Debt Rattle, October 5 2008: In Your Face

Edward S. Curtis Hopi girls 1900

Ilargi: We’ll focus a bit more on Europe today, because things are running out of hand so fast there.

Germany figured it had saved Hypo Real Estate, a bank with Lehman-size liabilities, and now that deal has fallen apart. There’s no doubt that the government in Berlin will arrange for a replacement salvation, but the course of events will linger in memory, both domestic and abroad.

If I were a cynic, I might suggest the Germans have set up the failure of the deal on purpose, so everyone else in the European Union understands once and for all that Deutsche taxpayers will not bail out Greek banks.

I’ve been accused of being anti-European, or anti-EU, but that is nonsense. First of all, I am European, passport and all. Second, I know very well why the union was built, both the economic and the political side of the issue.

The problem I see is that it was built with only prosperous times in mind. The leaders who are now talking non-stop about ways to tackle trouble together will at some point, and I think that point is near, have to go back home, simply because their houses are on fire.

They will simply not have time to agree on a common approach. When you see that it will take 10 years to go through all of Lehman’s administration, it should be clear why that is. The laws to regulate an overall European policy in times such as these should have been written years ago; now the crisis is here, it’s too late.

Most of what I see amounts to same-old straight-faced lies and ignorance. "The fundamentals are strong", that sort of thing. They still refer to what’s falling on their heads as "the American crisis". Yeah, sounds nice on TV, doesn't it? Politically palatable. But also an attitude that makes it that much harder to save what still could be saved.

While American home prices rose 100% in the past decade, British real estate "value" went up 400%, and in Ireland it was more like 800%. Spain built more houses in 2005-2006 than Britain, France and Germany combined. And believe me, I could go on like that for a while; I have warned about the risks to Europe for a very long time.

Yes, Germany has a lot going for it: no housing bubble, for one. But that is still not enough, even if the country’s citizens will fare much better than most because of it. The way overinflated credit casino has been a global game, and the Germans and the Dutch have been sitting at the same crap table as the rest of them.

I see for instance the Dutch starting to get worried about the value of their overpriced real estate, demanding that the government guarantee that "value". Guys, you have no idea what’s going to happen, and your politicians ain’t telling. But wait till the next bank needs a bail-out. that’s when the message will start to change.

The European Union, at least in its present shape, will fall apart, country by country. They forgot to write the treaties that could have prevented that. And now individual panicked governments, like the Irish, do crazy things, like guaranteeing all bank deposits, even though they could never pay.

Willem Buiter writes:

"The Irish guarantee is the most ‘in-your-face’ beggar-thy-neighbour provocation since medieval armies catapulted bubonic-plague-ridden corpses into the cities they were besieging."

Amen. The problem is that there are no other tools available; Europe never thought they’d be required. The first tool you need in a crisis is realism, knowing what you're up against. I see no such thing. What I see in Europe is a sense of entitlement that is way beyond any sort of proportion, and which risks pitting countries and individuals against each other instead of working together.

PS: I need to rush out, we'll talk later in the afternoon.


Europeans scramble to save failing banks

Governments across Europe scrambled to save failing banks on Sunday, working largely on their own a day after leaders of the continent's four biggest economies called for tighter regulation and coordinated response to the global meltdown.

In Berlin, the German government held crisis talks after the collapse of a ballyhooed €35 billion (US$48.4 billion) bailout of Hypo Real Estate AG, the country's second biggest property lender. In Iceland — particularly hard hit by the credit crunch — government officials and banking chiefs were discussing a possible rescue plan for the country's overstretched commercial banks.

Belgian government and banking officials struggled to salvage the Belgian operations of Fortis NV, whose Dutch operations were nationalized amid fears they could go insolvent. Options on the table include a Belgian move to buy up the entire bank or to seek another bank to take over.

British treasury chief Alistair Darling said that he was ready to take "pretty big steps that we wouldn't take in ordinary times" to help the country in weather the credit crunch. In the past year the government has acted to nationalize struggling mortgage lenders Northern Rock and Bradford & Bingley.

Darling told the BBC that the government, which has provided billions of pounds (dollars) in support to the banking sector, that it was "important to take generalized action as well as being ready to take particular action if you get a particular problem with an individual bank."

"The European banking industry is feeling the wind of default blowing from the other side of the Atlantic," said Axel Pierron, senior vice president at Celent, a Boston, Massachusetts-based financial research and consulting firm. "The value of financial stocks has been eroding constantly for the last two weeks."

The erosion has also been seen in overall confidence and concern among investors, politicians and the European public, too.
On Saturday, the leaders of Germany, France, Britain and Italy met to discuss the growing meltdown which has leapfrogged across the Atlantic from the U.S. to Europe, but shied away from the massive US$700 billion (€506 billion) bailout passed by the U.S. Congress a day earlier that President Bush signed into law.

