Lets invest in the American bubble ~ German Banks

The German banks became uneducated investors in US toxic waste with a sideline in eastern europe. While Germany avoided a housing bubble and did all sorts of interesting things in terms of energy policy it was the fatal mistake of state guarantees for the banks that had perverse consequences..

... thx to Charles Powell for the link and this vital debate....

To get a better understanding of the situation in Germany and the growing financial crisis affecting that nation's banks, we spoke last week with Hans-Joachim ("Achim") Dübel, CEO of FINPOLCONSULT (http://www.finpolconsult.de ) in Berlin, one of the leading and relatively few independent voices in the German housing finance community.


The IRA: Tell our readers about yourself and why your views on Germany and the financial markets there are well informed. We worked in the market for German bunds and other European government bonds from London years ago, so we know a little about the local banking scene.


Dübel: I started my professional career working in housing policy and eventually began to focus on housing finance. I worked at the World Bank focused on housing finance policy globally and even worked for Westdeutsche Landesbank for a few months where I had a pretty traumatic experience. The traders basically dismissed all of the bank's economists and risk managers. They said they were running the bank properly using purely tactical, short-term trading methods. They would draw triangles on charts of market data and call that risk management. These were the types of strategies that eventually sunk the bank. You will recall from the 1980s onward that WestLB was recapitalized every few years, they have four historic state aid cases with EU competition authorities from the last 15 years. I got a very quick introduction to the real role of an economist in a German financial institution.


The IRA: Well, maybe the German traders have it right. Most contemporary risk management tools used in banks were designed by financial economists and are entirely ineffective. The whole Basel II framework, for example, is an economist's model, that is, a fantasy that has no link to the real world of finance and commerce. Professor Dick Richardson of the University of Texas wrote in 2001: "Economics is an artifact of human imagination, and the agreement among certain humans who "play the games" together -- thereby it is a social technology." But we digress. What did you do after WestLB?


Dübel: I pursued the housing field as a private consultant economist to agencies such as the World Bank and the EU Commission. My role here in Germany is somewhat that of the critic. Since I have worked outside of Germany and have relative freedom, I decided to use my perspective to provide an independent voice here. The sad fact is that there is virtually no discussion in the policy community in Germany regarding the financial crisis. Most of the professors in the universities in Germany that work in finance have their chairs co-sponsored by banks, so they are effectively gagged in many cases. It is easy to become a critic in Germany because there are so few independent voices. The political parties are deeply involved in finance through the state sector banks, (Landesbanken and Sparkassen ) and the private financial community takes its lead from Deutsche Bank (NYSE:DB), which has decided not to make a public issue out of the problems in the state sector institutions.


The IRA: Wait a minute! Was it not DB that sold most of the toxic waste to the Landesbanks? Our recollection is that it was DB, Merrill Lynch and Lehman who were the key perpetrators in stuffing the Landesbanks with toxic waste. No wonder the DB does not want to talk about it! We have the same problem in the US, namely that the larger banks have taken control over the federal government, leaving the real economy and the population at the mercy of Wall Street. Our colleagues who work in the financial world are mostly employees and thus are cowed into silence. The lack of critical debate in the US financial community regarding the crisis is stunning.


Dübel: I am familiar with the problem in the US from colleagues who ran into problems with the GSEs, particularly Fannie Mae. Funnily enough, we have the same problem in Germany with most bank lobby groups, and public banks are not different from private in that respect. They are very aggressive in going after independent economists to attack their reputations if they have the temerity to criticize them. I think both countries have a serious oversupply of bank lobbying groups, which mostly are staffed with aggressive lawyers.


The IRA: We used to get a lot of flak from Fannie and Freddie, but this is not a problem now. In fact, after we published a brief comment about the role of Peer Steinbrück in creating Germany's financial crisis, we started getting calls from the German press before we even ran this interview. One reporter from the German edition of the Financial Times called last week demanding to know the identity of our sources. We gave our usual reply: "Foxtrot Oscar."


