Landesbank Baden-Wuerttemberg: A Lone Buyer in a Buyer's

UNCLAS FRANKFURT 000666

SIPDIS

DEPARTMENT FOR EUR/AGS
TREASURY FOR LUKAS KOHLER/OFFICE FOR EUROPE AND EURASIA

SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON GM

SUBJECT: Landesbank Baden-Wuerttemberg: A Lone Buyer in a Buyer's
Market


ENTIRE TEXT IS SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET
DISTRIBUTION

REF: a. 08 Leipzig 0002; b. 08 Frankfurt 0568


1. SUMMARY: Landesbank Baden-Wuerttemberg (LBBW),Germany's largest
state bank, has emerged from the recent crisis in the state bank
sector as a potential buyer for several troubled counterparts.
After concluding plans to take over SachsenLB, LBBW is now awaiting
EU approval of the deal, while rumors abound that it may also be
eyeing BayernLB and WestLB. While officials in Baden-Wuerttemberg
say that LBBW needs to digest SachsenLB before making any other
moves, political pressure mounts to rescue troubled banks and
consolidate the industry, with LBBW left as one of the few viable
buyers. END SUMMARY.

SachsenLB Deal on Track
--------------

2. On February 27, LBBW CEO Siegfried Jaschinski,
Baden-Wuerttemberg (B-W),Minister President (M-P) Guenther
Oettinger and Saxony M-P Georg Milbradt met with EU Commissioner
Neelie Kroes in Brussels to discuss the takeover of SachsenLB by
LBBW. The EU Commission is currently reviewing the terms of the
deal, specifically whether the 2.75 billion euro ($4.18 billion)
guarantee from the state of Saxony against further losses by
SachsenLB, may constitute improper use of state aid. With both
states owning a large share of their respective banks, both
Oettinger and Milbradt (both Christian Democratic Union
politicians),have significant political capital invested in a
successful outcome.


3. Representatives of the B-W Finance Ministry emphasized to Econ
Off and Econ Spec that the deal needed to succeed. Otherwise,
SachsenLB would fail and badly damage the credibility of Germany's
network of state banks. One Finance Ministry expert expressed
confidence that Brussels will approve the state guarantee, citing
its approval of the state bailout of the British bank Northern Rock.
LBBW has the option to withdraw if the state guarantee is not
approved, leaving SachsenLB's fate unclear. As part of the deal,
LBBW agreed to guarantee 6.4 billion euros ($9.73 billion) which
would be used if the state guarantee was exhausted. CEO Jaschinski
has reacted publicly to criticism of this provision, saying LBBW has
done its homework and the deal poses no large risk to his bank.

LBBW's Success Creates Pressure to Buy
--------------

4. LBBW expects its own subprime write-downs for 2007 to total 800
million euros ($1.2 billion),stemming from investments made by its
subsidiary, Landesbank Rheinland-Pfalz (LRP). The losses make up 1%
of the LBBW's overall investment portfolio. The bank still expects
a profit of around 300 million euros ($456 million) for the year. A
prominent Social Democratic Party leader who sits on the LBBW
Advisory Board says that LBBW's business model has succeeded where
others have failed because it has its own clients and serves as a
house bank for small and medium-sized companies throughout the
state. An LBBW economist said that the bank's wide range of
services and diversified clientele had generated strong profits for
years, easing pressure to earn money from other, riskier sources.



5. LBBW's relatively strong position has led to speculation that it
will step up as a buyer for two other troubled state banks, BayernLB
and WestLB, both of which are much larger than SachsenLB. The LBBW
board member said that the National Savings Bank Organization and
CDU politicians are pressuring LBBW to rescue other banks, which by
law can only be bought by another state bank. The rumor of a merger
with BayernLB began as early as fall 2007, but has recently been
rekindled by BayernLB's recent surprise announcement of 1.9 billion
euros ($2.9 billion) in write-downs. Now that Helaba's bid for
WestLB looks unlikely to go forward, LBBW is seen as one of the few
eligible buyers for the deeply indebted banks; all sides prefer to
see a market solution to the problem. The LBBW board member
cautioned, however, that LBBW needs to digest SachsenLB before
taking on any other troubled institutions.


6. Representatives at the B-W Chamber of Commerce (IHK) noted that
the global financial turmoil had not had any visible impact on the
Baden-Wuerttemberg economy. They reported that commercial borrowers
in their state were not experiencing a credit crunch. The only real
effect, as they saw it, was an already palpable psychological impact
on investor confidence.


7. COMMENT: Despite the recognition that German state banks need
to consolidate, few of them have the will or the finances to take on
their troubled counterparts and the law prevents private banks from
entering the process. On paper, LBBW is the best-suited to lead the

process. The bank, however, will have to strike a balance between
pressure from politicians and market forces on the one hand, and its
own considered judgment as to what is best for the institution. END
COMMENT.


8. This cable was coordinated with Embassy Berlin and ConGens
Duesseldorf and Leipzig.
POWELL