.

Heribert Prantl, who is in favour of the nationalisation, has written in
the Süddeutsche Zeitung: "This state takeover is in no way a socially
revolutionary measure, it is not even an instrument of social reform." Nor
is it a means of increasing state assets. The state is laying its hands on
a central body of capitalism, "not to systematically change it," but to
help it survive.

While every German citizen is now liable for HRE to the tune of 1,200
euros per head, not a single one of the financial speculators, main
shareholders or board members of HRE has been held accountable for their
corrupt and irresponsible practices.

The HRE business model was based on securing long-term loans with
short-term loans. In order to avoid the supervisory control of the
financial and treasury inspectors, HRE devolved part of its activities to
its daughter firm Depfa in Ireland. The outbreak of the financial crisis
shattered these practices. Because of the credit crunch, in which banks
have largely ceased lending to each other, HRE can now only survive in the
short term and have a chance to refinance itself with the help of billions
of euros in guarantees from the German government.

Despite all this, the German government still considers itself obliged to
do what the banks and the financial elite command them. Their "emergency
takeover" bill proposes to legalise enforced nationalisation by the end of
June, if the shareholders do not voluntarily accept the current state
takeover deal. The expropriated shareholders would then receive as
compensation the average stock market price for their shares from the two
weeks prior to the expropriation. Should the bank later be re-privatised,
which they expect to happen soon, the deal offers the former shareholders
first option to re-purchase the same shares.

The American investor group J.C. Flowers, which is HRE's majority
shareholder with 24 percent of all shares, has offered no serious
objection to the planned expropriation. In a letter to the federal
government, the board of the group declared that they also agree with the
government's aim of taking on a majority share in HRE of 75 percent plus
one share. Only the amount of compensation for the concerned shareholders
was "in our view not acceptable".

In June 2008, J.C. Flowers became majority shareholder when it bought a
billion euros' worth of stakes in HRE at the price of 22.50 euros per
share. The current value of these shares - EURO 1.60 each - has melted 60
billion euros away from their portfolio's value. Should the bank go bust,
the shares would be worth absolutely nothing. So now J.C. Flowers wants
the state to make up for their speculative losses.

But investors are trying their luck at pushing the price higher. They are
threatening to contest enforced nationalisation with long-drawn-out legal
processes and are demanding compensation for the voluntary surrender of
their shares--compensatio n that, at three Euros per share, is double their
current stock market value.

The nationalisation envisaged by the German government is nothing more
than an effort to rescue the bank at a cost to the German people of
billions of euros. But these government actions will neither halt nor
solve the financial and economic crisis. They will leave untouched the
basic interests of the ruling class, which are rooted in the private
ownership of capital and control over the financial system as a whole.

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Alamaine, IVe

"The irrationality of a thing is no argument against its
existence, rather a condition of it."
Friedrich Nietzsche
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