Dübel: What Fannie Mae did in her worst days, which I think are behind us, was to put indirect pressure on people who were critical, usually to try to get them fired. German banks play the same games, some as direct as Fannie, but most are more subtle, working behind the scenes to undermine critics. The fact is that everything in Germany is public; all of the data that I use in my work is freely available, yet nobody looks at it or uses it in the public debates. The Brussels declaration of 2001 that allowed the Landesbanken to issue dozens of billions of state-guaranteed bonds without any other purpose than regulatory arbitrage clearly names the German politicians who were the negotiators. Each of these men are also the key figures in creating the problems within the Landesbanks in each state, but still there is virtually no debate in Germany regarding these issues.


The IRA: You stated that you think that the Germans are not given sufficient credit for their role in creating the subprime crisis. Start from the beginning of the story and explain for our readers how Germany reached its present predicament. We notice that Germany has moved forward with a very watered down version of its own plan for dealing with problem toxic assets in the banks. We also saw that Günter Verheugen, the EU commissioner from Germany, has been attacking the German banks and Finance Minister Peer Steinbrück. Is he a critic?


Dübel: Verheugen is at the end of his career. German politicians only speak up before retirement, if at all. It must be added here that we are currently in a state of "omertà" to use the Sicilian term - i.e. no politician of the coalition government will speak about the scandal before this fall's Bundestag elections. Both main parties are afraid of another Berlin. After the Bankgesellschaft Berlin scandal earlier this decade the CDU was reduced from governing party to near-oblivion status. It is a classical prisoners dilemma, nobody wins politically from a debate. And what the main political parties do not want to be debated does not make it into the public media, and even most private media.


The IRA: Sicilians say: "He who is deaf, blind, and silent will live a hundred years in peace." What was the condition of the German housing market in 2005? Was there a boom in housing prices or was the crisis purely caused by poor investment decisions by the state banks?


Dübel: The level of housing prices in Germany was relatively stable and - as German economic conditions in general - had no serious impact on the Landesbanken. During the current decade, the Landesbanken were not lending at home, but rather converted themselves into mutual funds to invest in international securities. The crisis started with the decision in the 1990s by the EU Commission, which had launched an EU Treaty violation process against Germany after the protest of German private banks against one of WestLBs recapitalizations. The EU argued that the state guarantees for the Landesbanken were illegal. Many publications such as the Financial Times and The Economist wrote about this extensively. We had the great Milan-based economics professor, Mario Monti, as the head of the EU competition authority. He pushed through the proposal against the combined weight of the German public bank lobby and both levels of government - state and federation. There was a protracted debate and finally, in early 2001, the EU decided to terminate the use of state guarantees by 2002. However, the public bank lobby in Germany continued to fight the proposal and basically sent federal and state government representatives to negotiate with Brussels.

The IRA: Was the counter-attack successful?

Dübel: Partly. The result was a postponement of the end of issuance of state guaranteed debt for all banks from 2001 to 2005, where the last bonds guaranteed would have to mature by 2015. The salient point is that there was only a time limit set in the agreement, but there was no volume limit, so the German state banks started to issue massive amounts of state-guaranteed debt after 2001. This money was not used to finance German or even European lending but simply to park funds in investment vehicles and make more money on it to boost their bottom lines. A nice euphemism they found for this is 'Kreditersatzgeschäft' (credit substitution business). If you look at research reports in the period, you will see that the volume of guaranteed bonds shot up dramatically after 2001 and especially during 2004 and early 2005. Critically, every guarantee given by the Landesbanken themselves would benefit from the guarantee standing behind the Landesbanken , so they kept guaranteeing ABCP-conduits and other off-balance sheet vehicles such as SIVs that boomed precisely during the critical period.


The IRA: So the German Landesbanks started to issue debt and buy toxic assets from DB, Merrill and Lehman? Great. Was there any legitimate purpose for this debt? How much are we talking about?


