US mortgages rot deep rooted in German banks
The European Union on Wednesday approved a German bailout of WestLB, a regional bank that lost billions from US mortgages gone badly. Germany can now put up 5 billion Euros to help the bank ride out its exposure to the subprime banking crisis.
The Dusseldorf-based bank lost 1.6 billion Euros last year on risky investments in securitized US mortgages that were approved for people with poor, or no credit history. The banks’ shareholders (the state of North Rhine-Westphalia and a pair of regional savings-bank associations) have moved to shield the bank and press it to cut costs.
The government bailout, however, required approval from EU regulators.
“The Commission’s investigation found that the risk shield constitutes state aid, but that the aid is in line with EU rules,” since the aid is limited to six months and is reversible, meaning it can be paid back if it distorts competition, the EU said in a statement.
The term of government aid ends August 8. Further assistance would require German authorities to submit plans for restructuring the bank so that it can remain viable in the future. In February, shareholders shielded the bank from further subprime risks, approving 3 billion Euros to cover the struggling securities portfolio. This happened only after the bank said its original risk shield of 2 billion Euros would not be enough.
WestLB said the government money would ease pressure on the bank. “That gives the bank the security to swiftly move ahead with restructuring plans” said spokesman Hans Albers.
Other European governments have jumped in to rescue troubled banks. The European Commission is investigating Britain’s nationalization of Northern Rock PLC, the mortgage bank that nearly collapsed in a bank run last year.
Numerous European banks have been battered by the U.S. mortgage crisis.
Switzerland’s UBS AG saw losses and write-downs of approximately 19 billion. US dollars; Deutsche Bank AG admitted on Tuesday that it wrote down 4.2 billion and German regional bank BayernLB reported that write-downs of 6.7 billion US dollars.