While Europe's four largest economies pledged to coordinate national responses to help banks in distress, their failure to agree an EU-wide plan showcased the divisions in Europe on how to deal with the crisis. France had suggested a multibillion-euro (multibillion-dollar) EU-wide government bailout plan, but backed off after Germany said banks must find their own way out.

Hypo Real Estate said Saturday that the rescue plan had fallen apart after private lenders withdrew support. It was not known if Germany, which planned to inject nearly €27 billion (US$37.35 billion)would raise its stake in the bailout package. In Iceland, — one of the countries most heavily exposed to the credit squeeze — government officials and banking chiefs were discussing a possible rescue plan for the country's overstretched commercial banks.

Icelandic banks expanded rapidly after deregulation of the domestic financial market in the 1990s and now have combined foreign liabilities in excess of €100 billion (US$138.34 billion) — dwarfing the tiny country's gross domestic product of €14 billion (US$19.37 billion. The government last week took over Iceland's third-largest bank, Glitnir.

Looming large was a growing sense that the continent's major central banks — which have been flooding euros and dollars to banks that have become increasingly stingy about lending money even to themselves — were ready to institute emergency cuts to their benchmark interest rates this week.

None of the banks, including the European Central Bank and Bank of England, comment about rate hikes or cuts but analysts already believe the Bank of England, which meets this Thursday, will likely lower its rate from 5 percent. The ECB left its rate unchanged at 4.25 percent on Thursday, but opened the door to a rate cut.

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No Joint European Strategy On Banks

The leaders of Europe's four largest economic powers vowed Saturday to protect their banks from the continuing reverberations of the increasingly global financial crisis but could not agree on a common Europe-wide strategy.

Unlike the United States, which last week committed $700 billion in government money to shoring up Wall Street, Europe plans to continue dealing with its financial problems on a case-by-case basis. That approach, which has involved tens of billions of dollars at a step, is complicated by the transnational presence of so many large European financial institutions.

But the European leaders did call for a global economic summit by year's end aimed at revamping the international financial system, which is a legacy of a conference held at Bretton Woods, N.H., in the waning months of World War II. French President Nicolas Sarkozy, Europe's most vocal advocate of a continent-wide response, announced that for now, he and the leaders of Britain, Germany and Italy agreed in four hours of discussions only that each country would use "its own means" to safeguard banks from collapse but would do so "in a coordinated way."

The outcome seemed to fall well short of the common policy that French and other officials had spoken of in recent days amid a rapid series of financial failures and a freezing up of the capital markets in Europe, which rival or by some measures exceed the size of the U.S. markets. The disunity in Europe also was apparent in complaints by some other countries that they were not even included in the discussion.

Failure to pursue a broader bailout reflected particularly strong opposition from Chancellor Angela Merkel of Germany and Prime Minister Gordon Brown of Britain to any attempt at pooling resources for a Europe-wide fund to protect weak banks. Each government should handle its own banking problems, they said, because each country -- and even each bank -- has specific problems that must be dealt with in different ways.

Indeed, even as the leaders discussed restoring confidence in the banking system, news reports said Germany's $49 billion rescue last week of the Hypo Real Estate Bank may not have been enough and that a further injection of government cash is under discussion. Similarly, the governments of Belgium and Luxembourg were said to be in negotiations to buy up remains of the giant Fortis financial group in their countries, following up on the Netherlands' nationalization last week of Fortis operations there. The Fortis rescue demonstrated the transnational nature of Europe's financial problems.

The lack of common strategy among leaders of Europe's main economies at a time of crisis with direct effects on the well-being of their citizens suggested that the 27-nation European Union, while united in many ways, still has a long way to go before becoming the continent-wide economic and political authority it has set out to be. In addition, some of the grouping's smaller members chafed at being left out of Saturday's summit, with Finnish Finance Minister Jyrki Katainen calling the restricted invitation list "a very bad idea."

Seeking to reassure nervous Europeans, however, the four leaders described their summit as a demonstration of resolve to prevent further bank crashes, make sure depositors do not lose their savings and get money flowing through the choked financial system again for businesses and consumers. "Today was expressed with great clarity the will of our countries to guarantee citizens' savings and preserve citizens' confidence in the banking system, which must continue to support the real economy," Prime Minister Silvio Berlusconi of Italy told reporters.

Merkel, whose government irritated French officials with public opposition to the European bailout fund proposal, called the summit conference "an important contribution" to restoring confidence in the continent's financial system. She and others pointed to the expression of determination not to let banking failures spread, indicating European governments are ready to intervene individually if not collectively.

