That certain whiff of sulphur surrounding Germany’s state-owned banks

The taxpayers of Hamburg have been a much put-upon group over the last ten years, having stumped up for a variety of city projects that have, to one degree or another, exacted their toll on the city. So much so that, in a moment of lucid determination in November 2015, a majority of the city’s voters rejected the city’s bid to host the 2024 Olympic Games. A very smart move.

Their pockets had been burned over the previous years as time delays and in ationary costs saw their new concert hall, the Elbphilharmonie, spiral skywards and out of control,  nally coming in to land at a cost of nearly €900m, a multiple of original estimates.

Thankfully the Elbphilharmonie, or ‘Elphi’ as it’s a ectionately known, has won over the hearts of Hamburgers and has become a major city musical venue, a great source of civic pride, and a worldwide tourist attraction, drawing thousands of visitors to the city daily. As a towering visual landmark and now indispensable part of Hamburg’s self-image, the acrimony and antagonism surrounding its birth pains are now a thing of the past.

Not so another northern German delivery, passing through the midwife’s hands as we write these lines – namely, the sale of HSH Nordbank to a consortium led by Cerberus and JC Flowers. The Landesbank, headquartered in both Kiel and Hamburg as a joint charge of the states of Schleswig Holstein and Hamburg, is passing into private hands as the only remaining option to being wound up with the loss of all hands.

The buyers are paying an estimated €1bn for the bank, a positive sum which even a year ago would have looked wildly fanciful – but much of the bank’s business has improved signi cantly since then. Still, the city is being stuck with the colossal losses that the bank has generated in the last 15 years, as in a mixture of hubris, gross misjudgment and a sprinkling of corruption, the bank tried to parlay itself into a major global player. The goal then was global domination, 15% annual return on capital, and then a public listing – a prize likewise considered almost unthinkable for a state-owned Landesbank.

Now the states of Hamburg and Schleswig-Holstein are nursing de cits of up to €15bn in losses and guarantees – or about fteen Elbphilharmonies – which they will be paying down for generations. That’s about €7bn each – the loss of an entire year’s revenue budget for Hamburg. Whatever happens with the bank’s new owners, they’re de nitely planning on major job shrinkage, and sweating those shrunken assets to get higher returns. This will still involve some shipping nance, but the main thrust will be infrastructure, particularly renewable energy projects, and commercial real estate.  

While painful for the taxpayers, this could have been a lot worse for the bank’s owners and other stakeholders. With the bank up against the deadline of end-February, the immediate only alternative was the bank’s dissolution.

And so the long saga of disastrous state involvement in Germany’s banking sector signs o on another chapter. All of the usual suspects played a role in the demise of HSH Nordbank – the bankers, the politicians, the auditors, the slavering media, the nancial watchdog BaFin, and even the Bundesbank. And in the end, the bank DOES get privatised. Just not in the style, or to the extent, that anybody at the time imagined.

Meanwhile, down at the other end of the country in Munich, another potential scandal is bubbling up at another state-owned bank, this time Bayerische Landesbank, and involving the Bavarian prime minister-in-waiting, Markus Söder, the GBW housing company, and the sale of 32,000 apartments to Patrizia Immobilien.

In short, Söder, the Bavarian nance minister at the time, is being suspected by business newspaper Handelsblatt of giving the green light to the €2.5bn sale of the GBW housing company, a real estate subsidiary of Bayerische Landesbank, to a consortium led by Patrizia Immobilien, although two members of the buying consortium were acknowledged money launderers with Russian and Cypriot connections. Now the opposition SPD party in Munich is demanding an investigation into whether the sale was legitimate.

According to Handelsblatt and Monitor, a TV-show on the state-owned channel ARD, Bavaria’s state criminal police were advised in advance of the sale that Russian investors with €1bn to invest were looking to be part of the consortium bid for the 32,000 GBW housing units. However, it seems the police closed their investigation of any possible improprieties into the sale with what looks like undue haste.

The normally un appable Mr. Söder has swatted away any allegations of wrongdoing as a tri ing matter of little concern. Normally the party machinery in Munich could be counted on to ensure that minor matters relating to real estate transactions of the past are not escalated up to full-blown state scandals. That should be the case this time too. At least, under normal conditions.

But in the somewhat poisoned political atmosphere in Germany – in Berlin, with Angela Merkel stumbling towards a new coalition government with the less-than-enthusiastic SPD, watched by disgruntled Greens and Free Democrats – and in Bavaria, facing its own state elections in October this year, there is plenty of potential for mischief. And many would-be mischief-makers.

It’s sadly true that the history of Germany’s Landesbanken is never entirely devoid of a certain accompanying whi of sulphur. It seems to be an a iction of the country’s state-owned banks. We suspect this story isn’t going to just disappear, as many would wish.