The latest crisis averted…..From Bloomberg:
The German government and the country’s banks and insurers agreed on a 50 billion euro ($68 billion) rescue package for commercial property lender Hypo Real Estate Holding AG after an earlier bailout faltered.
Germany’s financial industry agreed to double a credit line for Hypo Real Estate to 30 billion euros, Torsten Albig, a spokesman for Finance Minister Peer Steinbrueck, said late yesterday in an e-mailed statement. The federal government’s guarantee for the credit line remains unchanged, Albig said.
The government and the Bundesbank have said that Hypo Real Estate, Germany’s second-biggest property lender, is too big to fail. They met with banks and insurers in Berlin all day yesterday to discuss a revamped rescue package after private banks on Saturday withdrew their support for a 35 billion-euro rescue package brokered a week ago.
From Reuters:
The German government and banks on Sunday agreed a new rescue package for Hypo Real Estate (HRXG.DE: Quote, Profile, Research, Stock Buzz) that addresses additional liquidity needs that surfaced at the troubled German lender in recent days, the Finance Ministry said.
Under the deal, commercial banks and insurers would provide an extra 15 billion euros ($20.8 billion) in liquidity for HRE on top of the 35 billion euros they already committed together with the Bundesbank, the ministry said.
The solution will stabilize HRE and strengthen the German finance sector, it added.
A ministry spokesman said HRE was saved and there would be no extra burden on the German tax payer.
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From the NYT article: Depfa underwrote a package of municipal bonds which were subsequently downgraded by ratings agencies. That step obliged Depfa to buy the bonds back…
I wonder what that’s all about. In what cases does the underwriter have to buy back bonds that are later downgraded? How could anyone afford to underwrite an issue with that kind of stipulation?
second-biggest property lender, is too big to fail.
It is not simply to big to fail, but is a big dealer of covered bonds (Pfandbriefe).
Depfa = Deutsche Pfandbriefe
This is a form of securisation, where the emitter has to cover any losses occuring with his own money (that should answer bob’s question).
As this covered bonds are a mean for the German industry to get reltively cheap financing, the gov’t wants to prevent any default on this special type of assets. That is IMHO the main reason, why the gov’t is so active, not its size.
Covered bonds are simply financings of receivables/loans/securities that are on balance sheet and intend to stay on balance sheet. They are akin to “balance sheet CLOs” that we used to see in the late nineties, issued by the large commercial banks such as Chase (LANCE) and JP Morgan (SEQUILS/MINCS).
I’m not surprised to see that bondholders have negotiated rating-driven puts whereby the financings are unwound when ratings drop below some pre-specified threshold.
Covered bonds are another cockamame financing scheme at one point supported by Hank Paulson as a panacea for financing our mortgage markets here at home.
How in the world did he ever become Chairman of GS?
I’m going to ask a question that has been on my mind lately and have had no one to ask.
What happens to the other economies in the world when the U.S. economy goes into a depression? This may sound a bit conspiratorial but I’ll press on because I’m curious. If all the other economies tank worse than the U.S. because they can’t afford to bailout all of their banks then what position does that put the U.S. in? Here we were seeing our role as the one and only world power being challenged by European and emerging economies, so at the end of all this where will those economies be? Is this the “Mother of all Power Plays”? Is the game being reset back to post WWII when the U.S. was the big man standing and everyone needed assistance? Would like to hear your thoughts on how a global depression would affect U.S. compared to other economies.
Thanks,
Matt
Another question: Now that the banking sector has a major part in the rescue package i wonder if this is really stabilizing? Now a number of German banks have more questionable assets on their balance sheet, making themselves more shaky than before.
In other words: If the aim was to stabilize the system, shouldnt it have been the aim to nationalise HRE and then liquidate it in an orderly fashion?
So the dude who helped con people in the IT bubble is going to head the bail out effort. Very nice, this country should be so very proud. Of course Einstein says "The problems we face will not be solved by the minds that created them."
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Prior to joining the Treasury Department, Mr. Kashkari was a Vice President at Goldman, Sachs & Co. in San Francisco, where he led Goldman's IT Security Investment Banking practice, advising public and private companies on mergers and acquisitions and financial transactions. Prior to his career in finance, Mr. Kashkari was a R&D Principal Investigator at TRW in Redondo Beach, California where he developed technology for NASA space science missions such as the James Webb Space Telescope.
