Germany’s most notorious banker, ex-Hypo Real Estate (HRE) chief executive Georg Funke, has gone on trial in Munich accused of finessing the property lender’s accounts before its 2008 bailout.
The high-profile Munich trial may shed new light on HRE’s 2007 takeover of Depfa, the Dublin-based covered bond specialist, and the German banking group’s financial meltdown a year later.
The 2008 rescue package, agreed by Berlin’s federal government and private banks, provided €10 billion up front and a €124 billion state guarantee for outstanding liabilities.
The lender was nationalised, shareholders squeezed out and non-performing loans transferred to a bad bank, loans that will take decades to wind up. In the intervening decade, the volume of the German taxpayers’ HRE guarantee has risen to €183 billion.
A decade after he was portrayed as the clueless HRE chief executive behind the collapse Mr Funke is determined to fight back against charges which carry a three-year prison sentence.
Financially sound
Reading 200 pages of written testimony on Tuesday, he will argue that his former bank was financially sound before the crisis. It only collapsed because of the international capital squeeze after the Lehman Brothers collapse, he will argue, and because of malicious gossip by other banks and then German finance minister, Peer Steinbrück.
The trial is not expected to look at all of HRE’s business activities as a property lender, nor Depfa’s arbitrage business in long-term infrastructure loans refinanced with lower-interest short-term borrowing.
Instead, prosecutors are determined to established the precise moment when Mr Funke and HRE financial director Markus Fell became aware of the group’s precarious financial position, and whether they delayed telling financial markets. Prosecutors believe the managers were aware of the problems as early as the summer of 2007, when they halted the group’s commercial property financing activities.
Despite growing market uncertainty, prosecutors will argue that the HRE managers went ahead recklessly with their takeover of Depfa, though the Dublin bank was itself on the brink of a liquidity collapse.
The Munich bank’s takeover of the Dublin-based bank saw the Irish taxpayer dodge the subsequent bailout bullet.
Banking crisis scapegoat
Crucial to the case is a March 2008 KPMG report, described as a “liquidity catastrophe plan”, and a claims by Mr Funke and Mr Fell in the 2007 annual and mid-2008 reports that the bank’s finances were “stable”.
Mr Funke will argue that became Germany’s banking crisis scapegoat, made an example of in public as a warning to others. The former chief executive admits the group had a liquidity problem after the Lehman collapse, but that a discreet €15 billion loan from other banks would have solved the matter.
Instead, he says, then Deutsche Bank chief Josef Ackermann’s approach to chancellor Angela Merkel turned the HRE rescue into a public spectacle. An initial €35 billion rescue plan subsequently collapsed, Mr Funke believes, thanks to the public remarks of then finance minister Peer Steinbrück.
“Decisive was, in the end, Mr Steinbrück’s ill-judged remark that the bank would have to be wound up,” said Wolfgang Kreuzer, defending Mr Funke.