Dübel: The direct extra issuance by the banks following the EU transition period decision was already massive and totaled probably €100 billion. However, if you consider guarantees given by Landesbanken you might well end up at €200, perhaps €300 billion in total exposure. Those guarantees were called upon when the banks and investors funding ABCP and SIV called in their capital during 2007. Moreover, there was a considerable balance sheet shift inside Landesbanken in particular from interbank market exposures to securities holdings. All in all, the data leaking out of various sources suggest that Landesbanken today sit on problem assets of €300-500 billion, much of them funded effectively with German government debt. Individual banks, such as WestLB, LBBW, BayernLB, HSH Nordbank sit on high double-digit € billion exposure positions. Compare these pictures to peak outstandings of US high-risk markets in €, e.g. Subprime RMBS of € 575 billion in 2007, and you get an idea about to what extent the Landesbanken funded Wall Street. Take all high-risk securities markets at peak levels together - from leveraged loan CLOs to Alt-A RMBS, and I think we are looking at some 15% of the Buy Side demand.


The IRA: Do you think that the Landesbank management just abused the political system?


Dübel: Politicians were always broadly in the picture regarding strategy; remember that they staff the boards (Verwaltungsrat) of the Landesbanken against good remuneration. They knew that the typical loan portfolio for a Landesbank was only 20-25% of total assets, so the rest of the structure was typically securities. Before 2001, the pressure set by the EU had lead to all types of strategies to spur loan growth. For example, the HSH Nordbank based in Hamburg and Kiel focused on ship finance, WestLB had an aircraft engine finance business. There were also regional expansion strategies, with HSH investing in Scandinavia, WestLB in Britain, BayernLB in South-Eastern Europe. Some have entered retail banking by acquiring other banks (e.g. BayernLB), so the business models were not homogeneous. But these markets were already overcrowded, and nobody in the political system dared to put pressure on the Sparkassen to accept the transfer of retail business to the Landesbanken to stabilize their business models. The Brussels agreement reached by German politicians against a reluctant EU was just the final nail in the coffin: it is like a parent who gets a child to finally focus on studies, only to have a rich uncle show up, give the child $1,000 in cash and says "do what you want" with the money. A political decision completely destroyed market discipline.


The IRA: Well, we know that story. Citigroup (NYSE:C) was doing precisely the same thing in the US during that timeframe under the direction of board members like Robert Rubin. The US banks also expanded their leverage via the issuance of non-guaranteed structures such as SIVs. At the end of this year, assuming that the FASB does not get rolled again a la fair value accounting, all US banks must repatriate hundreds of billions of dollars in off-balance sheet ("OBS") assets, which will drive down capital levels dramatically. The notion of banks repaying their TARP equity this year is ridiculous if you include OBS assets in the analysis. Yet isn't it remarkable that C and the German banks were essentially all doing the same stupid things? The common denominator must the global sales push from the large Sell Side dealers like DB, Merrill and Lehman, among others.


Dübel: The dealers in Germany, DB included, are certainly co-responsible. The dealers always looked at the Landesbanken with their distorted incentives as easy prey. C surely fell into the same trap after Glass-Steagall was repealed; to me the important Citi analogy there is rather the Garn-St.Germain Act of 1982 that allowed the US S&Ls to expand into commercial lending. To me it looks as if C and Landesbanken are not very far apart in their clout on their domestic political system, just the flavors of the favors differ.


The IRA: There are no coincidences on Wall Street. Whatever toxic waste the dealers are feeding to Buy Side firms in the US is also being offered around the world. The Sell Side firms are not clever enough to have a different sell message for each market. We can recall the first adventures of Solomon Brothers in Europe selling CMOs to Belgian dentists in the 1980s. It was a slaughter, but none of the regulators in EU or US ever said a word.