"We jointly commit to ensure the soundness and stability of our banking and financial system and will take all the necessary measures to achieve this objective," a communique said. "We will work cooperatively and in a coordinated way within the European Union and with our international partners," it added. "In the spirit of close cooperation within the European Union, we will ensure that potential cross-border effects of national decisions are taken into consideration."

This language was seen as a rebuke to Ireland, which last week decided to offer guarantees to all Irish depositors. The decision, taken unilaterally, irked Brown and his lieutenants in London, who feared it might lead Britons to pull their money out of British banks and put it in Irish banks instead to enjoy the guarantee.

Sarkozy, speaking to reporters on the sidelines of the summit, emphasized that the financial crisis is a global problem and should be dealt with in cooperation with nations outside Europe as well, particularly the United States. "It is a worldwide problem, and it should get a worldwide response," he said.

At his urging, the four European leaders endorsed an earlier French call for an international summit conference before the end of the year to begin revamping the world financial system set up at Bretton Woods in 1944. In addition, they made it clear that increased regulation around the world should be part of the retooled system, a message Sarkozy has been sending strongly since the crisis erupted.

"We call for the holding of a summit at the earliest possible date," they said in their statement. "Such a reform should notably be underpinned by a comprehensive framework of supervision. All parties with significant financial impact should be appropriately regulated or under surveillance."

The four leaders also issued a call for establishing clear rules of responsibility between banking executives and regulators, on one hand, and the failure of banks under their control on the other. This also has been a Sarkozy rallying cry, a politically popular stand insisting that high-flying bankers must pay if their institutions go under.

For instance, a top executive at Dexia, a collapsing bank rescued by the French and Belgian governments last week, was forced not only to resign but also to renounce his severance package on insistence from the French government, which since the rescue holds a 25 percent stake in the bank's capital.

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Europe Bids Adieu to Common Financial Crisis Approach

The idea of an EU rescue fund to address financial crisis symptoms in Europe is off the table. A summit meeting on Saturday of Europe's largest economies may end up being little more than a sharing of national strategies.

For a while this week, it looked as though the European Union was preparing to come up with a bloc-wide response to the growing financial crisis. On the eve of a mini-summit in France to discuss a possible strategy, however, a consensus seems to be emerging that the piecemeal approach European countries have been using to confront specific threats may be good enough.

Indeed, with France and Germany both distancing themselves from an apparently Dutch plan to set up a €300 billion ($415 billion) EU rescue fund, it is unclear just what Saturday's meeting -- which will see leaders from France, Germany, Italy and Britain meet in Paris along with European Central Bank head Jean-Claude Trichet and Luxembourg Prime Minister Jean-Claude Juncker -- might accomplish. Plus, according to a Thursday evening report published on the Web site of the Financial Times, EU countries not attending the meeting have said the select group has no authority to take decisions for the entire 27-member bloc.

"It is right that individual countries would want to take their own decisions, particularly when national taxpayers' money is potentially at risk," a spokesman for British Prime Minister Gordon Brown said on Thursday. It now looks as thought the much-touted meeting may devolve into little more than a sharing of ideas and national strategies. According to the Financial Times, one concrete idea left on the table is that of developing common standards on guaranteeing bank deposits.

Some were displeased by Ireland's blanket guarantee of all bank deposits this week, a move that was mirrored by a similar political guarantee made by Greece on Thursday. Saying that Greece's banking system is "totally safe and reliable," Finance Minister George Alogoskoufis said, "I must also state that citizens' deposits in all banks that operate in Greece are absolutely guaranteed."

The idea of an EU rescue fund was apparently first proposed by the Netherlands and supported initially by France. Germany, however, quickly voiced its disapproval and on Thursday, French President Nicolas Sarkozy pulled the plug. "I deny the sum and the principle (of the proposed rescue scheme)," he said.

Still, Europe continues to struggle as shockwaves from the crisis hit the continent. Late on Thursday night, a number of banking and insurance leaders in Germany agreed on the details of the €35 billion plan to save ailing mortgage bank Hypo Real Estate, first announced last week. The European Union, which had taken a close look at the bailout, also gave it a green light on Thursday afternoon.

In Switzerland, UBS, which has been hit hard by the US crisis due to its overexposure to the American subprime mortgage market, announced it was cutting 2,000 investment banking jobs. The cuts come in addition to the 4,100 other employees the bank has cut in the past year.

The European Central Bank meanwhile left interest rates steady at 4.25 percent on Thursday but opened the door to the possibility that the rate could be cut in November. In announcing the decision to hold steady, ECB head Trichet said bank officials had discussed lowering the rate, a comment which sent the euro plunging to its lowest rate against the dollar in 13 months. The ECB has been accused of ignoring darkening economic clouds in Europe and focusing too much on combating euro-zone inflation, which, at 3.6 percent, remains well above the bank's target of 2 percent.

