[NYTr] Too big to fail: Germany rescues subprime lender

[All the News That Doesn't Fit]

Financial Times - August  1, 2007
http://www.ft.com/cms/s/46fe1d80-4063-11dc-9d0c-0000779fd2ac.html

Too big to fail: Germany rescues subprime lender

By Tim Bartz, Elisabeth Atzler, Joanna Chung, 
Paul J. Davies, and Stacy-Marie Ishmael

The German government has pulled together a rescue operation --
drawing in all three pillars of the country's banking system -- to
shore up Europe's first major casualty of the subprime crisis.

The rescue of IKB, a specialist lender based in Dusseldorf, began
on Sunday when Peer Steinbruck, the German finance minister, called
leading banking executives to discuss a bailout. According to people
who took part in the conference call, Jochen Sanio, head of Germany's
financial regulator, is said to have warned of the worst banking
crisis since 1931.

IKB announced a big fall in its earnings because of subprime exposure.
The news sent its shares plunging and prompted KfW, the state-owned
development bank, to step in with a pledge to guarantee obligations
of more than E8 billion ($10.93 billion) -- more than five times
IKB's stock market value.

The intervention suggested that the problems at IKB are much worse
than thought. Mr SteinbrC<ck phoned several banking executives,
including Josef Ackermann, chief executive of Deutsche Bank, on
Sunday to bring them on board.

Deutsche Bank, Commerzbank, and a number of publicly-owned Landesbanken
and Sparkassen, as well as several other private banks, are taking
a 30 per cent stake in a rescue fund worth E3.5 billion, FT
Deutschland, the FT's sister paper has learned, with the rest being
shouldered by KfW.

Axel Weber, Bundesbank president, said the rescue effort had
effectively tackled IKB's problems. "The exposure of German banks
in the US real estate market is manageable and limited overall,"
he said.

Details of the German intervention came as more bad news from hedge
funds and the US housing sector battered investor confidence across
the globe and dashed hopes of a quick end to the recent credit-led
turmoil in global markets.

UK and European stock markets were hit, with the FTSE 100 finishing
the day down 1.7 per cent at 6,250.6 after having been more than
2.5 per cent lower earlier in the day. The FTSE Eurofirst 300,
meanwhile, ended 1.5 per cent lower at 1,526.26.

In London cable company Virgin Media announced it was delaying its
auction in the hope that the credit market turbulence would settle
in time to allow private equity suitors to finance bids which could
reach $23 billion.

A day of extreme volatility saw US stock markets rocked after shares
in a number of US homebuilders collapsed. At lunchtime the Dow Jones
Industrial Average and S&P 500 were flat after a morning of sharp
fluctuations.

Concerns about a lasting credit crunch are leading to expectations
that central banks will have to step in to ease the sudden lack of
liquidity.

Interest rate futures markets are now pricing in as a certainty
that the US Federal Reserve will make at least one cut in rates by
January.

Mounting fears of massive mark-to-market losses by hedge funds
stemming from investments in the subprime and the so-called "Alt-A"
mortgage sector -- in between prime and subprime -- are fuelling
wild price swings across all markets.