Feeling the Crunch
August 13, 2007
Despite European stocks rising in early morning trading on Monday in a reverse of the two-day slump stemming from US subprime mortgages credit crunch, the bad news for German banks continued as reports broke of another US building society with connections to Germany filing for bankruptcy.
German banks Deutsche Bank AG and Commerzbank AG, along with French bank BNP Paribas, are among the creditors of HomeBanc Corp. and are all listed as 'lenders' in HomeBanc's filings which were sent to the Securities and Exchange Commission (SEC) on Friday. While reports on the bankruptcy did not specify how much HomeBanc owed to each bank, the filings to the SEC listed its assets at $5.1 billion with debts of $4.9 billion.
The US subprime crisis also continued to dog Germany's troubled IKB Industriebank AG. After being bailed out to the tune of 8.1billion euros ($11.1billion) in the form of a liquidity line from the state-owned development bank KfW last month, IKB admitted Friday that the state prosecutor's office in Düsseldorf had launched an investigation into the bank.
Prosecutors said they had received two complaints about IKB and its information policy in relation to the US credit crunch. They did not elaborate on the substance of the complaints. IKB said that it would support and cooperate with the prosecutors.
IKB feeling the bite of US credit crunch
It has been a torrid few days for IKB. Last week when the US crisis first emerged, IKB said that it had "felt the impact" from across the Atlantic and that its operating profit target for the fiscal year, forecasted at 280 million euros, would not be met. A subsequent announcement over potential losses related to its exposure in the US subprime markets saw investors flee the stricken bank's Rhineland Funding fund.
Then on Thursday, German banking officials agreed to form a banking pool to shield IKB from any further losses or credit squeezes. And by the weekend, both the bank's chief executive, Stefan Ortseifen, and its chief financial officer, Volker Doberanzke, had resigned.
It has been reported that IKB and its affiliates or associates extended a total of 7.8 billion euros in the US mortgage sector, more than twice the 3.5 billion hitherto considered likely by financial experts. IBK itself invested 544 million euros, its Luxembourg-based subsidiary 757 million and the Rhineland Funding Capital Corporation a massive 6.5 billion, it said.
The bank could face further problems if the European Commission decides to investigate the KfW rescue package. The Commission is alarmed at the German state bank's action and has given Germany less than a month to show it did not break EU competition laws.
SachsenLB and WestLB issue assurances
At the same time, SachsenLB had to deny reports that it was at risk of being caught up in the growing crisis in the US housing market.
SachsenLB said Friday it was not concerned about its Ormond Quay fund following a report in the Frankfurter Allgemeine Zeitung newspaper that the German stock market watchdog was probing the bank because the fund was similar to the Rhineland Funding fund operated by IKB. Such funds are exposed to subprime mortgage loans, meaning loans to Americans who have poor credit ratings -- one of the sources of the current crisis.
Meanwhile, WestLB issued a statement at the weekend assuring its investors that its 1.25 billion euro exposure to subprime-related securities through subsidiaries was "relatively limited" and that the securities were highly rated.
Spokesperson Hans Obermeier said that 98 percent of WestLB's securities were rated "A" or better, while 87 percent were rated "AA" or better.
"The commitment is relatively limited, and its rating is very high, which signals that we do not have to be too concerned," he said. "We are not under pressure to sell. We have spoken about it with investors and rating agencies."