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