Dübel: In the US and particularly with C, the problems in the asset-backed commercial paper or ABCP market was very similar to what was happening in Germany. This was very typical of the Landesbanken, who basically have no set business model. They saw the yield curve and played the markets. They demanded "AAA" ratings with a juicy spread pickup, which means squaring the circle. If you put together all of the factors, the lack of limits on state guarantees, the lack of controls on the activities of the Landesbanks, and the sales pressure from the global securities dealers, you have a real toxic mix.


The IRA: What we find startling about your tale is the EU here is the more conservative, fiscally responsible party, while the German bankers, who are reputed to be so conservative, seem instead to be completely reckless cowboys. It's as though the entire German financial system was run like Fannie Mae, with the Barney Frank (D-MA) and other American politicians making financial decisions from Capitol Hill and carving out special slush funds for their own personal use. Is this a fair comparison?


Dübel: Yes, absolutely. And it is a complete conflict of interest. The typical German savings or state bank has 25-30 board members. This becomes a harbor for politicians, who are given sinecures on these boards when they retire. The campaign finance system in Germany is under continuous scrutiny, but meanwhile practices like packing the boards of banks with retired politicians continues. But we see some change: there is a big uproar currently as BAFIN has started calling for minimum banking qualifications of supervisory board members, which typically excludes your local mayor.


The IRA: This is why we constantly lecture our fellow citizens in the US about the threat of the Democrats and their plans to supplant American democracy with a Euro-style corporate state. If you want to see how the nationalization of Chrysler and General Motors (NYSE:GM) will affect American politics and push the US further in the direction of authoritarianism and political dysfunction, it seems that Germany provides a case in point.


Dübel: The other issue besides the practice of parking politicians on the boards of the banks is the role of municipal and state finance. The German municipalities own the Sparkassen, which in turn own as a rule of thumb half of the Landesbanken. And then you have the states owning the other half. Both are notoriously cash strapped and have been forced to make painful cutbacks, but the seeming profitability of the state banks provided at least the appearance of cash flow, which is now gone. That invites the use of greater leverage, of course.


The IRA: Of course.


Dübel: Take the example of Saxony, with a €16 billion state budget of which only half is financed by taxes - the rest comes from block grants, which are politically painful to acquire. Saxony's Landesbank SachsenLB ran off-balance sheet vehicles three times the size of the state budget before it collapsed in 2007. One single rescue loan arranged for LBBW's takeover of SachsenLB after the collapse was larger than the entire state budget. There is in theory a regulatory framework for the state and municipal finances, as every layer of government in Germany guarantees the next lower layer, but in practice there is no limit on the actions of the politicians much less disclosure.


The IRA: So it sounds like the situation in Germany was not about a bubble in the housing market but instead failed financial engineering motivated by the wrong incentives set by politicians.


Dübel: Yes, you must forget the word "mortgage" when you are looking at Germany. I am a housing expert, but this problem comes down to a lack of basic prudential and political controls in German banks. The state banks have entered and exited the mortgage market several times in the past few decades. Most recently, there has been a proliferation of direct banks providing mortgages, ING from the Netherlands and even the Postal Bank is involved. The irony of the Landesbanks is that they did not lose a penny on investments and loans Germany. All of the losses were caused by investments in foreign assets, primarily from the US. The overhang of assets was caused by the failure of the EU Commission to limit debt issuance by the German banks. Thus the question came: where to put the money raised via the issuance of debt? The US was the choice. Had there been a capital markets boom in China, the Germans would have invested there instead. The choice of asset selection was completely opportunistic and engineered by Wall Street. Don't forget that many other nations in Asia and the Middle East were given the same treatment by the American banks.


The IRA: Even the Chinese? We have not really heard much noise coming from China, but then again, data from Chinese governmental and financial institutions is not really credible.


Dübel: Actually the Chinese were relatively more clever than the Germans! The Chinese basically invested almost nothing in subprime or alt-a or zeros. A typical German Landesbank would be full of these securities.


