Germany: banking system collapse possible due to Hypo Real Estate

A week into the European leg of the meltdown of the global financial system, Germany has hit major turbulence. Hypo Real Estate, a member of the DAX-30, Germany’s equivalent of the Dow Jones Industrial Average looks to be on the verge of failing.

According to the German Magazine Der Spiegel, the planned bailout of the company is unraveling and failure is a looming possibility, as the company faces a potentially massive 70 to 100 billion euro funding gap by 2009.

The German central bank has warned that if Hypo Real Estate fails, a collapse of similar proportions to the fallout after the Lehman Brothers failure would threaten Germany. This story should alert readers to the depth of the liquidity problems that exist not only in the U.S., but in Europe as well.

Below is the translation of Spiegel’s report of the most recent events.

UPDATE: 5 OCT 2008 700PM ET: The German government has bailed out Hypo Real Estate with a 50 billion euro rescue package. Let’s hope that ends HRE’s problems. In the meantime, policy makers can get to work and unfreeze the money markets.

Rescue package for Hypo Real Estate collapses

A surprising twist in the case of Hypo Real Estate: the laboriously negotiated rescue package for the Munich bank has temporarily come undone. The bank is fighting for its survival, said a spokesman this evening.

The 35 billion euro rescue package for the battered real estate financier, Hypo Real Estate, has failed. As HRE announced on Saturday evening, the loan commitment by several financial institutions is currently no longer valid. The group is examining the resulting consequences for the business units of the company. Alternative solutions are being explored. Further details have not been made.

Shortly afterward, HRE spokesman Hans Obermeier said, the bank was fighting for its existence. The bank is obviously in a difficult situation. He assumes and hopes that all parties involved in the discussions are fully aware of the seriousness of the situation. As to specific measures that HRE is now investigating, he gave no initial comment. The major shareholders are prepared to support the bank financially.

HRE spokesman Obermeier did not want to comment Spiegel Online as to reports that the liquidity Gap of the bank could reach 70 to 100 billion euros by the end of 2009. He could only confirm that the consortium’s original aid pledge had been withdrawn. “Why, we do not know,” Obermeier said. He said there were clear signals from the shareholders and Government, that they wanted to cooperate to find a solution to the problem.

The Finance Ministry was not informed in advance

This evening, the Federal Government pointed to the responsibility banking supervision played. The government will not take a position just yet, government spokesman Ulrich Wilhelm told the AP news agency in Paris. A spokeswoman for the financial regulators BaFin did not want to comment on the failure of the rescue package.

Sources close to [Finance] Minister Steinbrueck said that the Finance Ministry had not been informed of the changed situation in advance by either Hypo Real Estate or the consortium of banks. The government was informed only through ad hoc communication with HRE that the rescue package had collapsed. “We will now try to pick up the pieces on Sunday,” the Ministry of Finance said. The aid plan, agreed to one week ago, foresaw a short-term loan of 15 billion euros and a long-term refinancing of up to 35 billion euros in the second half of 2009.

“Die Welt am Sonntag” had previously reported that Deutsche Bank had found in a study that HRE already clearly needed more money in the short-term. According to the Deutsche Bank report, the company would lack up to 50 billion euros by the end of the year and even as high as 70 to 100 billion euros by the end of 2009.

Quick solution necessary

In financial circles, it is expected that on Sunday evening, again at a crisis meeting, a rescue will come for Hypo Real Estate. According to estimates of experts, stakeholders have little time to forge a new rescue package for HRE: “If there is no solution when stock markets open on Monday morning, the company won’t make it two more days,” said a banker.

This week, the Bundesbank and the BaFin had labeled the rescue operation which is now collapsing as vital to avoid “severe disruptions to the financial markets”. In a letter from the Bundesbank and BaFin to Finance Minister Peer Steinbrueck it was said that otherwise the German financial and economic system would be threatened by “similar unforeseeable consequences” as after the collapse of the U.S. financial group Lehman Brothers. Moreover, in the letter dated Monday, it was said that the bankruptcy of the real estate firm, because of it strong interconnectedness, would have affected a large group of creditors.

Hypo Real Estate got into trouble through liquidity problems at Ireland-based subsidiary Depfa. For the rescue of the real estate financier, the federal government had prepared a guarantee amounting to 35 billion euros. However, the latest is that the banks could not agree to their share of 8.5 billion in the package. The current relief program, for which the federal government and the financial industry are liable, should provide HRE for the coming weeks up to 15 billion euros in additional liquidity. Der endgültige Notkredit, der danach greifen würde, beläuft sich auf 35 Milliarden Euro. The final emergency credit, which would be available to draw down afterward, amounts to 35 billion euros.

Back in the mid-1990’s I worked as a consultant for Hypo Real Estate’s precursor Bayerische Vereinsbank. It was Germany’s fifth largest bank by assets. They were looking to fix their retail lending operations and had hired the consulting firm I worked for to do a Credit Reeningineering Project. My role was to develop a schema to rationalize the retail lending process and procedures. Later the bank merged with crosstown rival Hypobank, only to find out the combined organization had massive real estate losses from speculation in the former East Germany.

Seeing the turmoil at the company, I dug out my final presentation to the company: “Massenkreditprozesse: Ueberblick und Quantifizierung” (Retail Credit Processes: Overview and Quantification) – a real page turner. Very nice people and good memories of Munich.

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Rettungspaket für Hypo Real Estate geplatzt – Spiegel Online

  1. jmf says

    Moin Edward,

    this story is just unbelievable…

    Make sure you read
    HRE – Da kömmt noch (viel) mehr!
    from the Blog “Weissgarnix”…

    You just have to taken one look at the table “liabilities to other banks” to see the problem…..

    His posting is from the beginning of last week… It seems that nobody involved in the bailout have read the latest interim report…..

  2. Edward Harrison says


    184 Billion Euros. That is a shedload of short-term debt to roll over. My god, if the politicians do not unfreeze the credit markets, we face a collapse in the financial system.

    Thanks for pointing me to that article.

    What do you make of HRE’s predicament?


  3. Anonymous says

    This is nothing compared to the exposure banks may have on the US$600 trillion derivatives market. It is common to bullshit about how superior a position banks have in Germany. Since no one really knows for sure till it is too late and it is a game of bluff to tide over the credit crunches, when it comes, it would always be said to be unexpected. Anyone following Germany government releases for the past 3 weeks knows it is propaganda bullshit and praying against hope that the over-leveraging will not get discovered. Problem is, even if banks were able to tide one financial scare, they would be emboldened to tempt another, always pushing the limits of crash. Ladies and gentleman, this lesson of crash will last for a few decades, at least.

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