Hypo Successor Germany’s Lehman Gets Another Chance

Germany’s costliest bailout in the financial crisis, Hypo Real Estate, is to be sold to the highest bidder – at a massive loss to the government.
The rainy days could be coming to an end for HRE, but at what cost?

It was just after Lehman Brothers went bust. Josef Ackermann, then the chief executive of Deutsche Bank, Germany’s largest financial firm and a major player in the investment banking world, was trying to avert the global panic spreading to his home turf.

Mr. Ackermann called Chancellor Angela Merkel at around midnight on Monday, September 29, 2008, not for a bailout of his own bank but to convince her to rescue the German mortgage lender Hypo Real Estate, or HRE, which had suddenly found itself shut out of capital markets and was sinking fast.

It would become Germany’s costliest bailout of the 2008 financial crisis. Up to today, the German government has invested €19.1 billion, including €7.7 billion in a capital injection, into the failed mortgage lender, which has been split into three parts. While Germany may not have been the country worst affected by the financial crisis, its taxpayers were still forced to cough up tens of billions to keep the system afloat.

Six and a half years later, the final chapter of the drama surrounding the mortgage bank is now set to unfold. The best remaining part of the bank is expected to be privatized or taken public by the end of the year, HRE announced on Tuesday.

Financial experts say a sale of PBB could generate proceeds of €2 billion to €3 billion, a fraction of Berlin’s original bailout.

Deutsche Pfandbriefbank, or PBB, is the so-called “good bank” within a bad financial firm. The mortgage lender was created from the best of the bankrupt assets of HRE and nationalized in 2008. It is the only part of the bank that is still operating.

The bad loans made in the financial crisis were folded into a separate “bad bank,” known as FMS Wertmanagement, which is engaged in the painstaking process of selling off the more than €150 billion in assets - Greek bonds for example - at the best possible return to its creditors, including the German government.

HRE is a shadow of its former self. The state bailout required PBB to limit its balance sheet to just €67 billion at the end of 2011 - about 15 percent of HRE Group's total size at the end of 2008. The bank is still shrinking as it continues to sort out the bad assets from the good.

Financial experts say a sale of PBB could generate proceeds of €2 billion to €3 billion, a fraction of Berlin’s original bailout cost. In the end, it looks like the government’s rescue will have cost each German citizen at least €199.

Despite the looming losses, the government didn’t really have a choice but to move forward. The European Commission, as a condition for approving the German bailout, set a deadline for PBB to be sold or taken public by the end of this year, meaning the government could only hold onto its loss-making investment for so long.

Financial insiders expect the number of potential buyers, mostly hedge funds, to be in the double digits. At the same time, the bank is preparing for a possible return to the stock market as “an alternative method of re-privatization,” PBB said in a statement. An IPO is generally viewed as the more likely scenario.

PBB's new business amounted to a record €10.2 billion last year.

Up to 100 percent of shares in PBB are to be sold, but insiders expect the federal government to retain a share of the bank below the 50-percent threshold that would constitute a blocking minority.

Over the last six years, PBB has concentrated once again on gaining a foothold in the real estate market. Its core business involves financing commercial real estate and public investment projects in Europe.

Portfolios totaling €33 billion are mentioned in the prospectus for the sale that was issued by HRE Holding and obtained by Handelsblatt. It also mentions a separate portfolio of commitments worth €24.9 billion, which are no longer part of the core business and are in the process of being liquidated.

New business amounted to a record €10.2 billion last year. According to HRE, earnings before taxes increased to €170 million, compared to €165 million in 2013. PBB had in fact anticipated a decline in profits.

Despite the favorable numbers, history suggests this will be a difficult sale.

Commerzbank, Germany’s second-largest bank that was also partially nationalized in 2008, failed to sell its loss-making real estate subsidiary Eurohypo and was eventually forced to liquidate it instead.

Potential buyers of PBB are required to express their interest by February 27. According to the plans of Citibank and Deutsche Bank, who are spearheading the sale, a pre-selection of potential buyers will be made by March 24. These buyers will then be able to submit non-binding, indicative offers.

The sale is expected to be complete by the middle of the year.


Robert Landgraf is the deputy editor of Handelsblatt’s finance section and has covered the German banking sector in Frankfurt for many years. Christopher Cermak covered the 2008 financial crisis from Washington and is now an editor at Handelsblatt Global Edition. To contact the author: [email protected]