"Steinbrueck Plan Lets German Banks Swap Bad Assets for Bonds
By Brian Parkin and Rainer Buergin
May 12 (Bloomberg) -- Germany’s Finance Ministry published a draft law that allows banks to swap toxic assets for guaranteed bonds under a voluntary program to be considered tomorrow by Chancellor Angela Merkel’s Cabinet.
Financial institutions would deposit assets in so-called bad banks at 90 percent of their book value and then sell bonds at that value, paying an annual fee for the guarantee, said the draft that was released yesterday in Berlin. The lenders will pay the government rescue fund the difference each year between the assets’ discounted book value and “fundamental” values as determined by auditors. The draft was not more specific.
Banking lobbies and business owners have complained that Finance Minister Peer Steinbrueck stalled over the bad bank model, failing to unfreeze credit as he sought ways to limit the burden to taxpayers before Sept. 27 national elections.
The draft “sounds the right political chords by placing the onus of cleaning banks’ books on shareholders rather than taxpayers,” Albert Rupprecht, a Christian Social Union lawmaker and chairman of the parliamentary committee that controls the Soffin bank-rescue fund, said in an interview. “It won’t be so attractive to banks for that very reason.”
The Berlin-based BDB private banks federation declined to comment on the draft.
“We need to study the detail,” spokeswoman Michelle Schmitz, said in a telephone interview. The BDB, representing lenders including Commerzbank AG and Deutsche Bank AG, has sought support for a rescue plan that places a larger burden on taxpayers than envisaged by Steinbrueck’s bill.
“Everything we’re proposing aims not to burden the taxpayer,” Steinbrueck told reporters in Berlin yesterday. “Burdens would accrue to shareholders and not to the taxpayer” at the end of maturity.
Steinbrueck said May 8 that ministers will probably ratify the plan to guarantee bonds sold by bad banks, which would acquire impaired “structured assets,” and a second stage would “deal with illiquid assets.”
Banks participating in the program will be allowed to deposit so-called “structured” debt into a special-purpose vehicle, or SPV, including asset-backed securities and collateralized debt and loan obligations, the draft said.
Eventual losses at the assets’ maturity will be paid by the parent bank’s shareholders, who will forego dividends, the draft shows. If the assets at maturity are worth more than the value reported in the SPV, the shareholders gain the difference.
The legislation will permit banks to clean their books in the “short-term” at the same time as “creating the security that banks need when planning the necessary writedowns,” the bill states. “The costs associated with the measures will be carried finally by the owners” of the banks.
Lawmakers such as Rupprecht have criticized Steinbrueck, a Social Democrat, for failing to expand the bill to include help for state banks. State lenders are potentially the program’s biggest customers, holding some 500 billion euros ($680 billion) of an estimated 853 billion euros of toxic debt on German banks’ books.
Steinbrueck’s plan “lacks key elements,” said Rupprecht. “It’s voluntary and invites banks to shy away. Secondly, it’s of little help to state banks.”
The draft is subject to change when it goes before Cabinet, Finance Ministry spokesman Torsten Albig said in an e-mail. The draft gave no estimate to the state of the proposal’s costs.
German banks hold some 300 billion euros in distressed debt and have another 500 billion euros in so-called “non-strategic” assets, according to the Finance Ministry. They’ve written off 70.4 billion euros amid the crisis, led by Deutsche Bank AG’s 13.6 billion euros and Munich-based Bayerische Landesbank’s 11.9 billion euros, according to Bloomberg data.