Germans to Repeat US Banking Mistakes?
Ah yes, as I observed in a post a few days ago, when it comes to state funds made available to prop up failing banks, the German bank bailout demand is low. But “low” does not have to mean “non-existent,” and in fact on Thursday the German government made use of the Sonderfonds Finanzmarktstabilisierung (“Special Fund for Financial Market Stabilization,” or Soffin) it had established to provide Commerzbank with €10 billion in exchange for taking up a 25% ownership stake. More precisely, of that €10 billion €1.8 billion actually buys that equity quarter-stake while the remaining €8.2 billion goes to a “silent participation” that gains no voting rights. By the way, at roughly the same time Commerzbank also took advantage of that other facility offered by Soffin – namely State debt guarantees – to bring in another €5 billion in new capital via a guaranteed bond-issue.
If you were to use your imagination to put yourself in the German federal government’s place – say, if you were a German taxpayer in whose name all this money was being spent – you might very well wonder what those civil servants in charge of the Soffin were thinking by accepting in exchange for the lion’s share of that €10 billion amount a mere “silent participation.” After all, it’s clear that insisting on a 100% active participation would have resulted in the purchase of the entire bank, with money to spare. (Do the math: that €1.8 billion bought a 25% interest, yet constituted not even 25% of the €10 total spent.) Instead, the remainder of that money gains for the government the “silent participation” that is in effect a loan, charging 9% interest.
The answer does seem to be obvious, along the lines of “What? You’re suggesting that the government completely nationalize one of the country’s major banks? This government just does not do that!” OK fine, so Soffin had to come up some maneuver whereby it could provide Commerzbank with the massive amount of capital it required without completely taking it over. In any case, since for Germany this is the first bank that has prompted this sort of emergency measure, this Commerzbank case has finally forced the German authorities to reveal how they intend to deal with these situations in practice (and we’d be foolish to assume that this will be a unique, one-time-only event). In fact, this episode reveals a couple of more-subtle elements to what has emerged as German policy: 1) The German authorities may not want to take full control themselves of such leading native financial institutions, but they’re also not about to let foreign interests do so, even if they can put up the required money. As an article in Forbes by Vidya Ram points out – Commerzbank’s Forced Marriage – that 25% stake that Soffin bought is actually 25%-plus-one-share, enough under German law to block any take-over. And 2) They otherwise intend to proceed in a very hands-off manner, i.e. to continue to leave basically all operational decisions to present management. Among the signs we see of this already is the evident lack of urgency Soffin is showing in coming up with its candidates to fill the two seats on the Commerzbank supervisory board to which it gained the right to with its 25% equity purchase.
The temptation naturally looms large here to attribute this second stance on Soffin’s part – i.e. the “hands-off” attitude, together with the missing Directors – to the little fact-nugget that was revealed in my post on this topic a few days ago, namely that that agency is still grievously under-manned even at the top level of its executive committee, where we know for sure who only one of that committee’s three members is going to be. They’re “hands-off” because they have no hands on deck! But we get a rather more credible, and interesting, set of explanations from a couple of commentaries that have sprung up in the wake of that Commerzbank move, from Malte Kreutzfeldt writing in Die Tageszeitung, a.k.a. the TAZ (The fearful State) and from Robert von Heusinger writing in Die Zeit (The private sector can’t get it done either). These explanations are heavily interrelated but nonetheless can still be listed separately: 1) The German financial authorities are still the intellectual captives of the idea of the superiority of unfettered capitalism, that “the market is always right”; and 2) They have no idea of the extensive re-structuring that is needed for the financial system and/or they don’t want to take up the responsibility for making that happen. Indeed, as Kreutzfeldt notes, the Chairman of the German Social Democratic Party (SPD), which makes up the current federal governing coalition, has even taken to denying in the press that that 25% purchase of Comerzbank by the State is any sort of partial nationalization.
Monkey Must See, Monkey Must Do
That sort of cover-one’s-eyes attitude from the authorities is precisely what is not needed just now, not when the failure of the Commerzbank – all while it was “under the control,” as Von Heusinger puts it, “presumably of much cleverer shareholders” than government bureaucrats – demonstrates that the whole system is rotten. No indeed, there is much that needs to be done, and Kreutzfeldt provides his own list (but bear in mind that the TAZ is reliably one of Germany’s more left-wing papers): “the distended banking sector must be reduced to its core-activities and must shrink. The circulation of money and credit must be secured; risky business-models based upon tax-avoidance must be stopped and profit-expectations must be re-set back to a realistic level.” And it’s a poor first step towards accomplishing any of that when the State wields its €10 billion only to secure for itself a participation that is mostly in the nature of debt, not equity, and so surrenders not only considerable voting-rights-control – which it seems hesitant to exercise anyway – but also the unlimited financial upside for the German taxpayer that could arise from Commerzbank eventually turning its fortunes around so that its share-price rises once more sometime in the future. (Indeed, with what is in effect a loan at 9% – and 9% is way above market rates these days – the German government would seem to have burdened its new quarter-owned banking property with a new and serious obstacle to achieving that turn-around anytime soon.)
As for myself, though, I am simply amazed at what seems to be the great trans-Atlantic disconnect here. This very week has seen the first report from the bipartisan panel appointed by Congress and headed by Harvard Law professor Elizabeth Warren to oversee the Treasury’s so-called TARP program – you know, basically that $700 billion released by Congress at the beginning of last October to buy troubled assets . . . er, to pump money into banks in trouble . . . er, to help bail out American homeowners facing foreclosure . . . er, to help bail out the Detroit auto-makers . . . well, to do something. Whatever it’s supposed to do, this first report makes clear that Treasury officials in charge of this money have come up way short when it comes to putting together a coherent plan and to creating any sort of transparency and accountability about where those funds go to and what they are used for. One thing that does seem fairly certain at this point is the particular lack of control and accountability attached to the monies used to re-capitalize banks – that is, the adoption by these Treasury officials of a quite unjustified “hands-off” stance towards the banks to which they were providing additional capital, a stance resulting from some false confidence that those banks would know what the best thing was to do with the money, but which has instead resulted on them merely putting it away in their vaults and sitting on it. The lesson here for Germany’s Soffin should be clear: a “hands-off” attitude towards banks in trouble, whom you are gifting with tremendous amounts of money, just doesn’t make any sense. And I’m sure that the command over English by the executive directors of Soffin – whoever they turn out to be – and others even higher up in the German federal government is more than sufficient to preclude a copy of the Warren panel’s latest report having first to be translated into German before it is sent over to Berlin.