Those economic fears were exacerbated on Friday with France announcing it expected negative growth in the third and fourth quarters of this year, meeting the commonly agreed definition of recession. A number of economists are predicting that the euro-zone economy will follow suit. The economy contracted in the second quarter and third quarter performance has not yet been announced.

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Europe shivers as credit freeze hits Iceland

Central bankers and officials in Iceland are locked in economic bailout talks this weekend, as Gordon Brown attempts to convince European leaders to back a £12bn fund for small businesses across the Continent.

Iceland's economy is on the brink of collapse, after the krona fell 27 per cent against the dollar last week. The fall sent fresh shockwaves through the UK financial system, as Icelandic banks have invested billions in the British economy. One of the biggest, Kaupthing, is estimated to have underwritten about £3bn in debt to finance deals in this country, and just two of the banks have more than 150,000 British internet customers.

The Icelandic government is believed to be considering a bailout plan after it was revealed the three largest banks have liabilities eight times greater than the country's GDP. It has already effectively nationalised Glitnir, investing €600m (£470m) in exchange for a 75 per cent stake in the bank last Monday.

Bankers in the City of London, of which about 700 work for Kaupthing, are worried that further nationalisation might be inevitable. However, a bank spokesman said: "There are no plans for nationalisation. Our position is much stronger than Glitnir's."

Kaupthing's chairman, Sigurdur Einarsson, said last night the bank's problems had been exaggerated: "Seventy per cent of our business is outside Iceland. Kaupthing continues to manage its business prudently. With our strong fundamentals, we are naturally concerned when we hear malicious rumours and sensationalism about Kaupthing."

Pension funds, some of Iceland's most active investors, are understood to be in direct communication with central bankers this weekend to unravel their numerous positions. An adviser who works for both Icelandic and UK institutions tried to play down the crisis, saying: "We need to keep this in perspective. The situation is more serious in the UK than in Iceland. Will the Icelandics follow the UK's lead and inject liquidity into the banking system? Maybe."

While attention was focused on Iceland, Germany's second-biggest commercial property lender, Hypo Real Estate, was facing an uncertain future after the failure of a €35 (£27bn) rescue plan. A statement on the bank's website said that "alternative measures" were being investigated.

In Paris, heads of state from the UK, Germany, Italy and France gathered at the Elysée Palace for an emergency meeting yesterday. Also attending were Jean-Claude Trichet, head of the European Central Bank, and Jose Manuel Barroso, the president of the European Commission.

Gordon Brown insisted all "necessary action" to end the crisis must be taken. "I want the message to go out from this meeting that no sound, solvent bank should be allowed to fail through lack of liquidity. That is why we must take the action necessary to sort out whatever failings exist in the system.

"People will be very clear that every country represented here will want to do whatever is necessary to secure the stability of the system and to ensure the safety of hard-working families and businesses." European leaders agreed to the French President Nicolas Sarkozy's call for greater co-operation. They also accepted Mr Brown's proposal for a £12bn fund to help European small businesses survive the credit crunch. No 10 said that the fund would help businesses continue their operations and pay staff.

The move will be welcome in the UK after a warning by its leading trade association that banks are hurting its members as they did in the Nineties, when many were forced into bankruptcy. A spokesman for the Federation of Small Businesses said: "There is evidence of banks jacking up overdrafts and transferring overdrafts into loans. Barclays, which deals with about 653,000 small businesses, has raised interest rates 4 per cent above base from 6.8 to 10.8 per cent, which brings total overdraft costs to 15 per cent. That's too much."

Lloyds TSB, which recently scooped up its ailing rival HBOS, has also been "renegotiating rates" for its 850,000 small business customers. Representatives from the Federation of Small Businesses met the outgoing Business Secretary, John Hutton, early last week to discuss the banks' squeeze.

Later this week, Mervyn King, the Governor of the Bank of England, will face pressure to cut interest rates by up to half a point, following figures from KPMG. The accountant's report will show that the five-year growth in salaries for permanently employed people has ended. With 1.7 million now unemployed, many economists would like to see a rate cut to spark life into the economy.

In the US, President Bush warned that it would take a "determined effort to get through this difficult period", though he insisted that the $700bn (£400bn) bailout package finally approved last week was "essential to helping America's economy weather the financial crisis". But the signing of the Bill was did not prevent US stocks suffering their toughest week since the 9/11 terrorist attacks. And Arnold Schwarzenegger, Governor of California, also warned that his state might require $7bn from federal government to maintain essential public services.

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UK companies face £50bn funding crisis

Many members of the FTSE350 face a serious crunch as at least £50bn in their publicly traded debt expires by December, and some will go to the wall, experts have warned. The news is the latest example of how the financial crisis is starting to impact UK companies even far beyond the City and the banking sector.

