It appears increasingly likely that the head of Germany’s financial regulator BaFin could face criminal charges for allegedly overstepping his authority.
Jochen Sanio, who headed Bafin from 2000 to 2012, has been the subject of an investigation by state prosecutors in Cologne since August over his role in the 2009 rescue of Germany’s then-largest private bank Sal. Oppenheim.
At the height of the crisis, with its own solvency on the line, Sal. Oppenheim received a €100-million ($129 million) loan from its more well-heeled subsidiary, BHF Bank.
Mr. Sanio faces possible charges of breach of trust and attempted blackmail for allegedly forcing BHF Bank to make the bridge loan to its corporate parent. New details obtained by Handelsblatt suggest the investigation by prosecutors is gathering steam, after they received a “treasure trove” of documents, according to a person familiar with the probe who declined to be named.
Should it come to a formal prosecution, a trial against the former banking regulator would mark a first in German legal history and a first for a large country in the aftermath of the 2008 financial crisis. Mr. Sanio was not alone in intervening actively to keep the financial system afloat. Regulators around the world prodded and pushed banks to restructure and in some cases, be sold after the U.S. housing market collapsed, exposing a mountain of bad debt that led to the Lehman Brothers bankruptcy.
A trial against the former banking regulator would mark a first in German legal history and a first in the aftermath of the 2008 financial crisis.
Former executive board members at BHF Bank and Sal. Oppenheim could potentially face similar charges to Mr. Sanio for approving the loan, which was made after Sal. Oppenheim became over-exposed following the collapse of a major client, retail giant Arcandor, formerly known as KarstadtQuelle. Investigators allege the loan to Sal. Oppenheim was too risky and should never have been given, and that BHF Bank had a duty to protect its own shareholders.
Only one former executive is not being investigated: BHF Bank’s then-chief financial officer, Ingo Mandt, who resigned at the time, saying the loan amounted to a breach of trust. Now it appears that Mr. Mandt himself may have become a key witness against his former colleagues and Mr. Sanio.
According to Handelsblatt sources, Mr. Mandt has met with investigators twice since the end of August and provided a “treasure trove” of documents that he had kept at two law firms outside of Germany, including the transcript of a call between him and Mr. Sanio.
The call took place on July 2, 2009, the day of an extraordinary meeting of the BHF management board. A transcript of this meeting makes reference to the call. Mr. Sanio allegedly urged Mr. Mandt to make the loan to its parent, and threats were made, according to insiders.
But was it really blackmail? Or was Mr. Sanio simply doing his job to stabilize the German banking system?
Mr. Sanio’s lawyer, Ulrich Sommer, confirmed to Handelsblatt that the call took place but said his client had only tried to save the dire situation: “The very existence of BHF Bank was in danger. The loan was therefore necessary. A subsidiary has never survived the collapse of its parent.”
Many shared this sentiment in 2008.
Politicians and regulators at the time feared the world could enter a second Great Depression if major banks were allowed to fail. In many cases, public bailouts were used to keep financial firms afloat, but other banks were also nudged to foot some of the bill, such as Bank of America’s acquisition of Merrill Lynch or JPMorgan’s acquisition of Bear Stearns in the United States. Both were initiated by the U.S. Treasury Department and Federal Reserve.
“The very existence of BHF Bank was in danger. The loan was therefore necessary.”
Both banks and regulators were operating very much in a legal “grey area” at the time, according to Martin Hellmich, a Professor of Financial Risk Management at the Frankfurt School of Finance and Management. Bank managers were on the one hand being asked to safeguard the financial system but on the other required to protect the interests of shareholders.
“For executive boards this was a nightmare,” Mr. Hellmich said.
As the head of Germany’s primary banking regulator at the time, Mr. Sanio had no interest in presiding over a second Lehman Brothers and was known throughout his tenure at BaFin for offering doomsday scenarios to force a bank’s hand.
Mr. Sanio played a key role in the sale of German regional bank SachsenLB to Landesbank Baden-Württemberg in 2007 after the former racked up €600 million in debts related to the U.S housing market. When one shareholder complained that they were being forced to act with their backs against the wall, Mr. Sanio reportedly replied: “You still don’t understand. There is no wall behind you. There is only a cliff.”
The bridge loan Mr. Sanio brokered for Sal. Oppenheim kept the financial firm afloat at a key time for the banking sector, though it did not prevent the bank from eventually being sold to Deutsche Bank. BHF has since been spun off again and now belongs to financial investment firm RHJI. BHF Bank’s current head, Björn Robens, was on the board at the time of the disputed bridge loan.
Like other national regulators in Europe, BaFin has since been stripped of much of its authority for winding down major financial institutions. Starting in November, the European Central Bank will take over as supervisor of Europe’s biggest banks. That means the ECB will lead crisis-fighting efforts in the future, together with a new pan-European board of regulators that will decide the fate of troubled banks going forward.
Massimo Bognanni is part of Handelsblatt’s investigative team in Düsseldorf, Yasmin Osman is a banking correspondent based in Frankfurt and Christopher Cermak is an editor for the Global Edition in Berlin. To contact the authors: firstname.lastname@example.org; Osman@handelsblatt.com; email@example.com