Owners of Germany's WestLB AG rallied to prop up the stricken state lender on Monday, by shouldering what the bank said would be a 1 billion euro ($1.5 billion) loss in 2007 and writedowns just as big. WestLB said its owners - local community savings banks and the state government of North Rhine-Westphalia - would foot the bill for the losses.
The announcement came a day after German financial watchdog Bafin and the country's central bank, the Bundesbank, attended an emergency meeting of WestLB's owners to examine how to stabilise the lender. It puts Germany back in the spotlight as one of the countries worst affected by the credit markets crisis, which almost sank two German banks and has sucked in many more.
They are now keen on a merger with rival state lender Helaba and want to accelerate a planned shake-up of the bank, which a source close to the owners said could see it slash a third of its almost 6,000-strong workforce. In a letter to staff, WestLB Chief Executive Alexander Stuhlmann also warned that further writedowns on withering subprime investments could not be ruled out.
CRISIS MEETING: On Sunday, Bundesbank President Axel Weber and Jochen Sanio, head of Bafin, unexpectedly showed up for the meeting of owners aimed at resuscitating WestLB's finances, illustrating the urgency of the situation.
Both attended similar meetings last year for subprime casualties IKB and SachsenLB and helped broker financial rescues that averted the collapse of the two banks. Europe's biggest economy has taken an especially hard beating from credit market turbulence and Germany's regional state-backed landesbanks such as WestLB have been badly hit.
Struggling after the abolition of government guarantees that made it cheaper for them to borrow, many seized on the booming market in securitised debt to bolster profit only to run into trouble when credit markets seized up.
The credit crisis, which started when US home owners were squeezed by falling property prices and rising interest rates, has rocked confidence in the global economy. It battered SIVs (structured investment vehicles), which raise funding by issuing short-term debt to finance longer-term investments in bank debt and asset-backed securities.
The off-balance-sheet vehicles have been caught out as investors shunned complex debt instruments and refused to cough up short-term funding, forcing fast asset sales to repay debt even as the value of their investments has tumbled.
WestLB, which ran a series of investment vehicles including SIVs with a value of about 25 billion euros, is worth about 7 billion euros - roughly the same as the value of its equity. The bank's move to absorb an offshore investment company onto its books saw its tier one capital ratio fall to 6.5 percent from 8.1 percent. This means the bank's financial muscle is withering - when the ratio sinks it can become harder for a bank to borrow.