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The German $400 billion toxic asset time bomb

This just in from the German daily Der Spiegel: German banks are still loaded with risky U.S. assets, only a fraction of which has been written down. If this report is true, it suggests that the entire German banking sector is extremely undercapitalized and vulnerable to further writedowns going forward. However, German Finance Minister Peer Steinbrueck refuses to set up a state-controlled ‘bad bank’ as the UK has done and Sweden did before it – a decision I believe Germans will regret.

You should also note that this story reveals that Deutsche Bank is the latest bank to end all proprietary trading activities. The business model of banks risking their own capital through large bets, trading for their own account is over.

Below is a translation of the story.

German banks are sitting on toxic securities in billions
Federal Government and banking supervisors are sounding the alarm: SPIEGEL has learned that a survey among the leading German financial groups revealed that the balance sheets of the institutions was burdened by toxic securities worth up to 300 billion Euros. Only a quarter of these has already been written down.

The financial crisis has taken the German banking sector firmly in its grip. The financial sector is threatened by further losses in the billions. SPIEGEL has learned that the companies have only written down a fraction of their bad securities pertaining to U.S. mortgage and student loans.

This was revealed in a survey by the Bundesbank and banking regulator BaFin among 20 major banks, created for the German Finance Ministry. All major banks and Landbanks were surveyed.

Accordingly, these institutions’ own toxic securities valued at just under 300 billion euros, of which only about one quarter has been written down. The rest remains at fictitious values on the books. The Finance Ministry itself believes that the entire German banking sector holds risky securities of up to one trillion Eurosoin the books.

Government experts expect significant impairment charges that will lead to further heavy losses in the banking sector. That, in turn, means that soon more institutions could need government capital injections.

Only recently, Commerzbank was forced under the umbrella of government protection. The federal government now holds a blocking minority at the company. The Landbank LBBW has also announced further capital requirements. Hypo Real Estate In addition, speculation in the industry remains regarding further aid for the ailing real estate financier Hypo Real Estate.

Deutsche Bank ends proprietary trading
Just in the middle of the past week, Deutsche Bank announced Billions of losses for the past quarter. For the full year, the biggest German bank estimates a loss of around 3.9 billion Euros. At the same time, Deutsche Bank chief Josef Ackermann was forced to bring Deutsche Post – and thus, indirectly, the state – as a major shareholder into the boat in order to consummate the purchase of Postbank in a somewhat capital-saving way.

Deutsche Bank is preparing for further cuts. After heavy losses of around 1.5 billion euros, the Board of Directors decided to step completely out of proprietary trading according to the SPIEGEL sources.

Already by the second half of 2008 were only a few hundred traders allowed to bet a double-digit billion amount on the future development of stock prices or credit derivatives with the capital of the bank. That is now over. “The risks are simply no longer tenable,” says one manager familiar with the situation.

In proprietary equity trading, most risks have already been eliminated. However, with credit derivatives, winding down will be delayed because some contracts can only be wound up in a few years.

No chance for Bad Bank
Given the large need for writedowns, Finance Minister Peer Steinbrück (SPD) considers it irresponsible for the State to take assets into a so-called Bad Bank. “In a worst case, this would cause the federal debt to more than double”, an employee of Steinbrück said to Der Spiegel in defense of this decision. Currently, the federal government as debt of almost one trillion euros.

Bank representatives have long been calling for the establishment of a Bad Bank — a kind of government waste dump for bad loans. . Without this measure, the flow of credit will not come back on track, they argue.

Don’t forget, this story makes no mention of Central and Eastern European credit exposure or German domestic credit exposure. One can’t help but be left with a sense that the German banking system will end up much worse off than it should be.

Source
Deutsche Banken sitzen auf Giftpapieren in Milliardenhöhe – Spiegel

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.