The IRA: In the form of collateralized debt obligations? Wonderful. So we put the German banks in the same category as the US banks and Buy Side funds that ate all of the CDOs and other toxic waste produced in the US and the City of London?


Dübel: Exactly. The Landesbank is the prototypical example of an uneducated investor, because of lack of incentives to really develop an interest in education.


The IRA: We call it "institutional retail," which are basically Buy Side shops that do not have the ability to independently rate or analyze securities and must therefore depend upon the Sell Side dealers for pricing. The Sell Side dealers prey upon these public and private funds, but regulators in the US do nothing.


Dübel: This is an international problem, and it seems exacerbated with financial globalization. The second-rate people who could not work on Wall Street or New York ended up at WestLB and immediately began to interact with their colleagues in New York or London and thus spread the contagion.


The IRA: They were hoping move up to the big time. It does rather sound like a financial version of the swine flu. The political conflict you describe in Germany seems every bit as serious here in the US as well, yet the authorities take no action. Is this a fair analogy? You have spoken a great deal about the current German finance minister and his role in creating the German financial crisis. Can you expand on this a bit?


Dübel: Peer Steinbrück comes from Hamburg and was also active politically in Northrhine-Westphalia, which is the home of WestLB. In 1993 Steinbrück became Secretary for Economy and Infrastructure in the State of Schleswig-Holstein until he changed to go on with his career in the State of North Rhine-Westphalia, where he became Secretary of Infrastructure in 1998 and Financial Secretary in 2000. Steinbrück was selected as one of the five negotiators dealing with the EU on the question of end state guarantees for the Landesbanks. Berlin selected three state finance ministers, the other two were Bavaria where Bayerische Landesbank is located and Baden-Württemberg with Landesbank Baden-Württemberg. The irony is that all three states are now among the big losers of the subprime crisis as a result of their own lobbying!


The IRA: During the height of the subprime mania in the US, LBBW's German staff were apparently buying toxic waste from the DB and the US dealers, but hiding the purchases from the LBBW staff in NY. When several traders we know raised issues about the activities by the German-based staff, several of the more senior traders at LWWB reportedly were fired for raising the alarm. The situation tracks almost precisely your earlier experience with WestLB in terms of traders making ill-informed investment decisions about credit and structured products that they did not understand.


Dübel: The head of LBBW, a capital market expert, was sacked just this month after reporting €2.1 billion in losses for 2008 and €90 billion of toxic assets. The state of Baden-Württemberg was asked to provide another €5 billion guarantee shield in support for LBBW. The Landesbanks have always tried to conceal their risks and periodically have to be bailed out with taxpayer money. Some have done well over the years - e.g. Helaba and NordLB -, but most have done badly. But nobody in Germany ever complains about the mismanagement of the Landesbanks because most of the media is controlled by the politicians! By law the TV channels must be independent, but the reality as with the banks is dictated by the politicians who sit not only on the boards of banks but also on the boards of the public media networks. If a journalist is too focused on investigative reporting or financial scandals in this particular area, it will definitely damage his career.


The IRA: So where does Steinbrück go from here in terms of policy choices? The latest German proposal for dealing with the crisis has been described in the media as "watered down." What does this mean for foreign investors who are looking at Germany?


Dübel: He has been in power since 2005. Steinbrück probably is the last finance minister for the grand coalition that has been ruling Germany. With the elections this year we will likely see a new political formulation. Steinbrück was notorious when he was in State of North Rhine-Westphalia for not attending board meetings of WestLB and generally neglecting his responsibilities for overseeing the bank, so given that issue and his participation in the Brussels deal in 2001, it may be that his political career is probably over. Being from Hamburg, a center of commerce which has a reputation for producing good merchants, I would not have expected Steinbrück to perform so poorly. To his credit it may be said that he came into a minefield: the savings banks in North Rhine-Westphalia have a well-deserved reputation for treachery and they have sabotaged creating a viable business model for WestLB for years, hence the above-average number of public rescues of that bank. But even if he was right to not even try - lacking a local powerbase, I don't know what happened to cause him to act so irresponsibly in relation to Brussels. After all, he is an economist and thus I am sympathetic to him on a personal level, but frankly Steinbrück screwed up.


