German rescue fund head: HRE collapse could be worse than Lehman

Mar 15, 2009, 17:44 GMT

Berlin - The head of Germany's bank rescue fund warned of catastrophic consequences if ailing Hypo Real Estate (HRE) bank were allowed to collapse, in a newspaper interview published Sunday.

'I'd go so far as to say, if this bank were not rescued it could have worse consequences than the bankruptcy of Lehman Brothers,' Hannes Rehm, the head of the German government's bank bailout agency (SoFFin) told the Frankfurter Allgemeine Sonntagszeitung.

Meanwhile, the third in a series of inconclusive meetings took place Sunday between German government officials and Christopher Flowers, the majority private shareholder of Hypo Real Estate.

A SoFFin spokeswoman told Deutsche Presse-Agentur dpa that no agreement had been reached on the main point of contention - how much control of the ailing mortgage lender the government should get in return for its financial rescue package.

The German government insists on taking complete control of HRE, which has so far benefited from 87 billion euros (112.5 billion dollars) of state guarantees to stay afloat.

Flowers, on the other hand, maintains that a majority of 75 per cent plus one share should give the state all the power it needs to ensure its funds are wisely allocated.

Maintaining a portion of the shares would give Flowers, and the other investors making up 24 per cent of the holdings, the hope of recouping a fraction of their investment in HRE if share prices recover.

Sources involved in the negotiations suggest, however, that Flowers could be convinced to part with his shares for the right price.

Speaking ahead of Sunday's meeting, German Chancellor Angela Merkel repeated her insistence that the government would pay no more than the going market rate for HRE shares.

At close of business Friday, that would have meant 0.87 euros per share.

When Flowers bought his HRE shares, at the start of the global financial crisis, he paid what was then considered to be a paltry 22.5 euros per share.

German Finance Minister Peer Steinbrueck has said he has little sympathy for the New York-based investor, arguing that the taxpayer shouldn't have to pay for risks Flowers had taken. Steinbrueck has turned down Flowers' offer to sell at 3 euros per share.

The mortgage lender urgently needs up to 10 billion euros of additional funding, but the government is dragging its heels over the ratification of plans to grant further state aid.

HRE is anticipating a huge financial hole in its 2008 balance sheet, while its capital ratio looks set to fall below the 4-per-cent minimum considered viable by Germany's financial regulator (BaFin).

If the balance sheet shows the losses expected, BaFin could give HRE some extra time to sort out its finances while it awaits the outcome of the legislative process, which would free up extra funding.

The government is thought to not have ruled out forcibly expropriating the remaining 24 per cent of shares.