Battle to control Hypo heats up over investor's demands

THE GLOVES have come off in the battle for control of troubled Hypo Real Estate (HRE) after its largest private investor demanded that Berlin pay him more than double the current market value for his 24 per cent stake in the troubled lender.

The demand came as a government finance expert with access to HRE’s accounts described the bank’s finances as “hellish”, with total liabilities of over €1 trillion.

As Berlin mulls a takeover of the bank, investor Christopher Flowers hinted yesterday that he would sue if the government tried to pay less than €3 for shares currently trading around €1.30.

Mr Flowers said the higher price reflects the share value before Berlin began discussing an expropriation bill, passed by cabinet earlier this week and scheduled to become law by April.

"This path would be far less complex and cost-intensive and involve far less legal uncertainty than an expropriation," said Mr Flowers to the Frankfurter Allgemeinenewspaper. In a letter to the finance ministry, the New York-based investor said he was "disappointed that no alternative scenarios have been put up for discussion and no further dates for further talks have been offered".

The media-shy billionaire’s remarks reflect the rising stakes in the battle, five months after Berlin stepped in with the first liquidity guarantees to save its Dublin-based subsidiary Depfa from collapse. To date HRE, now worth €300 million, has received €102 billion in state loans and guarantees with reports that another €20 billion may be required.

Mr Flowers’s consortium has lost an estimated €1 billion since buying its stake in the bank last year at a share price of €22.50.

Officials said yesterday that talks with Mr Flowers were ongoing, but there appears little official interest in paying the US investor a premium for his shares.

Not only would that be a politically hazardous proposition just months before a general election; by April, the government expects its expropriation law to come into effect, giving it the right to seize ownership of HRE as a last resort.

Finance minister Peer Steinbrück has dismissed the idea of a payout above market rates.

“I don’t see why an investor should be compensated by the government when he knows that, all going well, he can make good money but when things go bad, he can lose money,” he said.

HRE’s problems began after the collapse of Lehmann Brothers, when Depfa was unable to find sufficient short-term funding to cover its trade in “pfandbriefe”, bonds backed by mortgages or loans to the public sector.

Experts say the consequences of the collapse would mirror Lehmann’s meltdown, dragging with it other banks, health insurance companies and pension funds.