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Cablegate: Views From an Epicenter of the Subprime Crisis in Germany

VZCZCXRO1433
RR RUEHAG RUEHAST RUEHDA RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN RUEHLZ
RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHDF #0005/01 0141420
ZNR UUUUU ZZH
R 141420Z JAN 08
FM AMCONSUL DUSSELDORF
TO RUEHC/SECSTATE WASHDC 0110
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCNFRG/FRG COLLECTIVE
RUEHDF/AMCONSUL DUSSELDORF 0126

UNCLAS SECTION 01 OF 02 DUSSELDORF 000005

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON PREL PGOV GM
SUBJECT: VIEWS FROM AN EPICENTER OF THE SUBPRIME CRISIS IN GERMANY

REF: A. 07 BERLIN 1575

B. 07 BERLIN 1746

DUSSELDORF 00000005 001.2 OF 002


Sensitive but Unclassified -- Not for Internet Distribution

1. (SBU) Summary: Senior bankers and regulators involved in
the subprime crisis in North-Rhine Westphalia (NRW) told a
Treasury delegation led by DAS Mark Sobel on January 9 that the
crisis is not yet over in Germany. After the bailouts of
Duesseldorf-based IKB and Leipzig-based SachsenLB, senior
regulators at the Bonn-based financial watchdog BaFin are
keeping a close eye on the investment activities of one large
private bank in Germany and NRW state-owned WestLB, which has
suffered losses unrelated to the ongoing crisis. Our
interlocutors expect "more surprises" during the first quarter
when annual reports will be published. Bankers openly praised
the European Central Bank (ECB) and the Fed for their timely
actions, but were cautious in commenting on BaFin regulators.
End Summary.

Hindsight is 20/20
------------------

2. (SBU) During a January 9 visit to Duesseldorf and Bonn of a
Treasury delegation led by DAS Mark Sobel, senior bankers and
regulators uniformly blamed rating agencies and banks' heavy
reliance on those ratings for subprime losses in the banking
sector. A senior WestLB executive summarized views, observing
that "we've learned not to rely on external rating agencies but
on our internal capacities." A senior BaFin official agreed,
stressing that banks need to develop their own independent
models of evaluation.

IKB Still on Shaky Ground
---------------------------

3. (SBU) A senior IKB executive told the delegation that the
bank still must undergo more restructuring, including
recapitalization and finding a new capital investor. A buyer
with deep pockets would put the bank in a position to do better,
but if markets deteriorate "we are still in trouble," he added.
In the last six months, the bank has tried to clean up, firing
four of five board members, initiating a criminal investigation
to determine if the crisis was a result of bad management or
fraud, and strengthening transparency by changing auditors and
accountants. The IKB official claimed that these actions have
worked and IKB has not lost the confidence of its clients.

WestLB: Consolidation vs. Privatization
----------------------------------------

4. (SBU) West LB senior executives agreed that NRW Minister
President Ruettgers is trying to retain control of the bank for
political reasons, stating that he feels responsible for
employment numbers and worries how the public would respond to a
privatization. They added that from an economic perspective,
the decision to consolidate instead of privatize is
questionable. A senior BaFin official observed that WestLB is
in a difficult situation, as the national savings bank
association cannot afford another five billion euros to bail the
bank out, which would then require the state of NRW to step in.
The EU Commission, however, has the option to speed up the
process of a possible private sector offer, he noted, if they
were to reject the use of public funds to bail out the bank.

5. (SBU) The delegation also met with another private sector
bank, HSBC, which characterized itself as a "subprime-free zone"
because it had largely weathered the financial sector turmoil by
its tough risk-averse portfolio management. It said the banks
in trouble had no one to blame but themselves. Senior bankers
were cautious in their comments regarding their past and present
relationship with BaFin. They would only say that they are in
close contact with BaFin, "who knows exactly what is going on at
WestLB, even if the public does not."

More Subprime Crisis Pain to Come
-------------------------------------

6. (SBU) A senior BaFin official described the crisis as the
deepest he had seen in his 35 years of practice and stated that
"it's not over." There is general consensus among both
NRW-based bankers and regulators that annual reports to be
released in the first quarter will shed more light on the
crisis. BaFin has encouraged banks to use the reports to lay
out their problems, arguing that it is much better to get the
pain over with than to draw it out over a longer period of time.
Preliminary reports from larger banks will be released in
February, with final reports expected in March. Annual reports
from public banks will be available in mid-April.

7. (SBU) BaFin expects the annual reports to lead to the
discovery of a few more problem cases, but has already

DUSSELDORF 00000005 002.2 OF 002


identified at least one more bank facing difficulties. BaFin is
keeping a close eye on a large private bank, which is "not
burning now," but which may experience trouble in the near
future as a result of its holdings of structured investment
vehicles (SIVs). BaFin expressed particular concern that the
SIVs consist of student loans and credit card debt.

ECB and Fed Lauded for their Interventions
--------------------------------------------

9. (SBU) Bankers lauded both the ECB and the Federal Reserve
for their timely and vigorous interventions. One called the ECB
actions "a huge stabilizing factor" and another concurred that
the ECB and the Fed did a very good job at preventing a major
crisis.

Comment
----------

10. (SBU) NRW banks and regulators are sitting tight as they
wait for annual reports to be published. The next few months
will be key, which may explain why our interlocutors were
reticent in their comments on regulations. The delegation's
meetings indicated that BaFin is focusing less on "lessons
learned" than on the present and near term, on the grounds that
the crisis may not be over. For now, NRW actors seem to be in a
holding pattern, hoping for the best, but bracing for more
possible rough weather.

11. (U) This message was coordinated with Embassy Berlin and
cleared by Treasury DAS Sobel.
BOYSE

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