It was a time of high drama, bullying and backroom deals around the world in late 2008 as regulators clashed with bankers over the survival of the global financial system.
Some banks were forced to close, others were bailed out by governments, and still others were swallowed by larger and more stable competitors – to clean up the mess sparked by the collapse of the U.S. housing market and the bankruptcy of Lehman Brothers.
Banks have long complained that regulators pressured managers to swallow bad banks – think of Bank of America agreeing to buy U.S. investment bank Merrill Lynch, just hours after Lehman Brothers collapsed, over one heady weekend in September 2008.
But was there blackmail?
Six years after the crisis, one of these financial watchdogs, Germany’s Bafin, is being investigated for exactly that. It is an explosive case complete with intrigue, threats and lies. It marks a first in Germany’s legal history and a first in the aftermath of the 2008 financial crisis.
Jochen Sanio, who headed Bafin from 2000-2012, has since August been the target of an investigation by state prosecutors in Cologne over his alleged role in the 2009 rescue of Germany’s then-largest private bank, Sal. Oppenheim, which was handed a €100-million lifeline by a subsidiary, BHF Bank.
Mr. Sanio faces charges of breach of trust and attempted blackmail for allegedly forcing healthier BHF Bank to make the bridge loan to its ailing parent, which had gotten into trouble through exposure to troubled retail giant Arcandor, formerly known as KarstadtQuelle. Investigators are looking into whether the loan was too risky and should never have been given. BHF Bank had a legal duty to its own shareholders to make sound investments.
The case marks a first in Germany’s legal history and also a first in the aftermath of the 2008 financial crisis.
It all boils down to one phone call on July 2, 2009: An allegedly heated exchange between Mr. Sanio and Ingo Mandt, BHF’s then-chief financial officer, who was pulled out of a crisis meeting at the bank to take the call from Bafin’s top official.
The same day as the call, BHF Bank reinstated the credit line to its parent and kept Sal. Oppenheim afloat – at least until later that year, when it was bought by Deutsche Bank. Mr. Mandt resigned soon after the loan was given, fearing it amounted to a breach of trust. He has since turned state's witness for the possible prosecution of Mr. Sanio.
State prosecutors in Cologne are now in the process of formally investigating whether charges should be brought against Mr. Sanio. If they move ahead, the next phase in Germany's legal system would be to ask a judge to bring the matter to trial.
So what exactly was said in the phone call? According to Mr. Mandt, there was a clear case of blackmail. Mr. Sanio threatened to withdraw Mr. Mandt's license to practice banking, which is akin to barring him from the profession.
“Mr. Sanio inquired about the cancellation of the credit line and warned of consequences. The conduct of Mr. Mandt disqualifies him for a banking license,” read the minutes of the phone call written by Mr. Mandt at the time, which was submitted to the Cologne court.
But was Mr. Sanio justified in making such a threat? Another regulator has sprung to Mr. Sanio’s defense, Handelsblatt has learned. It seems Mr. Sanio and Mr. Mandt were not alone on the phone call.
Frauke Menke, a top Bafin official, has come forward since the investigation opened. According to her notes of the call, written four days later, Mr. Sanio was threatening Mr. Mandt in a completely different context. The top bank regulator allegedly confronted Mr. Mandt with an explosive rumor: That Mr. Mandt had told Sal. Oppenheim it was Bafin’s idea -- not his -- to stop the credit lifeline from BHF. Insiders say that this prompted Sal. Oppenheim bankers to complain directly to Bafin.
According to Ms. Menke, the July 2 phone call began with Mr. Sanio confronting Mr. Mandt over the rumors: “He could not imagine that the management of BHF Bank would make such false statements. If this were the case, he would have to consider the management to be unreliable,” she wrote in her notes.
In German banking legal parlance, labelling a manager “unreliable” is akin to threatening to remove their banking license. But to hear Ms. Menke’s version, the threat had nothing directly to do with the credit line given to Sal. Oppenheim.
To be sure, the credit line was discussed. Mr. Sanio expressed sympathy for keeping the lifeline alive, but stressed this had to be decided “independently” by BHF Bank, according to Ms. Menke’s notes. He urged BHF Bank to consider the matter from all angles: Should Sal. Oppenhiem collapse, it might bring BHF down with it.
Such were the uncertainties of the time. Many banks and regulators in 2008 were warning that the world could face a second Great Depression if major banks were allowed to fail. In some cases public bailouts were used, in other cases other banks were nudged to foot some of the bill.
“For executive boards this was a nightmare,” said Martin Hellmich, a professor of financial risk management at the Frankfurt School of Finance and Management. Both banks and regulators were operating very much in a legal “grey area,” he said.
Executive boards were on the one hand asked to safeguard the financial system, but on the other were required to look out for the interests of shareholders.
Neither Mr. Sanio, Mr. Mandt. the BHF Bank nor Bafin would comment to Handelsblatt for this story.
State prosecutors in Cologne also would not comment on the ongoing investigation.
As the head of Germany’s top banking reglator, Mr. Sanio had no interest in presiding over a second Lehman Brothers collapse on German soil. He was known during his time at Bafin for offering doomsday scenarios to force a bank’s hand.
Mr. Sanio played a key role in the sale of German regional bank SachsenLB to Landesbank Baden-Württemberg in 2007 after the former racked up €600 million in debts related to the U.S. housing market. When a shareholder complained they were being forced to act with their backs against the wall, Mr. Sanio reportedly replied: “You still don’t understand. There is no wall behind you. There is only a cliff.”
Yasmin Osman is a correspondent for Handelsblatt in Frankfurt, where she covers banks and finance regulators. Christopher Cermak is an editor for the Handelsblatt Global Edition in Berlin and has covered the financial crisis in the United States and Europe. To contact the authors: [email protected] and [email protected]