Commission’s Dirty Task: WESTLB Devoured By Private Banks
3 July 2011, by Ralph T. Niemeyer
This graph shows that from 1999 the Großbanken (major private German banks) had left the path of sustainable traditional banking business and engaged in gambling with CDOs, Credit Default Swaps, and Derivatives instead of concentrating on their core work of lending to businesses. Public Sparkassen was involved only minimally in this kind of 'investment banking' but increasingly handed out loans to the ‘real’ economy. Private banks in Germany instead accumulated an estimated €600 billion in ‘toxic assets’ by ‘investment banking’ branches, for which German taxpayers are providing guarantees.
For many years, German public Sparkassen and Landesbanken had a bad reputation, as they were branded as being too bureaucratic and ‘unsexy’ because they were reluctant to follow private banks’ trend of protecting their core business, providing liquidity for the ‘real’ economy and turning to what Wall Street called ‘investment banking’, which in turn produced skyrocketing profit rates.
In recent years, Deutsche Bank AG fed their record profits almost exclusively through their 'investment banking' division, which made fortunes gambling with Greek state obligations by trading Credit Default Swaps. And, when this turned sour, the German government bailed out Hypo Real Estate (HRE) where Deutsche Bank AG had dumped these toxic assets. Taxpayers could have handed over their money directly to Deutsche Bank AG shareholders without allowing CEO Josef Ackermann to ruin Greece beforehand.
The European Commission had been lobbied since the early 1990s by German private banks, namely Deutsche Bank AG, to attack the German government over the country’s ‘inflexible’ public banking sector.
In Germany, there are more than 500 rural Sparkassen that own 12 Landesbanken, 11 Landesbausparkassen and employ 350,000 people who, via a network of 17,000 branch offices, administrate 70 million accounts.
Public Sparkassen are more efficient in serving average citizens and SMEs, because they are not stock companies that have to satisfy shareholders’ hunger for ever bigger dividends.
Their market share is steady at around 36%, whereas private banks in Germany only account for 28.4%, of which the four major banks control more than 50%. Deutsche Bank AG dominates this segment by almost 50%, but with its 7% market share is still well behind public Genossenschaftsbanken that are owned by municipalities and communities.
Logically, private banks in Germany are eager to break up the market dominance of public banks and use the Commission for that purpose. In Great Britain, for example, the market is reduced to only a few highly profitable private banks and also in France the biggest five private banks control 50% of the market, in Belgium two thirds and in the Netherlands four fifths.
The IMF has demanded for a long time to have any public monopolies in the German banking market broken up, citing ‘inefficiencies’. Lately, since the financial crisis began on 11 August 2007, German private media was citing the flaws of the German Landesbanken, which also took part in some reckless gambling with CDOs and Derivatives and lost billions in the Goldman Sachs, Deutsche Bank and Lehman Brothers-Ponzi schemes
But, truth be told, the time span over which and the extent to which public German banks became involved in highly speculative transactions are laughable in comparison with the damage done by private banks, for whom taxpayers are now providing guarantees.
Nevertheless, the media concentrated on the failings of Landesbanken and Sparkassen, although these are minimal in comparison with the big wheels that major private banks were spinning.
On top of that, it was the public banks and Sparkassen that supplied the real economy with liquidity and increasingly stepped in for the private banks that over the past decade withdrew from that business segment and put almost everything on the casino tables of the financial markets.
The fact that major private banks in Germany account for the least profitability in the loan segment proves that Sparkassen and Genossenschaftsbanken, both owned by the public, are doing by far better in this important core business than their reputation suggests.
This, of course, raises the appetite of private banks, who wish to pick the cherries from the pie and would like to eat into that segment.
That is the only reason why Landesbanken came under attack by the Commission and German government as well as mainstream media, as only by discrediting the institutions will it be possible to create public support for privatising one of the most lucrative and stable businesses in Germany.
After all, we are talking about a 50% market share in the private client’s segment that Sparkassen were able to build up, because private banks had continuously pulled out of this field while concentrating on the seemingly more profitable ‘investment banking’ which, to put it mildly, was not such a good idea.
In order to win back this important market share, it has become a prerogative to destroy public banking in Germany completely. This unpopular move could never come from the German government itself, so that’s why the Commission is being employed for this dirty job.
For the restructuring of WESTLB, government money will be needed. Such state aid is always subject to the Commission's approval.
This, however, is a sensitive issue as over recent years, Germany's private banks have received far more public money than the Landesbanken - without Commission interventions.
Deutsche Bank AG had also benefited from taxpayer’s money when the rescue mission for HRE had been completed. Without state aid, Deutsche Bank AG would not have had a dividend to pay out the following year but to eat its losses resulting from Unicredit- and HRE-engagements.
Instead of throwing more large privatisation deals to that monster bank, one should rather consider demanding taxpayers’ money back, which might result in Deutsche Bank AG’s nationalisation.
Germany’s major private banks have evidently not fulfilled their obligations by providing liquiidty for the real economy. This tendency clearly points towards being symptomatic, as the financial experts of Germany’s SME federations are citing a 63% more difficult access to re-financing sources.
Obviously, private banks in the EU are clearly acting in a pro-cyclical fashion, and by this are adding fuel to the fire as they are not fulfilling their obligations.
Across the EU, similar developments are being noted as Ireland, Spain and Greece tumble into state bankruptcy.
The credit crunch is hitting SMEs especially hard, as re-financing is crucial for those companies if there is ever to be a recovery.
The question as to which banks are primarily responsible for the credit crunch is not on the Commission’s agenda or those of member state governments, it appears, and the question of how much more privately owned banks are to be made responsible for the drying out of the re-financing market in comparison to publicly owned banks such as the German Volksbanken and Sparkassen is also being studiously avoided.
This may only be logical, however, as the Commission over recent years has continually undermined the German Landesbanken, state-controlled banks that are owned by public rural Sparkassen, which were targeted by the federation of the German private banks (Bund deutscher Banken).
The aim, it seems, was to discredit such publicly owned banks by citing inefficiencies as well as certain bureaucratic excesses.
The Commission’s role is at least questionable, too, since it adopted the position of the German private banks that couldn’t wait to take over the profitable parts of such public banks once these were forced into privatisation under EU rules.
In fact, the suspicion seems legitimate to say that the Commission potentially conspired with private banks to abolish any public financing sector that has always been a strong competitor when it came to SME financing in Germany.
Ralph T. Niemeyer is editor-in-chief of Euchronicle.