Companies are already struggling hard to keep their accounts in order, withdrawing money from their bank deposits at a rapid rate, according to figures from the Bank of England. However, the squeeze is likely to intensify in the coming months, as businesses attempt to raise money against the backdrop of a credit crisis and a likely recession.

At least 21 members of the FTSE350 have to raise major chunks of money between now and the end of the year, with some £49.6bn of publicly traded debt coming up for renewal. Since businesses also borrow directly from banks, the total shortfall may be close to double this. Pippa Wicks, a partner at AlixPartners said: “There will be companies that will face crises. People have to wake up and smell the coffee. There is a real risk that lots of the refinancing will not get away.”

She added that some of her clients were facing increases in their borrowing costs of as much as 7 percentage points, as hard-pressed lenders restrict their cash. The findings underline growing concerns that the UK is facing not just a financial crisis but also a broad-based recession which could be worsened by the difficulty of finding credit. Bank of England money figures show that companies are digging into their credit facilities at the fastest rate since 1992, when the country was last in recession. In the year to June, the amount companies had in available, unused credit facilities dropped by 13.3 per cent.

The Bank’s figures show that the amount of cash held by Britons in their bank accounts and in currency dropped by 0.6 per cent in the year to August – the first annual fall since 1969. According to Simon Ward of New Star, the chances of a broad recession have risen above 50 per cent. He said his model, which takes account of all of these factors, now priced in a 55 per cent chance of a recession, though he said it would not necessarily be as severe as the one experienced in the early 1990s.

“The outlook is less negative than before prior recessions because of a smaller rise in interest rates and the large fall in the effective exchange rate over the last year, which will support net exports. The latter effect is already evident: trade contributed 0.5 percentage points to GDP growth between the fourth and second quarters.”

Eric Benedict of AlixPartners said it was in the coming months that companies would face difficulty in raising finance.
“These things are beginning to bite, and what we know is that financing is becoming more expensive to come by and is getting impacted by the general recessionary sentiment,” he said. “Default rates will triple or quadruple in the coming months.” Wicks said: “Every single company in corporate Britain should be obsessing about cash. Too many boards are uninformed about the cash position of a company.”

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German bank Hypo Real Estate announces collapse of 35 billion euro rescue

German bank Hypo Real Estate (HRE) said Saturday that a planned 35-billion-euro (48-billion-dollar) rescue had fallen through after the banking consortium involved pulled out of the deal.

The rescue bid was the biggest in German history and came after HRE was sucked into the global financial turmoil through its inability to refinance debt, one of many high-profile European emergency cases in the past two weeks. HRE said in a statement that a consortium of German banks taking part in the rescue had "refused to provide liquidity lines" and that it was seeking new measures.

The property lender said it was in the process of "determining the consequences" of the consortium's withdrawal on various divisions and that it would seek other solutions. Earlier in the day, the Welt am Sonntag newspaper said in a report to appear on Sunday that the bailout plan would have to be reworked because the bank's cash needs had been underestimated.

The biggest German Bank, Deutsche Bank, had reportedly evaluated that HRE would need 20 billion euros in fresh capital by the end of next week. Deutsche Bank warned in addition that "by the end of the year, there will be a shortfall of up to 50 billion euros and even of 70 to 100 billion by the end of 2009," the newspaper said. Deutsche Bank issued the warning late Friday during a telephone conference with representatives of the German banking and insurance sector, the report said.

The rescue plan had comprised an immediate cash injection by private banks and by the European Central Bank, which was to be backed by a 35-million-euro guarantee. Most of the backing, 26.5 billion euros, was to be provided by the German government, with the rest covered by private banks. It was announced on September 29 following weekend talks between German officials and the banks, and given the green light on Thursday by the European Commission.

The Commission had hailed Berlin's bailout plan as "part of the solution" to the current financial crisis. HRE was hobbled by debts incurred by a German-Irish subsidiary, Depfa, which it bought in October 2007, after the international financial crisis emerged with the collapse of the US market for high-risk, or subprime, mortgages. Depfa specialises in the financing of public works projects.

The parent real-estate bank found itself unable to refinance operations owing to a credit squeeze that worsened after the US investment bank Lehman Brothers declared bankruptcy in September. HRE shares had lost three-quarters of their value last Monday, and though they clawed back some ground over the week, they closed on Friday at 7.51 euros, down a hefty 44.4 percent from their level one week earlier.

In Paris meanwhile, German Chancellor Angela Merkel was attending European crisis talks on the financial crisis when it was announced that the HRE rescue plan had fallen through. Merkel had told media earlier that "each country must take its responsibilities at a national level," and added: "It is important to act in a balanced way, and for countries not to cause harm to each other." That comment appeared to be aimed at Ireland, which has issued a blanket guarantee to bank depositors without consulting its neighbours.

