Former investors in Hypo Real Estate (HRE) launched a test case in Munich yesterday, demanding compensation for losses sustained by the bank's near collapse and subsequent nationalisation.
Once Germany’s largest real estate lender, HRE was involved in major capital lending around the world until its Dublin-based subsidiary Depfa ran out of short-term liquidity to finance long-term loans in 2008. The meltdown forced the German state to step in with loans and guarantees for the embattled lender worth €124 billion and counting.
Despite earlier claims, it is now unlikely that German state prosecutors will take legal action against former CEO Georg Funke. His testimony in Munich on Thursday is likely to be his only court appearance relating to the affair.
The proceedings mark an interesting change of pace for Berlin, which attacked Mr Funke’s crisis management in 2008. Now lawyers for HRE’s new owner – effectively the German state – will argue in the opposite direction to minimise the chance of compensation.
In opening arguments yesterday, HRE lawyers said that the bank was well aware of burdens it faced as a result of the financial crisis – and communicated this to shareholders.
“There was no phase of disinformation,” said Wolf von Bernunth for HRE, pointing to the write-downs on bad US investments recorded in quarterly reports and mentioned in official communications with investors.
Even stronger
But lawyers for investors disagreeing, pointing to letter from November 2007 in which Mr Funke claimed HRE had emerged even stronger from the crisis.
The trial involves 100 investors and its eventual verdict will impact on dozens of other compensation claims by former HRE shareholders.
It follows a failed court action by them to claw back their investment by contesting the nationalisation.
A draft report into the bank’s report suggested that Mr Funke and the HRE board breached German stock market and banking law with their “inadequate liquidity management”.
The report's claims, to be debated this week in Munich, cast doubt on a widespread view in Germany that the Munich-based lender was felled solely by Depfa's huge liquidity requirements.
Five months after HRE took over Depfa, Mr Funke admitted in a March 2008 email that the “liquidity situation” facing the group “was not created overnight”. Instead it was the result of the group “driving on” its international property lending – HRE’s speciality – “to generate business” with “mostly unsecured” financing while other banks were winding down their international exposure.
Reacting to concerns about the group’s financing in March 2008, Mr Funke claimed he “hadn’t noticed” that most of the financing for HRE’s own long-term loans was “given merely for a few months”.
Key weakness
Another key weakness in HRE's structures, according to the investigative report, lay in its inability to produce up-to-date figures about the bank's financial situation. The investigation report said the data the bank presented to the board in Munich was always at least a month old and often riddled with errors.
Meanwhile a successful buyers for HRE’s Depfa subsidiary could be announced within a month. The Munich bank is assessing bids as high as €350 million, according to Bloomberg.
It said that bidders include JC Flowers, Apollo Global Management LLC and a group led by Third Point LLC. Blackstone Group filed a joint bid with Och-Ziff Capital Management Group LLC. A HRE spokesman declined to comment on the report.
