HRE inquiry told banks were unaware of problems

Aug 18, 2009, 15:56 GMT

Berlin - Germany's private banks had not realized how critical the situation was at mortgage lender Hypo Real Estate (HRE), a parliamentary inquiry into a 100-billion-euro (140 million dollar) government bailout was told Tuesday.

The former president of Germany's banking association, Klaus-Peter Mueller, told the inquiry that none of the other banks knew what degree of problems HRE was facing.

'The seriousness of the situation at the bank was not clear to us,' Mueller told the panel of opposition politicians from the ranks of the Liberal Democrats (FDP), Greens and the Left Party.

The two-month parliamentary inquiry has entered its final stages, with Finance Minister Peer Steinbrueck and Secretary of State for Finance Joerg Asmussen due to face questioning later in the week.

Mueller said HRE caused a lot of anger by not giving reliable figures and repeatedly revising its financial requirements upwards.

As the head of the supervisory board of Commerzbank, Mueller had contributed to an initial 35-billion-euro HRE rescue package from a consortium of banks and government in September 2008. Just days later, a huge top-up was required to keep HRE afloat.

The banker said the government had remained steadfast in its treatment of HRE.

Mueller added that the bank's downfall was exacerbated by a loss of market confidence, not as a result of a comment by Steinbrueck suggesting that the bank would be wound up.

Launched in May, the inquiry seeks to identify the roles of the government and banking supervisory bodies in the near-bankruptcy of the Munich-based mortgage lender.

Members of the inquiry have revealed several weak points in the supervisory structures overseeing the banking industry, and have demanded the dismissal of Asmussen, whom they accuse of serious oversights.

Mueller said there was little alternative but to rescue the bank, echoing previous statements by HRE executives that the consequences would have been disastrous had the mortgage lender been allowed to fail.

'An HRE bankruptcy would have hugely affected the German banking industry,' Mueller said, adding that this would have probably led to a collapse of European markets.

HRE was ultimately rescued with a 102-billion-euro bailout, of which 87 billion euros were supplied by the government.

The inquiry ends in September, and is due to present its results imminently before Germany's general election on September 27.