The IRA: So where does Germany stand today given the announcement of the rescue plan? How much of an impact will the crisis in the German banks have on the economy?


Dübel: It has a very serious impact on both growth and the fiscal situation. It is no small irony that we now have in Peer Steinbrück one of the people who lead us into the crisis now leading the effort to resolve it. And we now have one of the other negotiators from Baden-Württemberg, Gerhard Stratthaus, is now co-steering the SoFFin, the bank rescue fund. Generally that fund is staffed by old Landesbanken hands, which has added to the reluctance of private banks to ask for bailouts. The only person who has distanced himself from the previous acts is Kurt Faltlhauser of the Christian Social Party in Bavaria. In December, the State of Bavaria needed to provide a €25 billion rescue package for BayernLB, the Landesbank in Bavaria. Again, the losses here have nothing to do with the German economy. Seehofer, the new prime minister in Bavaria, which is essentially a single party state, comes from the left wing of the party. He was greeted with great reluctance as a quasi-social democrat. But he cleverly used the discovery of the holes in BayernLB to force the finance minister of the former state government headed by right party wing representative Stoiber, to publicly admit his mistakes. This provides him with political cover against his inner party foes. In fact it is a hidden attack on the person or Stoiber, who put a very aggressive speculator at the head of BayernLB and also was involved in the downfall of Hypovereinsbank earlier in the decade. In addition to €15 billion in guarantees, BayernLB needed a €10 billion recapitalization in December and has cut 30% of its staff.


The IRA: Listening to you almost makes us feel better about the goings on in Washington. It sounds like the political class in Germany is less responsible and less responsive to the needs of voters than America's corrupt political class. Is this fair?


Dübel: Well, you have Fannie and Freddie and the Wall Street lobby, which are huge problems. And as you have written in The IRA, America is rapidly accumulating a large crowd of state-owned enterprises, including Chrysler and GM.


The IRA: We like to tell our readers that the US is becoming very European. Maybe this discussion will help to illuminate that distinction. If you think of Barack Obama as Silvio Berlusconi without a media empire, it all seems to make sense.


Dübel: Well, the politics are amusing at a certain level, but the economic implications are not. We have a shocking culture in German banks of hiding problems and keeping things under the lid that goes beyond public banks. Dresdner Bank for example took similar risks like the Landesbanken and for years failed to properly disclose this to her owners at Allianz. German banks hide their business activities, which is why you saw a proliferation of unrelated strategies, and the use of derivatives and offshore vehicles to hide these strategies. Some of the strategies were couched as loans, in other cases direct investments, so nobody really knows the true exposure of the German banks, public and private, to toxic and underperforming assets. The government admits to an aggregate figure of €800 billion or so, but there are no bank-by-bank figures. The assumption is that two-thirds of that amount is in the Landesbanks.


The IRA: So if the deposit base in all German banks is about €2 trillion, then banking system has essentially taken up bad assets equal to half of deposits? The Landesbanks fund off the bond market, but this is still a very ugly macro situation. In the US we have parked the toxic waste at the Fed. Is that the situation in Germany?


