Blame for German bank collapse lies a lot closer to home than Dublin, study reveals
The prelude to the Irish crisis began at 10am on August 24th, 2007, at a closed-door meeting of German bankers in the Bundesbank in Frankfurt.
Jochen Sanio, then head of banking regulator BaFin, launched a scathing attack on bank executives present from SachsenLB bank, based in the eastern German state of Saxony. The bank faced ruin, Sanio said, because of a “shatteringly large discrepancy” between its equity and the value of assets managed by its Dublin subsidiary, SachsenLB Europe.
The Dublin operation controlled off-balance sheet operations, called special-purpose vehicles, with names such as Ormond Quay and Georges Quay and with a portfolio worth about €40 billion. Their business was interest rate arbitrage: refinancing long-term asset-backed securities such as credit card debt or mortgages with short-term commercial papers and pocketing the interest-rate difference between the two.
But, by August 2007, the subprime toxin had spread from the United States to Europe. Nervous banks began hoarding cash, drying out the short-term commercial paper market.
“[That] market is dead and for you it is particularly dead,” said Sanio to the SachsenLB representatives. “[You] are still clinging to the hope that the markets will spring back to life and there will be a happy end . . . [but] if we don’t act today, I don’t see how you will survive Monday.”
When the meeting finally broke up on August 26th at 2.15am, German bankers threw SachsenLB a €17 billion lifeline. It survived – just – and was later sold off but Saxon taxpayers were stuck with the rescue bill of €429 million and counting.
Next year, five former SachsenLB directors face trial, accused of breach of trust and exposing the bank to irresponsible levels of risk. The trial will recast the narrative established with SachsenLB, and developed further by the near-collapse of Depfa, that pre-crisis Dublin was Europe’s financial “wild west”.
This narrative, well worn in Germany, presents Ireland’s subsequent banking and economic meltdown as the self-inflicted, logical consequence of attracting too many banks to Dublin with low tax and light-touch regulation.
But a study commissioned by the state prosecution in Leipzig, written by a leading international law firm and seen by The Irish Times, paints another picture. Over 556 pages, it vilifies the institutional incompetence by German managers who encouraged profitable, risky activities in Ireland that would eventually bring down a politicised German bank that had no commercial reason to exist.
“Not only did the [SachsenLB board in Leipzig] not find fault with the [Dublin] capital market business,” the audit for the prosecution concludes, “on the contrary it encouraged and placed demands on it.”
The Dublin conduits – green-lighted by and ostensibly overseen by German executives in Leipzig – were an “unusually creative solution, without capital limits, to use the minimum of a capital burden to maximise off-balance revenue using interest arbitrage business”.
Leipzig mangers let the Dublin subsidiary operate under a “very unusual contract structure” which laid down “far-reaching obligations to meet liabilities” of the subsidiary “yet took no appropriate measures to steer and limit these”.
A guarantor’s letter (Patronatserklärung) extended “unqualified obligation” from Leipzig to cover Dublin’s liquidity needs – and its liabilities.