Eight years after the collapse of the U.S. sub-prime mortgage market brought the global financial sector to its knees, banks around the world are still paying the consequences.
In Germany, Handelsblatt has learned that a trial is set to begin against three former executives from a former tiny publicly owned bank that, like many during the pre-crisis era of high finance, grew well beyond its means.
The trial will mark the end of an eight-year investigation by state prosecutors that has cost more than €2 million, or $2.2 million.
SachsenLB, a bank once owned by the eastern German state of Saxony, was one of a series of publicly owned banks in the country that saw an opportunity to expand beyond their traditional regional borders, hoping to profit from what seemed like a solid U.S. mortgage market at the time.
That would mean that the former head knowingly led his bank into ruin. That is absurd. Barbara Livonius,, Defense Lawyer for SachsenLB
Instead, the market headed for disaster. Sub-prime variable rate mortgages couldn’t be repaid by homeowners, and the U.S. housing market began to collapse – with repercussions across the globe.
SachsenLB wrote off nearly €2 billion in failed mortgages and had to be sold over a weekend to the rival state bank LBBW. Another German state-owned bank, WestLB, didn’t survive the financial crisis at all.
The debacle is especially embarrassing for banks like SachsenLB. Publicly-owned so-called “Landesbanken” have long held a special responsibility in Germany’s banking system to further the goals of the regions that back them.
It is this responsibility that has gotten its executives into trouble. The charge being leveled against the bank’s former executives, including its then CEO Herbert Süß, is breach of trust.
Prosecutors in Leipzig, where the trial will take place, allege that SachsenLB executives were knowingly reckless with the state bank’s money and took unnecessary risks that brought the bank to the brink of collapse. The charges run to more than 600 pages and include 900 additional files.
The three executives deny the charges.
“The burden of proof for breach of trust is only met if somebody acted purposefully,” Barbara Livonius, who is defending Mr. Süß, the former SachsenLB chief executive, told Handelsblatt. "That would mean that the former head knowingly led his bank into ruin. That is absurd.”
Indeed, the track record in proving such charges against German banks involved in the crisis has not been good. Since 2008, executives from four other banks have been charged for their role in the crisis. They include three state-owned banks – BayernLB, HSH Nordbank and LBBW – and the small corporate bank IKB.
Only former IKB head Stefan Ortseifen was found guilty of exchange manipulation in the crisis. Charges of falsifying balance sheets brought against LBBW were eventually settled out of court for a fine, while executives from BayernLB and HSH were cleared in court.
One former SachsenLB manager, Werner Eckert, has also escaped the trial by agreeing to pay a five-figure sum to the state and to a children’s hospice. Mr. Süß and two other former managers, Stefan Leusder and Yvette Bellavite-Hövermann, will face trial in the fall.
Unravelling the details of SachsenLB’s meddling in asset-backed securities has proven especially complicated – and costly. The prosecutors were overwhelmed by the mass of material to process and they spent an estimated €2.6 million on outside help.
SachsenLB dabbled in asset-backed sub-prime mortgage securities via its Ireland-based subsidiary, SachsenLB Europe, as well as through other investment vehicles, Ormond Quay and Georges Quay.
These U.S. investments caused massive losses at the bank and nearly led to its downfall. LBBW essentially bailed out the bank in the fall of 2007.
To uncover the details, Leipzig prosecutors hired Thomas Emde, a prominent lawyer at Freshfields Bruckhaus Deringer, to investigate the bank’s practices. Mr. Emde in turn hired consultants Deloitte to help him go through the reams of paperwork and data.
The findings: Management mistakes and inadequate risk provisions contributed to the bank’s crisis, according to sources familiar with Mr. Emde’s testimony.
The investigation could prove costly for the defendants, who will have to pay the prosecutors’ legal fees if they lose the trial.
“It has become extremely expensive, because the expert witnesses relied in large part on hiring additional experts,” said Ms. Livonius.
It is not clear how long the case against SachsenLB’s managers will take. The court, which has already deliberated for over two years on whether to bring the matter to a full trial, is likely to plan at least 14 court dates.
Volcker Votsmeier is an editor with Handelsblatt’s investigative reporting team. Elizabeth Atzler covers banks and the financial markets for Handelsblatt in Frankfurt. Christopher Cermak of the Handelsblatt Global Edition contributed to this story. To contact the authors: [email protected] and [email protected]