Dübel: The ECB made their own mistakes, but they are not allowing themselves to be as openly abused as the Fed. The situation differs from the US in that the German states began early to create bad banks for the Landesbanken. However, most are financially not in the position to bear the losses, so the search is on for a deal which would create a single Landesbank bad bank in exchange for structural reforms - in particular mergers and downsizing of the business. The good news is that after the German crash the interest of the EU Commission and the federal Ministry of Finance are broadly realigned. That changes the picture. But it is still not a pretty one. The ECB wrote down $5 billion on $10 billion in British mortgage assets following the Lehman collapse alone. Using that benchmark, the losses to the public sector in Germany will be huge. Using what public sources we have available, taking the exposure of the Landesbanks of some €300-500 billion from that source alone we could see losses exceeding €100 billion. The merger of Dresdner Bank and Commerzbank, which was only made possible with SoFFin intervention in the form of Tier-1-capital at Commerzbank, is another fallout from the crisis. Both banks were overstaffed and poorly managed, and now they are merging to an entity run to a great extent by the government. Dresdner had similar business model problems as the Landesbanken and may have lost some € 10 billion in the US. A large mortgage bank, Eurohypo, will be spun off which likely will not find a buyer other than government. Then there is another large mortgage bank Hypo Real Estate, in which the federal government already invested some € 100 billion in guarantees and equity. And we have the Mittelstand lending bank IKB, which was the first failure of the crisis. The Landesbanken are likely to have bought IKB's paper, which allowed IKB to invest in US mortgage assets. And IKB learned from them and set up her own ABCP conduits.


The IRA: Great. Another example of the benefits of a free market in OTC financial instruments.


Dübel: Another one of the German stories that connect with the global crisis and nobody here wants to tell is de-facto collapse of local financial centers such as Düsseldorf or Munich. The entire European leg of the crisis is the story of the ambition of smaller banking centers, backed ultimately by local taxpayers. You have Reykjiavik, Dublin, Edinburg with Royal Bank of Scotland (NYSE:RBS), Dusseldorf, Leipzig, Stockholm with Swedbank, Budapest with OTP, you have Lisbon with Millennium Bank losing money in Poland, Belgium with both Fortis and KBC and so on - the axis of the insolvent is longer than most people imagine. So the smaller European banks went on a speculative spree where, the believed, they were becoming regional and even international players. The results are very serious for smaller European jurisdictions, such as Belgium which has 25% of GDP in loan exposure in Central and Eastern Europe. And there was lots of local contagion. Everybody knows the Iceland story, but few know that, for example, basically all of the banks in Düsseldorf went bankrupt in the crisis. My suspicion is that they all talked to the same investment bankers on road shows.


The IRA: Of course.


Dübel: Long story short, the total back of the envelope figure for Germany in terms of rescues so far is already safely in the 10% of GDP range. SoFFin, the federal rescue fund, has provided alone about €190 billion or roughly 7.5% of GDP; add to this the state rescue programs, which are basically SoFFin cofinancing shares, for the Landesbanken. Are some €250-300 billion in protection enough to address a problem calibrated semi-officially in the €800-€900 billion range? Probably not, especially considering the high toxic asset shares at the Landesbanken .


The IRA: What impact do you think that the rescue plan now under formulation will have on this situation? Will the German economy start to improve by the end of the year or continue to struggle?


Dübel: My guess is that the Landesbanken alone will cause ultimate losses of 8-10% of German GDP, which is real money. Compare that sum with the 5% of GDP costs for the US S&L crisis.


The IRA: How much do you think the cost of the cleanup plus the end to the use of state guarantees is going to affect visible GDP in the EU? In the US, our assumption has been that as much as 5-10% of reported GDP was not income as much as the increased flow of funds due to debt issuance. If Germany and the other EU nations are forced to forego such borrowings, what will the reported GDP in the EU look like in 2010 and beyond?


Dübel: Yes, the flow stops and the loan demand also falls, well below what the Fed and the ECB would like it to be. And higher savings rates in the US and EU will contribute to this shrinkage in GDP as well. I think that the Fed is wrong to try and restore previous levels of consumption. There needs to be an adjustment. The further you push the bubble, the bigger the adjustment. But there is another question with serious implications for our growth prospects, which is: who bears the losses, taxpayers or debt investors in banks.So far, the rescue operations in both the US and Germany are heavily biased against taxpayers. This needs to change, if we do not want public investment and private consumption (via cutbacks in transfer programs) to heavily suffer.


The IRA: Precisely. Thanks Achim. Be well.

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