Sachsen LB losses expose directors' 'cluelessness'
The 2007 meltdown of the state-owned Sachsen LB bank cemented in many German minds Dublin’s reputation as the light-touch regulation “wild west” of European banking.
However, a new report suggests that the “cluelessness” of Sachsen LB’s German-based directors played a crucial role in losses of at least €429 million for the German taxpayer.
The 556-page report, commissioned by the state prosecutor office in Leipzig, is likely to form the backbone of charges of breach of trust against five former landesbank directors.
The report describes these directors as “fair-weather pilots”, unaware of the massive risks in the bank’s balance sheet, they failed to change course as clouds gathered on global markets in 2007. Had they sold Sachsen LB sub-prime assets at the first sign of the looming storm, the report suggests, they could have saved the bank €114 million and financial ruin.
Five years after it was founded in 1992, Saxony’s state-owned landesbank set up a Dublin subsidiary, Saxon LB Europe. By 2003 this operation was financing a massive buy-up of loans with short-term credit.
Activities of about €30 billion were managed in off-balance sheet “conduits” named “Georges Quay” and “Ormond Quay”.
According to the report conducted over 19 months by Freshfields and Deloitte, Sachsen LB’s directors ignored the “gallop” of investors out of markets in 2007. While other German institutions were getting out of the market, the audit found that the Leipzig bank continued to invest.
At a meeting on July 16th, 2007, chairman of the board Herbert Süß conceded that the bank’s capital markets division was beginning to feel an interest rate squeeze, but insisted the bank was not vulnerable to the sub-prime crisis. Another board member insisted that the bank only invested in top-rate assets.
On August 17th, 2007, the bank was hit by the sub-prime wave washing over Europe. The report’s authors say the directors were “stunned and amazed” by the danger facing the bank. With a week to survive, other banks threw Sachsen LB a €17 billion lifeline. It was later sold off to the Landesbank Baden-Württemberg of Stuttgart.