Interesting to see how the HRE problem resolved itself – the banks/insurers end up guaranteeing an extra 15 billion euros after having said ‘no deal’ the day before. In exchange, to an extent, depositors are now supposed to feel that their money is secure due to an explicit government assurance that no savings will be lost in a bank.
Those wacky Germans politicians – instead of giving in, they simply demonstrated who is truly in charge, and it isn’t the financial industry. This is much easier to do in a society which actually manufactures things without financial engineering, and one where the tolerance of voters for ‘locusts’ (the affectionate name for Wall Street types) is much lower than one might imagine if your only source of news is something like Bloomberg – a news empire owned by a billionaire who just coincidentally happens to be the mayor of the city where Wall Street sits.
Germany is simply not following the playbook which Treasury Secretary Paulson is so busily creating. Which is why this story is likely to be left to wither quickly while more important issues spring up – like how far 700 billion dollars doesn’t go anymore.
And after this rescue, where is the talk about the end of the EU or the euro? The subject seems to have magically disappeared also.
The entire world financial system is under extreme pressure, and is likely to suffer major failures, within eurozone countzries as well as outside them.
But to the extent that the cure for the problem is to allow failed institutions to die, Germany is at least staking out a position which is totally at odds with conventional American wisdom.
However, in the case of HRE, this wasn’t so hard, as the main problem rested on the fault line between liquidity and solvency – municipal bonds which are bought back are likely to retain much more value than toxic trash based on American mortgages.
Which is the other unstated part of this mess – HRE pursued a stupid strategy to its demise, but at least the assets it owns aren’t imaginary. And at least the incompetent managers that caused the problem won’t be allowed to continue to try to fix it.
The problem of imaginary assets will be the problem when a lot of the American alphabet soup of hallucinated wealth begins its crash on the other side of Mt. Ponzi. And German banks are holding as much as this garbage as anyone, of course.
Deutsche Bank is still at risk – but much of that risk rests in its Americans originated ‘assets.’ Unfortunately, much of the remainder rests in Spain. But then, Ackermann earns no sympathy in Germany. He was almost convicted, paying 3.2 million euros as fine to avoid the ‘convicted’ title his actions would have earned, for something that can be translated as self-enrichment as part of the Mannesman buy-out. At the start of the trial, he said that only in Germany are the successful and productive members of society placed in front of a court to answer for their actions. He also basically stated that American style capitalism was impossible in Germany after his almost conviction.
This means that Ackermann’s best hope is the U.S., because there, people such as himself are still running things, spreading their success and values to anyone in reach of their grasping hands.
Though these days, it is hard to tell if the grasping is from greed, or the desperation of a drowning man. At least in Ackermann’s case, if he ends up in court again (possible, very possible), the grasping will be that of a drowning man. And this time, he probably won’t be flashing a V for victory symbol at the press at the start of the trial.
So Anon of 2:51, I hear you, as folks used to say. Pick a handle and hang around, it’s always a good thing to get summaries from those current on names, asses, and assets, outside the US.
We’re going to get a unified banking regime in the eurozone on the hurry-up; it’s already in the wind. And the nonsense about ‘the demise of the euro’ will fall permanently silent on that day. I maintain what I have said in comments here at NC on other times: I am favorably impressed by the response of public authorities in Europe to the financial crisis. Are they perfect? Hardly. They are holding their own, to me, and I can’t say as much regarding the US. Suppose, for one, that we get an internationally coordinated rate cut: the ECB is in a vastly better position to cut, now, would get better bang for their cut, has more room to cut, and needn’t cut as far. The ECB has also demonstrated that IT is in charge, not the banks nor the equities markets. We’ve made fools of ourselves by comparison on the west side of the Atlantic.
Good day,
this morning I heard an interview with the secretary of finance, Steinbrück and he announced that the Bundesbank would now accept low rated securities for lending. It sounded pretty much like the TSLF reform by the FED several days ago. The banks were somewhat like crowded when I passed by.
Thanks for this great website by the way.