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Germany: banking system collapse possible due to Hypo Real Estate

A week into the European leg of the meltdown of the global financial system, Germany has hit major turbulence. Hypo Real Estate, a member of the DAX-30, Germany's equivalent of the Dow Jones Industrial Average looks to be on the verge of failing.

According to the German Magazine Der Spiegel, the planned bailout of the company is unraveling and failure is a looming possibility, as the company faces a potentially massive 70 to 100 billion euro funding gap by 2009.

The German central bank has warned that if Hypo Real Estate fails, a collapse of similar proportions to the fallout after the Lehman Brothers failure would threaten Germany. This story should alert readers to the depth of the liquidity problems that exist not only in the U.S., but in Europe as well.

Below is the translation of Spiegel's report of the most recent events.

Rescue package for Hypo Real Estate collapses

A surprising twist in the case of Hypo Real Estate: the laboriously negotiated rescue package for the Munich bank has temporarily come undone. The bank is fighting for its survival, said a spokesman this evening.

The 35 billion euro rescue package for the battered real estate financier, Hypo Real Estate, has failed. As HRE announced on Saturday evening, the loan commitment by several financial institutions is currently no longer valid. The group is examining the resulting consequences for the business units of the company. Alternative solutions are being explored. Further details have not been made.

Shortly afterward, HRE spokesman Hans Obermeier said, the bank was fighting for its existence. The bank is obviously in a difficult situation. He assumes and hopes that all parties involved in the discussions are fully aware of the seriousness of the situation. As to specific measures that HRE is now investigating, he gave no initial comment. The major shareholders are prepared to support the bank financially.

HRE spokesman Obermeier did not want to comment Spiegel Online as to reports that the liquidity Gap of the bank could reach 70 to 100 billion euros by the end of 2009. He could only confirm that the consortium's original aid pledge had been withdrawn. "Why, we do not know," Obermeier said. He said there were clear signals from the shareholders and Government, that they wanted to cooperate to find a solution to the problem.

The Finance Ministry was not informed in advance

This evening, the Federal Government pointed to the responsibility banking supervision played. The government will not take a position just yet, government spokesman Ulrich Wilhelm told the AP news agency in Paris. A spokeswoman for the financial regulators BaFin did not want to comment on the failure of the rescue package.

Sources close to [Finance] Minister Steinbrueck said that the Finance Ministry had not been informed of the changed situation in advance by either Hypo Real Estate or the consortium of banks. The government was informed only through ad hoc communication with HRE that the rescue package had collapsed. "We will now try to pick up the pieces on Sunday," the Ministry of Finance said. The aid plan, agreed to one week ago, foresaw a short-term loan of 15 billion euros and a long-term refinancing of up to 35 billion euros in the second half of 2009.

"Die Welt am Sonntag" had previously reported that Deutsche Bank had found in a study that HRE already clearly needed more money in the short-term. According to the Deutsche Bank report, the company would lack up to 50 billion euros by the end of the year and even as high as 70 to 100 billion euros by the end of 2009.

Quick solution necessary

In financial circles, it is expected that on Sunday evening, again at a crisis meeting, a rescue will come for Hypo Real Estate. According to estimates of experts, stakeholders have little time to forge a new rescue package for HRE: "If there is no solution when stock markets open on Monday morning, the company won't make it two more days," said a banker.

This week, the Bundesbank and the BaFin had labeled the rescue operation which is now collapsing as vital to avoid "severe disruptions to the financial markets". In a letter from the Bundesbank and BaFin to Finance Minister Peer Steinbrueck it was said that otherwise the German financial and economic system would be threatened by "similar unforeseeable consequences" as after the collapse of the U.S. financial group Lehman Brothers. Moreover, in the letter dated Monday, it was said that the bankruptcy of the real estate firm, because of it strong interconnectedness, would have affected a large group of creditors.

Hypo Real Estate got into trouble through liquidity problems at Ireland-based subsidiary Depfa. For the rescue of the real estate financier, the federal government had prepared a guarantee amounting to 35 billion euros. However, the latest is that the banks could not agree to their share of 8.5 billion in the package. The current relief program, for which the federal government and the financial industry are liable, should provide HRE for the coming weeks up to 15 billion euros in additional liquidity. Der endgültige Notkredit, der danach greifen würde, beläuft sich auf 35 Milliarden Euro. The final emergency credit, which would be available to draw down afterward, amounts to 35 billion euros.

