BAILOUT FALLOUT

Trial Begins of Former HRE Bank Executives

HypoRealEstate
The defendants blame state intervention for the bank's failure. Picture source: DPA.

On the first day of the Munich trial of HRE bank executives Georg Funke and Markus Fell, both the substance of the prosecution’s case and the contours of the defense strategy became clearer.

The former managers of HRE bank, facing charges of misrepresenting the bank’s financial situation and of market manipulation, are expected to claim that the overall climate in world finance was confused and unclear, and that misguided political interventions had more to do with the bank’s failures than the actions of its executives.

Speaking in court Monday, Mr. Funke’s defense lawyer pointed the finger at Germany’s finance minister at the time, Peer Steinbrück. “Ultimately, Mr. Steinbrück’s public intervention was the decisive factor – it was he who made comments that weren’t thought through, saying the bank would have to be wound up,” said Wolfgang Kreuzer, on behalf of Mr. Funke.

The prosecution claims that HRE went to extraordinary – and criminal – lengths to conceal the damage done to its balance sheets in the financial crisis of 2008.

In 2008, badly burned by investments in U.S. mortgage-backed securities and facing a full-blown liquidity crisis, HRE had to be bailed out by German taxpayers to the tune of almost €10 billion, or $10.7 billion. Financial authorities feared a contagion effect if HRE were allowed to collapse.

A sixty-page prosecution summary was read out in court Monday, outlining how HRE came ever closer to the abyss over the course of 2007 and 2008. HRE, like many other European financial institutions, had alarming exposure to U.S. mortgage-backed securities, which then proved far less watertight than had been claimed. The prosecution claims that HRE went to extraordinary lengths to conceal the damage done to its balance sheets.

Shortly before the publication of the HRE annual results in 2008, said prosecutors, external auditors drew attention to the poor state of HRE’s liquidity. “Action must be taken as a matter of the highest urgency,” said their report. However, HRE’s annual report, published some weeks later, explicitly claimed that: “Despite difficult market conditions in 2007, the group has a stable liquidity position.” The prosecution is claiming that this, among other problematic claims, represented a “crass contradiction” of the circumstances as the HRE executives knew them to be.

On the first day of the Munich trial, prosecutors also mentioned a further key institution involved with HRE at the time: Depfa Bank, a former German state bank which had been reconstituted in the looser regulatory environment of Ireland’s financial services center. HRE bought Depfa in 2007, although prosecutors suggest there was already evidence that the Irish bank had its own profound liquidity problems. The acquisition of Depfa was the step that ultimately brought the German bank to its knees.

Mr. Funke and Mr. Fell are expected to argue that financial circumstances were exceptional at the time, with HRE – and themselves – as much a victim of circumstances as any other actor.

 

Christian Schnell is a correspondent with Handelsblatt, writing about the auto industry. Brían Hanrahan is an editor with Handelsblatt Global Edition. To contact the author: schnell@handelsblatt.com

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!