Hypo Real Estate board breached German law, report says

The board of Germany's Hypo Real Estate breached German stock market and banking law with its "inadequate liquidity management", according to a draft report into the group's near-collapse in 2008.

The damning report on the final year of HRE suggests the bank could have avoided disaster – and a German state bailout of €124 billion and counting – had it reacted in time to deteriorating market conditions. Instead, management ignored signs or had no oversight of the bank’s vulnerability.

Regardless of the cause, an investigator appointed to investigate writes in his 870-page draft report that chief executive Georg Funke and his managers had "general care obligations" and failed to honour their obligations under German stock market law.

The report, leaked to the Süddeutsche Zeitung , points to serious problems in operations from before HRE purchased Dublin-based Depfa bank for €5.7 billion in October 2007.

The claim by the report's author, accountant Wolfgang Russ, casts further doubt on the generally accepted claim in Germany the Munich-based lender was felled solely by Depfa's huge liquidity requirements.

Five months after the takeover, in March 2008, Mr Funke admitted in an email the “liquidity situation was not created overnight”. Instead it was the result of the group “driving on” its international property lending – HRE’s speciality – “to generate business” with “mostly unsecured” financing while other banks were winding down their international exposure.

In an email on March 19th, six months before the Lehman Brothers collapse closed already parched liquidity markets, Mr Funke admitted "funding and liquidity are our exposed flank".

Constant refinancing
While Mr Funke described his bank as "stable in the long term", he conceded that deteriorating market conditions left the bank with an "even higher funding need than necessary" for massive short-term loans that required constant refinancing.

By this point at the latest, March 2008, Mr Russ said “the board should have put together . . . a liquidity emergency plan . . . to have a concrete list of measures in a drawer”.