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BayernLB: Chapter 6
Police razzia in the BayernLB headquarters.
Since Wednesday the Munich city prosecuter's office is searching the premises of the BayernLB. The warrant is based on the suspicion that the price of the acquisition of the HGAA in 2007 was purposely held high. This would amount to a breach of trust.
After the signing of the purchase agreement, and before payment of the €1.7bn, the price should have been reduced, because it was clear enough that in the meantime, due to the financial crisis, the HGAA was no longer worth the originally negotiated price. However none of the gentry involved - not even the Board of Supervision - stumbled across the idea of empowering the CEO to renegotiate the price, or of cancelling the agreement.
The Munich Justice department gives a wide berth to the BayernLB Supervisory Board. In the eight pages of the warrant, the Board is not mentioned once.
In a crisis meeting at the end of August 2007 the BayernLB Supervisory Board decided that "the meeting documents had to be collected and destroyed". The supervisors had agreed to treat all information concerning the effects of the financial crisis as confidential.
The HGAA is suffering because of large credit defaults in Eastern Europe. Due to these new burdens, the BayernLB will book a loss for 2009 of over €1bn.
By now, the HGAA is in need of €1.5bn additional capital. The BayernLB is apparently prepared to offer up to €1bn, if Austria were to shoulder the remaining €500m. An agreement is not in sight. Without financial help from the owners of the HGAA, the Austrian banking controllers plan to intervene in December (insolvency). Yet insolvency is not an option because the bank is in the category systemic
In an internal report ordered by the Bavarian Finance Minister Fahrenschon, the BayernLB auditor (Corinna Linner) has listed numerous deficiencies and failings concerning the purchase of the HGAA in 2007. She came to the conclusion that it was "questionable that the persons involved fulfilled their obligations to excercise due diligence". Linner's report was dated 27 May 2009. The Finance Minister waited until now to present the report to parliament, i.e. until after the report had been anonymously sent to the Greens [opposition party]. Fahrenschon claims he had no intention of concealing anything.
After an intensive discussion
with the Board of Supervision on 21 July 2009, auditor Linner has retracted her criticisms because of new insights
The details that Corinna Linner had collected concerning the HGAA deal leave the BayernLB, the Bavarian government, and the ruling majority party CSU in difficulties, even if Linner retracted her reproofs later on. The take-over of the Austrian bank was a questionable transaction that today costs the BayernLB and the state many billions. Evidently the only ones whose balances were positive were wealthy investors, whom the BayernLB had helped to a quick and sizeable profit.
It seems that before the purchase of the HGAA, the BayernLB had given a large credit to an investment broker, Tilo Berlin, who was known to the BayernLB CEO (Schmidt). This credit served the clientele of the broker to buy stock of the HGAA, and then to sell this stock at a distinctly higher price as part of the purchase by the BayernLB. With money from the state bank, Berlin & partner invested €700m in the HGAA. Shortly thereafter they received €800m from the BayernLB. In less than a year. After this purchase by the BayernLB, Tilo Berlin was nominated CEO of the HGAA.
"One person knew: Corinne Linner, the Phantom of the Bank"
This Wednesday Corinne Linner talks to the parliamentary control commission for the BayernLB about all the things that she had discovered about the state bank. Aside from the purchase of the HGAA, she also vehemently criticized the dealings of the bank with US mortages etc.
Astonishingly she also retracted these objections, just as she had previously retracted her criticisms of the HGAA purchase. Fahrenschon saw a defused version of the Linner report dated 15 July, which however still contained the noteworthy sentence: A study of the trade literature suggests that the transactions carried out by the BayernLB with credit packets "could possibly be seen as unlawful", since they were incompatible with the statutes of the bank. Somebody had crossed out this sentence. Somebody from the Ministry? Is it an attempt to prevent the state bank from becoming a case for the state prosecutor?
The final, corrected version of the audit report of 28 July only contained reprovals at a detailed level. The sentence concerning the possibility of trading being unlawful was missing. And everything else, that Linner had originally criticized was suddenly fine. [Eulenspargel: as ever, honi soit qui mal y pense]
The erstwhile CEO of the BayernLB (Schmidt), during whose term of office the HGAA was bought, has (upon being dismissed from the BayernLB in May 2009) obtained a consultancy contract with the HGAA from his old acquaintance, Tilo Berlin. The annual remuneration is €50,000 for two years.
The Munich city prosecuter has been investigating in matters concerning Schmidt for a while. The suspicion is that the state bank paid €400m too much for the HGAA.
Questioned on his consultancy contract, Schmidt answered "This contract cannot be dubious because the sum involved is ludicrously small".
Commentary: "A treasured instrument of power"
The BayernLB has been used by the CSU for political purposes. Over the years the mission of serving the common good just faded away.
The close proximity to politics is demonstrated by the observation that time and again merited state officials were given lucrative positions in the bank or its subsidiaries. Even the previous Finance Minister and BayernLB supervisor, Erwin Huber, admitted that over a long time government politicians had regarded the bank simply as "an integral part of the State apparatus". The banking expert, Wolfgang Gerke, spoke of the "extended arm of politics".
The Austrian state has taken over the 67% of the HGAA that was held by the BayernLB for the symbolic price of €1
. In addition, the BayernLB foregoes €825m in claims wrt. the HGAA, and even helps to secure the liquidity of the HGAA.
Bavarian Finanz Minister Fahrenschon: "Together with the Republic of Austria, we have now succeeded in stabilizing a (for Austria and SE Europe) system-relevant
bank". The head of the European Central Bank, Jean-Claude Trichet, was also present during the night-long negotiations.
A solution now - before the bank is to open coming Monday - was deemded absolutely necessary, because of the imminent threat of a run on the bank.
The HGAA is purported to have been involved in cases of fraud. The bank has pledged itself to systematically investigate possible fraud occurrences.
The Klagenfurt (State of Carinthia) prosecutor has already begun to investigate the charges. It is believed that the deceased Carinthian far right-wing Premier, Jörg Haider, misused the bank to fund many personal prestige projects.
Comment: if the politicians sitting in the Supervisory Boards are and were objectively out of their depth, then the supervisory system must be changed. If they failed subjectively, then they should have to face the consequences personally.
Once more, new losses threaten the owners of the BayernLB. The BayernLB investors will probably be called to participate in the efforts to rescue the bank. For the state of Bavaria, this means foregoing the interest from the invested €10bn, which would have amounted to several hundred million Euros.
According to Finance Minister Fahrenschon, a worsening of the economic situation in 2010 could lead to yet further losses. Bavarian Premier Horst Seehofer announced that it was planned to sell the bank as soon as possible. The value of the bank is currently being assessed.
The erstwhile CEOs of the BayernLB and the HGAA are to present testimony before the Bavarian parliamentary investigation commission for the BayernLB on the causes of the HGAA debacle, and whether insider deals had been made at the expense of the taxpayer. At an inquiry of the Carinthian state parliament the three CEOs had concealed two secret meetings they had held in January and February 2007. These meetings have strengthened the suspicion of insider deals. According to Finance Minister Fahrenschon, the government is considering reversing the purchase of the HGAA from 2007 (!). Later the same day a Ministry spokesman gave a dementi: reversing the deal was not possible, but the government will attempt to negotiate a compensation for losses incurred.