The New York Times had a great article on the globalization of the US mortgage crisis.  At the UBS annual shareholder’s meeting in Zurich an investor yelled at the bank’s chairman: “You’re responsible for the biggest loss in the history of the Swiss
economy. Put an end to the Americanization of the Swiss economy!” And, in fact, UBS has already written off $37 billion in assets – more than Merrill Lynch, more than Citibank.

How bad is the crisis that began with subprime mortgage loans in the US but has spread to all types of mortgages and consumer credit?  EuroIntelligence puts the losses at $1 trillion. And Germany’s banks have been hit especially hard.  But the crisis in Germany has been exacerbated by the state-owned banking system in Germany.  This week Germany saw its first high-profile political casualty: Ingrid Matthäus-Maier, the head of state-owned development bank KfW, has been pushed out ("retiring for health reasons" was the official explanation). KfW had provided its AAA-rated guarantee to the mortgage-backed securities held by the  IKB Deutsche Industriebank AG.  In an excellent op/ed piece in todays FT-Deutschland, Wolfgang Münchau of EuroIntelligence asks the question whether state-owned banks like KfW are even needed today in Germany.

The problem in Germany is deeper than simply poor risk management.  Because of their structure, the state-owned banks such as the Landesbanken are forced into risky capital markets transactions if they want to make a profit.  More often than not, they are on the receiving end of bad deals and the German taxpayers foot the bill.  Sebastian Jost in Die Welt writes about how BayernLB has become a black hole for German taxpayers: "BayernLB ist ein Klotz am Bein der Steuerzahler."

Die BayernLB hat Milliarden verbrannt. Der Steuerzahler muss dafür
aufkommen. Die BayernLB hat wie alle Landesbanken aber noch ein viel
größeres Problem: Sie kann überhaupt nur Geld verdienen, wenn sie
riskante Geschäfte wagt. (BayernLB has burned through billions of euros. The taxpayer has to make good on this. But BayernLB, like all the other Landesbanken, has a much bigger problem.  It can only make money if enters into risky business transactions.)

How the state-owned banks justify these risky transactions is interesting to examine.  The financial expert and writer Hauke Fürstenwerth found the transcript of an internal conference call from IKB Deutsche Industriebank AG which he has published on the indispensible Web site NachDenkSeiten. The IKB bankers thought they were geniuses because they were buying $$billions of long-term securities – backed by junk mortgages – and funding them with short term credits in the commercial paper market. This was indeed a brilliant strategy until the merry-go-round suddenly stopped, the commercial paper market dried up, and the bank had to refinance these securities from internal resources – which it didn’t have.  Here an IKB banker boasts of his "expertise":

Wir nutzen unsere große Expertise in diesem Bereich aber auch, um auf
Provisionsbasis externe Gesellschaften bei deren Investments in
internationale Kreditportfolien zu beraten. Dies bezieht sich
insbesondere auf das Conduit „Rhineland Funding Capital Corporation” in
den USA. Aufgrund unserer Beratung investiert diese Gesellschaft in
vergleichbare Portfolien wie die IKB. Auf diese Weise stellen wir
sicher, dass für Dritte die gleichen Qualitätsstandards wie für unser
Haus gelten. (We use our great expertise in this area also in order to grow our fee income by advising 3rd-party investors with respect to their international credit portfolios. In particular, we are advising the conduit "Rhineland Funding Capital Corp" in the USA.  Thanks to our advisory services, the vehicle is acquiring a portfolio that is comparable to that of IKB. Therefore we are able to ensure that the same high quality standards that we have also apply to third parties.)

It turns out that Rhineland Funding was a captive vehicle of IKB, and the brilliant "experts" there acquired $$billions in worthless securities.  So far, IKB as been rescued 3 times already this year at a cost of $12billion to the German taxpayers.