Back in the mid-1990's I worked as a consultant for Hypo Real Estate's precursor Bayerische Vereinsbank. It was Germany's fifth largest bank by assets. They were looking to fix their retail lending operations and had hired the consulting firm I worked for to do a Credit Reeningineering Project. My role was to develop a schema to rationalize the retail lending process and procedures. Later the bank merged with crosstown rival Hypobank, only to find out the combined organization had massive real estate losses from speculation in the former East Germany.

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Hypo Real Estate Rescue at Risk as Banks Withdraw Their Support

Hypo Real Estate Holding AG, the ailing German property lender, said a 35 billion-euro ($49 billion) government-backed bailout plan collapsed as commercial banks withdrew their support. "The bank is in a very difficult situation," Hypo Real Estate spokesman Hans Obermeier said in a telephone interview. "We hope everyone involved in the discussions is aware of this."

German authorities brokered the Sept. 28 bailout to avoid economic damage that would have resulted from the failure of the nation's second-biggest property lender. Hypo Real Estate said in a statement late yesterday that "alternative measures are being investigated."

Hypo Real Estate's financing needs exceeded the bailout plan guarantee, Germany's Die Welt reported yesterday, citing unnamed people in the finance industry. It will need 20 billion euros by the end of next week and 50 billion euros by the end of the year, according to the newspaper. As much as 100 billion euros may be needed to shore up the bank's finances by the end of 2009, Die Welt said. Obermeier declined to comment.

The European Central Bank and the Bundesbank planned to contribute jointly 20 billion euros, and a group of unidentified banks another 15 billion euros. The plan called for Hypo Real Estate to use 42 billion euros in assets, mostly debt owed by government borrowers, as collateral. Heiner Herkenhoff, a spokesman for the German BDB banking association, declined via e-mail to comment. Bundesbank spokesman Christian Burckhardt and the German Finance Ministry didn't return calls seeking comment.

The bank sought the lifeline after its Dublin-based Depfa Bank Plc unit, which specializes in government lending and depends on now-closed money markets for funding, failed to get short-term funding amid the credit crunch. Failure to provide the rescue package "may have triggered unpredictable consequences for the German financial and economic system similar to those of the collapse of U.S. financial group Lehman Brothers," Frankfurt-based Bundesbank and BaFin, Germany's financial regulator, said in a joint letter dated Sept. 29 and addressed to Finance Minister Peer Steinbrueck.

"If we had not acted, the bank's crisis wouldn't have just hurt the financial sector, but its network of business would have hurt the real economy, in Germany and beyond," German Finance Minister Peer Steinbrueck said the same day.
Hypo Real Estate, run by Chief Executive Officer Georg Funke since it was spun off from HVB Group in 2003, reported writedowns on collateralized debt obligations on Jan. 15. The company said Aug. 13 that second-quarter pretax profit plunged 95 percent because of further markdowns on debt.

A group led by J.C. Flowers & Co., the buyout firm run by Christopher Flowers, bought a 24 percent stake in Hypo Real Estate for about 1.13 billion euros in June. Former parent HVB Group is now a unit of UniCredit SpA, Italy's biggest lender, which is holding an extraordinary board meeting today to boost its regulatory capital and settle investors' concern with its finances.

The global financial crisis that prompted Lehman Brothers Holding Inc.'s Sept. 15 bankruptcy filing is weighing on Europe. Belgian authorities are exploring "all methods" to keep Fortis in business even after it received an 11.2 billion-euro government bailout on Sept. 28. Belgium and France on Sept. 30 threw Dexia SA a 6.4 billion-euro lifeline.

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Europe: In it together

This was the week that the US-originated financial crisis was distributed to Europe with a vengeance. With five European banks having crashed in a matter of days and a French budget minister finally acknowledging yesterday that the eurozone’s second biggest economy is in recession, the leaders of France, Britain, Italy and Germany will hold an emergency meeting this afternoon in the gilded splendour of the Elysée palace in Paris to discuss their response.

In a letter sent to European leaders on the eve of the meeting, Mr Sarkozy said the European interest demanded an “intense effort of co-ordination”. “Our citizens are expecting from us resolute action to protect them,” he wrote. The meeting brings an end to a period of qualified optimism, in which policymakers and financiers expressed quiet confidence that Europe could ride out the storm.

Most European countries, they reasoned, had avoided a US-style housing and credit boom – the UK, Ireland, and Spain excepted. Until very recently, the European Central Bank had been more worried about the inflationary effects of resilient growth than the deflationary impact of financial sector contraction. Yet the latest financial spasm in the US provoked investor panic worldwide over how weaker financial institutions could continue to fund themselves. Within days, Fortis, Bradford & Bingley, Glitnir and Dexia were forced into accepting government bail-outs.

