Near-collapse of German bank and its Irish subsidiary shrouded in mystery
The name of the bank that broke Ireland might not have been Anglo Irish Bank, but Depfa – to the tune of around €130bn and rising
Done deal: Hypo Real Estate Bank AG CEO Georg Funke (left) shakes hands with Depfa CEO Gerhard Bruckermann at a press conference in Munich on July 23rd, 2007 to announce that Hypo had agreed to buy Depfa for ¤5.7 billion to form, at the time, Germany’s biggest real estate financing company. photograph: thorsten jochim/bloomberg news/via getty images
In a caustic commentary, reflecting a common view in German finance circles, the Handelsblatt business daily denounced the IFSC institution as the “source of all evil”.
Five years on, the near-collapse of Germany’s HRE banking group and its Irish subsidiary remain shrouded in mystery.
Yet as Ireland prepares to exit the bailout necessitated largely by Anglo Irish Bank’s collapse, it’s worth recalling just how near a miss Ireland had with Depfa.
Though not a household name – in Germany or Ireland – the lender opened an Irish operation in the 1990s and pursued a highly profitable, if speculative, business model: lending money for long-term infrastructure and commercial property projects which the bank borrowed, in turn, on short-term money markets at lower interest rates. The short-long interest rate difference was Depfa’s profit.
When Lehmann Brothers collapsed five years ago, short-term liquidity evaporated as lenders battened down the hatches. Facing ruin, Depfa put in an emergency call to its HRE parent which, in turn, appealed to Frankfurt banks and the federal government in Berlin.
The hole in Depfa’s balance sheet widened from an initial estimate of €10 billion to €30 billion, then €100 billion and beyond.
Berlin steps in
Fearing a domino effect in Germany, and possible collapse of finance markets around Europe and worldwide, Berlin stepped in with loans and guarantees and, a year later, the first – and to date only – nationalisation of a financial institution in Germany’s post-war history.
The problem landed in Berlin’s lap because, just one year earlier, HRE had taken over Depfa in Dublin.
Had that fateful deal not gone through, it is very likely the mess would have been Dublin’s problem. In the history books, the name of the bank that broke Ireland might not have been Anglo Irish Bank, but Depfa – to the tune of around €130 billion and counting.
Five years after flirting with financial disaster, are we any the wiser as to what really happened?
Even now, the wall of silence surrounding the HRE/Depfa drama is almost impenetrable.
One of the few people willing to talk is former Deutsche Bank executive Michael Endres. He knows the books of HRE and Depfa like few others in Germany, as he was brought in as supervisory board chairman from November 2008 until the nationalisation a year later.
Sitting in his Frankfurt office, in the shadow of Deutsche Bank’s twin towers, the 75 year-old Bavarian says the mainstream view in German finance circles – that Depfa sank HRE – is not strictly correct.
“HRE would have gone down on its own, because of its own business,” he says, a view he formed during a hectic year studying HRE’s books.
The former Deutsche Bank board member doesn’t absolve Depfa: he has harsh words on its transformation, under the nose of a weak Irish regulator, from a “sleepy bank in Wiesbaden” to a Dublin dealer in “questionable business”.
A former Depfa board member agrees with this assessment. Speaking on condition of anonymity, the director says that Depfa became a victim of its own hubris. Its determination to enter the global capital slipstream in the last decade was not reflected in adequate oversight structures: a risk committee was only set up at board level in 2006.
“But whether the scale of Depfa’s dependence on the short-term capital markets grew to unacceptable levels, I don’t know,” said the ex-director.
The central figure in the HRE/Depfa meltdown is the bank’s former chief executive Gerhard Bruckermann.
The son of a savings bank manager from Solingen, a small town east of Düsseldorf, Bruckermann joined Depfa in 1991 when it was still called the Deutsche Pfandbriefanstalt.
It was originally founded in 1922 to provide residential property loans, but moved into the commercial sector in the 1970s and privatised in 1990.
It opened an Irish office and eventually transferred its headquarters from Wiesbaden to Dublin.
The then Fianna Fáil government enacted special legislation in 2002 to ease the transition, hoping to establish Dublin as a trading centre for the booming market in Depfa’s speciality of covered bonds – specialised debt securities invented in Prussia in the 18th century.
As Depfa chief executive in Dublin, Bruckermann expanded Depfa’s commercial, property and infrastructure loan business radically, lending long and borrowing short to generate equity returns of almost 33 per cent.