The meltdown of a Dublin-based subsidiary will come under the microscope in the Bundestag next week, writes DEREK SCALLYin Berlin

NEXT WEDNESDAY promises to be an interesting day in the life of Munich property lender Hypo Real Estate (HRE) and Depfa, its Dublin subsidiary.

Eight months after saving the liquidity-starved bank with €102 billion in state guarantees, the federal government is expected to take control of the bank at an extraordinary shareholder’s meeting in Munich. At the same time in Berlin, opposition members of the Bundestag finance committee are promising exciting revelations about who knew what and when in the HRE/Depfa affair.

Four months before the general election, the investigation has dangerous potential for the grand coalition government of Christian Democrats (CDU) and Social Democrats (SPD). The SPD in particular wants to limit the scope – and potential political damage – the investigation might cause SPD finance minister Peer Steinbrück.

But opposition politicians smell a cover-up and are determined to extract every ounce of political capital before election day.

In the words of one opposition member, the committee has invited auditors and officials to explain why a bank, months after being audited by the Bundesbank, “went up in flames”.

“I don’t know,” admitted Bundesbank auditor Rainer English, “I ask myself that every night, too.” He has declined to comment on whether Depfa’s finances – described as “fraught” by Bundesbank’s auditors last year – were examined by the German regulator during HRE’s 2007 takeover.

A second Bundesbank auditor, Manfred Eder, who co-ordinated last year’s 19-head assessment team, also declined to answer the question yesterday.

When opposition Left Party MP Axel Troost asked him whether HRE’s Irish subsidiary was “basically a junk model”, Mr Eder replied: “Depfa is a bank with a long history.”

When Depfa faced dry liquidity markets in September, he said, it was like a motorist who leaves Munich to drive to Berlin with a half-full petrol tank, assuming he can fill up on the journey.

“What if the first petrol station he encounters is closed, the second, too, and the third won’t accept credit cards no matter how much you are prepared to pay?” he asked.

SPD MP Jörg Otto Spiller suggested that Depfa’s business model – short-term refinancing of long-term loans – was equivalent to a motorist departing Munich to drive to Berlin with a half-full tank “and just €25 cash in his pocket”.

Opposition Green MP Gerhard Schick asked Mr Eder if any of the auditors recruited for the HRE/Depfa audit had special knowledge or experience of the Sachsen LB case, when the German state bank nearly collapsed after speculation at a Dublin subsidiary.

“I don’t know of anyone on the team with specialist knowledge,” said Mr Eder. Defending his audit, he said: “We did what we could, we did some good work.”

Next week’s sitting will analyse the chain of communication between the Bundesbank, which conducted the audit, the regulator (BaFin) which prepared the final report on the bank and forwarded it to the finance ministry in July.

The ministry says that when the final report arrived, the relevant senior official was away on holiday. By the time he returned, more junior officials had filed the report away without showing it to the senior official or the minister.

The political dynamite lies here: what did the finance ministry know and when?

The government maintains that the auditor reports – which the finance minister never saw – gave no indication of an immediate disaster at Depfa, and that no one could have known the Lehmann Brothers’ collapse would have the effect it did.

The opposition say that, at the very least, the ministry was ignorant of the risks because of the sloppy administration that prevented the report coming to attention of senior officials.

Dr Volker Wissing of the Free Democrats (FDP) is convinced the government has cost the taxpayer billions because it failed to act.

He goes further, claiming that last September’s bank guarantee was not just to save HRE/Depfa, but to prevent the collapse of the German credit market in Pfandbrief or covered bonds.

“Steinbrück claimed last autumn that German authorities weren’t allowed examine Depfa, an incorrect claim that is scary,” said Dr Wissing. “There already had been an audit, and a special one, not routine.”