More problems at three European financial institutions

This weekend has seen two major European financial institutions forced into the hands of government and a third on the verge of major new asset writedowns and job cuts. The events highlight the fragility of European banking and the need for concrete solutions at the upcoming G-20 summit in London.

First, in the UK, you may have seen a link in our news feed yesterday to reports of the demise of Dunfermline Building Society in Prime Minister Gordon Brown’s constituency.

Savers in the Dunfermline Building Society, Scotland’s largest customer-owned mortgage lender, will have their deposits protected by the U.K. government as it seeks to broker a sale of the company in the coming days, Prime Minister Gordon Brown said.

“Savers will be protected,” Brown said today at a press conference in Vina del Mar, Chile, where he was on an official visit. “It is important to recognize that throughout this whole crisis anyone who has saved has been protected. Our determination has been to ensure people’s savings are even safe in years to come.”

The government is seeking to arrange a merger or takeover of Dunfermline, a U.K. Treasury official said today. Authorities are looking for a “long-term solution,” said the official, who can’t be identified in line with departmental policy.

The government’s rescue of Bradford & Bingley Plc, an English mortgage lender, may be an example for Dunfermline, Scottish Secretary Jim Murphy told British Broadcasting Corp. radio today. Bradford & Bingley was nationalized in September as the global financial crisis worsened. The bank’s branches and deposits were purchased by Banco Santander SA, and the U.K. Treasury took over 41 billion pounds of mortgage loans.

The U.K. government has looked at “every possible option”, but “no other option was possible,” Murphy said of Dunfermline.

In the current financial crisis, the British government already has bailed out Royal Bank of Scotland Group Plc and Lloyds Banking Group and nationalized mortgage lender Northern Rock.

Scotland’s First Minister Alex Salmond said in a statement he was “deeply disappointed that the Treasury now believe it isn’t possible to sustain the society as an independent institution.”

Dunfermline employs almost 500 people, half at its headquarters in Fife and half in its network of 34 branches, the BBC said.

The company, which is based next to Prime Minister Brown’s parliamentary district, has been hit by losses on commercial real-estate loans.

This past December, I indicated that the U.K. and Ireland would see major domestic residential mortgage-related downturns and this looks to be occurring.

Meanwhile, in Germany, Hypo Real Estate (HRE), the mortgage lender which threatened to take down the entire German banking system last year, is in the news again. The company is haemorrhaging losses, having reported another 5.5 billion euro loss. Recently, the Germans changed their nationalization laws with the express purpose of taking over HRE. This now seems imminent.

Hypo Real Estate Holding AG, the bailed out German commercial real-estate lender, said it posted a wider-than-expected loss of 5.46 billion euros ($7.3 billion) last year and that the government will take an 8.7 percent stake as a first step toward nationalization.

Hypo Real Estate had a pretax loss of 5.38 billion euros compared with a pretax profit of 862 million euros in 2007, it said in a statement today. Four analysts in a Bloomberg survey had expected a net loss of 4.5 billion euros.

Germany’s bank rescue fund, Soffin, will acquire 20 million shares valued at 60 million euros, the company said in a separate statement. The new stock must be issued at a “minimum prescribed” price of 3 euros a share.

Hypo Real Estate, which lost 93 percent of its market value over the last 12 months, has already been bailed out by the government and financial institutions with credit lines and debt guarantees totalling 102 billion euros. The lender, which almost went bankrupt after its Dublin-based Depfa Bank Plc unit failed to get short-term funding in September, said today it expects to remain in a “loss situation” for at least two years.

“It is a prerequisite for the intended recapitalization of Hypo Real Estate Group by Soffin that either Soffin or the German government gain full control over Hypo Real Estate Holding,” the Hypo Real statement said. “To this end, it is intended to make use of the options that will be provided by the German Financial Markets Stabilization Amendment Act, which is currently being discussed in the legislative process.”

Nationalization Law

Hypo Real fell 1.7 percent to 1.14 euros a share yesterday in German trading, valuing the company at 240.6 million euros.

J. Christopher Flowers and Richard S. Mully, who lead a group of investors that together owns 23.7 percent in Hypo Real Estate, said on yesterday they were leaving the lender’s supervisory board because of “possible measures to be taken by the German government against Hypo Real Estate shareholders.”

Germany’s upper house, the Bundesrat, will be asked to approve the Hypo Real Estate seizure legislation when it comes before them on April 3, following its passage by the lower house on March 20. The law also imposes a time limit, stipulating that any seizure has to be initiated by the end of June.

The lender’s nationalization would be the first of a German bank since the 1930s.

The third European institution in trouble is a familiar one, UBS, the Swiss giant. Reports are emerging that they are poised to take writedowns, this time on their CLO (Credit Linked Obligations) portfolio. The Swiss are in a bit of a pickle because UBS is too big to bail, but remains systemically weak.

Switzerland’s UBS is expected to announce more writedowns and job cuts in the coming days, Swiss newspaper Sonntag reported on Sunday.

Shares in UBS, the world’s largest wealth manager in terms of assets, fell 7 percent on Friday as rumors swirled of a profit warning and more writedowns in the first quarter. The bank, one of Europe’s hardest-hit in the crisis, has already written down more than $49 billion since mid-2007.

Sonntag said UBS would write down at least another $2 billion on illiquid assets, including asset categories so far not much in the spotlight such as Credit Linked Obligations (CLOs), the paper said citing people familiar with the matter.

The Swiss bank giant would also slash another 8,000 jobs, the newspaper said, including some private banking staff.

You should note that NONE of these troubles have much to do with Eastern Europe, revealing that Western European banking has problems all of its own. With the G-20 in London coming up, these revelations make it that much more imperative that the Europeans step up and help deliver a multilateral solution to this mess.

Billionaire investor Gorge Soros has said the G20 summit will be a “make or break” event for the world’s economy.

In a BBC interview, Mr Soros said the international financial system had collapsed because it was flawed and it had to be restructured.

Mr Soros say it may be the last chance to prevent a full-scale depression.
He said the G20 meeting had to come up with concrete solutions to help the developing world in particular, which had been been worst hit.

‘Depression’

Mr Soros warned that any attempt to pull economies out of recession had to be done co-operatively.

He said: “The G20 meeting is make or break because unless they do something for developing world there will be serious collapse in that part of the world.

Don’t hold your breath.

Sources
U.K. Government to Protect Dunfermline Customers – Bloomberg.com
Hypo Has EU5.46 Billion Loss; Germany Buys Stake – Bloomberg.com
Fresh writedowns, more job cuts seen at UBS: report – Reuters
G20 ‘make or break’, Soros says – BBC News