Depfa saga ends but at what cost to Germany?

Employees of Dublin’s Depfa bank will hear what lies ahead for them today when Berlin moves ownership of the bank from one state-owned institution to another.

Ownership of Depfa, a lender to infrastructure projects and, since 2007, a part of Munich's Hypo Real Estate (HRE) group, will be transferred for €320 million to FMS Wertmanagement – a bad bank set up in 2010 to manage almost €176 billion in toxic assets belonging to HRE and Depfa.

Those assets were the HRE group’s collateral damage after it almost followed Lehmann Brothers into the financial abyss in 2008. That caused global liquidity markets to dry up, leaving Depfa unable to finance its debt arbitrage business – short-term refinancing of long-term loans for infrastructure projects and pocketing the interest rate difference as profit.

State-lead bailout

Dangerously exposed, Depfa turned to its HRE parent in Munich which, in turn, rang Berlin in a panic. After two tense weekends, the HRE group was saved with a state-lead bailout, backed by Germany’s private banks, comprising loans and guarantees of €124 billion.

In 2009 the federal government in Berlin nationalised HRE. As new owner, Berlin agreed to sell off Depfa by the end of this year – a demand imposed by the European Commission to offset competition concerns. Last May, Berlin announced Depfa would be sold all right, but not in the way anyone expected.

Founded in Berlin in 1922 as a state-owned property lender, Depfa was privatised and put on the stock market in 1990-91. Depfa Bank plc then moved its main operation to Dublin.

Here, chief executive Gerhard Bruckermann stepped up financing of large-scale infrastructure projects. But his critics of Bruckermann accused him of taking full advantage of Ireland's light touch banking regulation to chase debt arbitrage business.

As the financial crisis began to build in 2007, Bruckermann sensed Depfa was headed into choppy waters and sold it to HRE for €5.2 billion. After pocketing €100 million on the sale, Bruckermann vanished.

A year later, the tsunami struck. Following the bailout, a Bundestag inquiry into the near-collapse revealed the extent of the risky business Depfa carried out, as an Irish bank under the nose of the Irish regulator. The inquiry also brought to light how senior federal finance ministry officials in Berlin ignored liquidity warnings on Depfa and on HRE from the German banking regulator.

Resignations

Since then two camps have formed: one sees Depfa as the root of all evil, dragging a good company like HRE over the cliff. The other believes HRE had its own problems and that chief executive Georg Funke had hoped that acquiring Depfa in Dublin was the solution.

The front between the two camps only hardened when the news broke in May that the Depfa sale was off. A furious HRE chief executive, Manuela Better, resigned, followed by supervisory board chairman Bernd Thiemann.

They had spent three years working with consultants and banks to manage the sale of Depfa, compiling a 250-page prospectus and lodging 40,000 documents in a “data room” for prospective buyers. Bidders felt they’d been had, and one has lodged a complaint with the European Commission.

Since then, opposing camps have shot anonymous poisoned arrows at each other through the German media.

HRE sympathisers, opposed to the FMS deal, suggest politicians in Berlin pulled the plug for fear of negative blowback should a new owner turn Depfa into a going concern. Rather than risk “Depfa losses nationalised, profits privatised” headlines, critics say the finance ministry ordered its FMS bad bank to acquire Depfa to run down the remaining portfolio, mostly sovereign bonds.

“Depfa under HRE was in deep freeze but it was a bank with a licence to operate, issuing Irish covered bonds,” says one source. “New private owners could have thawed out the bank and put it to work but that won’t happen now under FMS.”

Higher return

In Berlin, however, finance ministry sources say the sale was stopped after a closer look at Depfa’s books made clear that holding onto the bank via FMS, and winding it down in the coming decades, would generate a higher return for the taxpayer.

With many questions unanswered, conspiracy theorists are having a field day. Critics of the FMS takeover suggest halting the sale, like the HRE nationalisation in 2009, is part of a strategy by Berlin to prevent outsiders gaining access to information that would explain the real story of the HRE/Depfa meltdown – and, perhaps, political culpability. Despite the massive cost to taxpayer, a parliamentary inquiry and looming civil and criminal trials, many opposition politicians say no one has ever got to the bottom of the collapse.

But other sources involved in the Depfa sale to FMS dismiss the conspiracy theories. They claim the sale was stopped after concerns that senior HRE executives would make a small fortune from the sale to one bidder.

There were concerns, too, that a new hedge fund owner would pull out as much capital as possible up front, putting Depfa again in a perilous position and leaving taxpayers – in Ireland or Germany – to step into the breach once more.

Good news

By transferring Depfa to FMS Wertmanagement, where it will quietly wind down its books without taking on any new business, Berlin has closed a door on a sorry and expensive episode of its financial crisis.

The good news for Depfa’s 140 staff in Dublin is that, under the new FMS owners, most will keep their jobs. The lights will remain on in Depfa’s Dublin office for years to come.

But hopes in Berlin that the Depfa transfer is the beginning of the end of the HRE drama may be premature. Next year HRE former chief executive Georg Funke goes on trial charged with false financial reporting.

In a separate civil case, a Munich court this week found that Funke cooked the books in 2007 and 2008 to make HRE appear less exposed to the crisis than it actually way.

This test ruling in Munich opens the doors next year to countless civil claims by private investors, hopeful they can squeeze over €500 million in compensation out of HRE’s current owners: the federal government in Berlin.

As the Depfa sale goes through, HRE is now a profitable state-owned bank. But for many years to come the HRE-Depfa saga will, for Berlin, remain an expensive gift that keeps on taking.