FRANKFURT (Reuters) - The German state and public banks clubbed together for the second time in five months to save subprime-stricken SachsenLB from collapse, heading off a blow to confidence in the country's financial system.
By John O'Donnell and Patricia Nann
FRANKFURT (Reuters) - The German state and public banks clubbed together for the second time in five months to save subprime-stricken SachsenLB from collapse, heading off a blow to confidence in the country's financial system.
SachsenLB is one of Germany's highest-profile casualties in the crisis triggered by subprime mortgages. It was first rescued in August under a deal that forced its sale to a rival, but rising losses threw negotiations into disarray.
Now the state of Saxony, which partly owns the troubled bank, Landesbank Baden Wuerttemberg (LBBW) -- which wants to buy it -- and other regional lenders have hammered out a deal to pay for SachsenLB's dud investments in subprime mortgages.
!ADVERTISEMENT!The result of the last-minute talks, overseen by German financial watchdog Bafin and the country's central bank or Bundesbank, was announced by Saxony's government on Thursday.
Sources familiar with the matter said that the trio rescuing SachsenLB have agreed to divide up responsibility for 17.5 billion euros ($25.7 billion) of the bank's investments in subprime and related debt.
These investments -- part of SachsenLB's programs which had a value of about 43 billion euros -- could throw up billions of euros in losses.
CLEANING UP
The lion's share of this risk will now be taken by LBBW and other state regional lenders known as landesbanks.
These landesbanks -- partly owned by local government and community savings banks -- would have been obliged under an industry guarantee scheme to step in to clean up the mess had SachsenLB collapsed.
A meltdown in U.S. subprime mortgages has set in train a global credit crisis, forcing banks to sift through their portfolios of complex mortgage-backed securities where value has been wiped out by subprime home owners defaulting on loans.
Global banks including UBS <UBSN.VX>, Citigroup <C.N> and Merrill Lynch <MER.N> have been among the biggest casualties, totting up billions of dollars in charges.
Germany, Europe's biggest economy, has taken an especially hard beating.
Two of its banks nearly collapsed under the subprime strain. IKB <IKBG.DE>, a formerly little-known small-business lender, has become a byword in Germany for the subprime crisis, while state bank SachsenLB was the second big near-failure.
Earlier in the week, the owners of battered German lender WestLB <WDLG.UL> emerged from crisis talks saying that they would be happy to sell a stake in their subprime-hit bank but would also enter merger talks with neighboring rival Helena
<HLAG.UL>.
(Additional reporting by Jonathan Gould and Andrew Hurst in Zurich; Editing by Louise Ireland)
