As a state takeover of the German real estate giant nears, opposition parties want an inquiry
SIX MONTHS on, Berlin’s €102 billion bailout of Hypo Real Estate still poses more questions than answers. As the government made the first move yesterday towards a state takeover – either a buyout or expropriation – opposition politicians, lawyers and banking experts say the truth about the HRE drama has not yet come to light.
Most controversial is the allegation that the Depfa bailout was as much to prevent the collapse of the sub-prime market in Germany arising from overpriced property in the east. If true, this would contradict the official story that the rescue was prompted solely by Dublin-based Depfa’s difficulties after the collapse of Lehman Brothers in September.
Depfa, bought by HRE for €5 billion in 2007, lends to governments for big infrastructure projects. These projects are refinanced in turn by means of short-term loans – presuming they are available.
This wasn’t the case after the Lehman’s bankruptcy and Depfa faced collapse. According to Berlin, such a collapse risked taking its Munich-based holding company with it.
Hypo Real Estate Holding was created six years ago after Hypovereinsbank (HVB) was bought by Italy’s Unicredit. The bank’s real-estate business was not part of the deal and was instead hived off to create HRE, focusing on commercial real estate, infrastructure and public finance, and capital markets asset management.
Some German observers suggest there is a connection between the Depfa/HRE drama and post-unification property speculation when banks, including HVB, sold apartments in eastern Germany at inflated prices determined by their own in-house “experts”.
These banks issued Pfandbrief covered bonds worth up to 60 per cent of these inflated prices on the understanding that, if the bank went under, the owner of the bonds could take possession of the underlying assets, the mortgages.
But if the underlying assets supporting the system are over-valued, as was systematically the case in post-unification eastern Germany, Germany’s entire Pfandbrief system could have a major problem.
Explaining September’s state intervention in HRE last September, Angela Merkel said that, without action, Germany’s entire covered bond or
Pfandbrief market would
collapse.
“It’s still not clear to me why the liquidity of Depfa in Ireland presents a danger for the whole €900 billion Pfandbrief market,” said Dr Holger Wissing, finance spokesman for the opposition Free Democrats. “It could only experience difficulties when the assets serving as cover are no longer sufficient.”
In an interesting coincidence, the September HRE bailout came just at the expiration of a five-year guarantee put on Hypovereinsbank covered bonds as part of the Unicredit sale. The state guarantees would presumably cover the old HVB Pfandbrief bonds on HRE’s books even if the covering assets didn’t.
German opposition parties want a parliamentary inquiry into HRE, including allegations that Berlin knew about Depfa’s liquidity problems months before the bailout.
Meanwhile, a Munich lawyer is demanding compensation for current and former HRE shareholders who feel HRE managers lied to them about the true state of the bank’s finances. Felix Weigend claims the bank broke German securities legislation by announcing larger-than-expected write-offs early in 2008, months after claiming such measures would not be necessary. He says it is likely that there are more problems with HVB/HRE covered bonds than is currently known.
“Hypo Real Estate was created as the bad bank of Hypovereinsbank,” he said. “It’s likely that huge sums of bad assets are slumbering in the accounts there that no one knows about.”
The finance ministry in Berlin says there is no connection between last September’s intervention and fears of a collapse of the Pfandbrief market.