To make matters worse, the latest data across many European countries confirmed there has been a shuddering economic slowdown as businesses have struggled with comparatively high interest rates and a strong euro. The UK, Ireland, Denmark and Spain are either technically in recession or flirting with it. Unemployment has spiked in Italy and France. Manufacturing output has dropped sharply in Germany.

European politicians have rapidly switched from whispering that the situation was manageable to screaming that conditions were worse than anyone could possibly have imagined. François Fillon, France’s prime minister, won pole position for pessimism by warning that the world was facing its worst financial crash since 1929 combined with the severest economic test since the 1973 oil price shock.

In some respects, Europe is well placed to confront the financial crisis. The European Central Bank has established itself as a credible monetary institution – even if European industry has been screaming for interest rate cuts – and has been agile in providing liquidity to the markets. The creation of the 15-country eurozone has introduced greater stability into the heart of the European economy, ending the frenzy of competitive devaluations that marked previous financial panics.

Europe’s governments have shown they can move with impressive speed and efficiency to rescue failing banks with cross-border operations such as Fortis and Dexia. Europe’s patchwork system of regulators and financial authorities may not work elegantly in theory, but it has been shown to work effectively in practice.

Yet this crisis is also exposing the flaws in Europe’s economy. Angel Gurría, secretary-general of the Organisation for Economic Co-operation and Development, says that devising and implementing a co-ordinated policy response across a 27-country area is inherently far harder than managing a single fiscal, regulatory and political unit such as the US or Japan.

He also warns that the financial crisis’s impact on Europe could be proportionately bigger and longer-lasting than on the US. European banks, he says, play a more central role in their economy than do banks in the US, where many “non-bank” financial institutions offer credit. US banks have also been far nimbler in attracting fresh funds to recapitalise themselves. “In Europe you have a more heavily banked economy. Therefore when the banks are affected by a crisis of confidence you have a proportionately greater problem,” he says in an interview with the FT.

Europe’s policymakers were alarmed at the fallout from the US authorities’ decision to let Lehman Brothers collapse and are determined to prevent such a scenario in the eurozone. On Thursday, Jean-Claude Trichet, ECB president, spoke of the “enormous?.?.?.?very unfortunate consequences” of letting Lehman fail.

The lesson, if not stated explicitly, is that politicians should not allow any significant European bank to collapse – and that policymakers should not be hung up on academic arguments over the principle of “moral hazard”. Ideologically, European leaders are readier to accept state intervention than their US counterparts. But their big fear is that a far larger and more diversified European bank may now fail.

Dennis Snower, president of the Kiel Institute for World Economics, says Europe must be prepared to inject massive sums into recapitalising the banking industry – as they have done in the US. “The central banks have been acting as the lender of last resort. But we are now discovering that we also need a buyer of last resort for financial institutions that pose a systemic financial risk,” he says.

Yet the practical difficulties of saving big financial institutions in Europe are enormous, given that some banks’ liabilities are larger than their home countries’ GDP. Mr Trichet has cast doubt on the feasibility of creating a European equivalent of the US Treasury’s $700bn Troubled Assets Relief Programme. “We do not have a federal budget, so the idea that we could do the same as what is done on the other side of the Atlantic doesn’t fit with the political structure of Europe,” he said.

The lack of a unified regulatory structure and a co-ordinated European response has led some governments to act unilaterally to protect their banks, even at the risk of infuriating their neighbours and distorting the single market. Britain has fiercely criticised Ireland’s guarantee for the debts and deposits of its six largest banks. Writing in his FT blog, Willem Buiter, a professor at the London School of Economics, commented: “The Irish guarantee is the most ‘in-your-face’ beggar-thy-neighbour provocation since medieval armies catapulted bubonic-plague-ridden corpses into the cities they were besieging.”

Several European governments will also be constrained in responding to the crisis by the state of their public finances. Whereas some fiscally virtuous European countries, such as Germany and Spain, can easily increase public spending to sustain demand, others such as France and Italy have little room for manoeuvre. “Saving for a rainy day has to be done in the sunshine. Now it is raining and some countries have very small umbrellas,” says Mr Gurría from the OECD.

Perhaps the biggest question in the longer term is whether this financial crisis will strengthen the statism that has been such a feature of the postwar European economy. Critics of the excesses of Anglo-American financial capitalism have certainly been given a boost. Last week France’s Mr Sarkozy, who has been a fierce critic of the EU’s liberal trade and competition policies, said the crisis had killed off laisser faire capitalism. But he also warned that it would be a historic error to return to “collectivist” solutions.

Franceso Giavazzi, an economics professor at Bocconi university, worries that this new interventionist mood will provide cover for politicians seeking to do “bad” things. He cites the Italian government’s intervention to prop up Alitalia airlines while blocking its acquisition by a foreign carrier. “The idea that you spend public money on keeping a local airline alive is a disgrace in my view. If one bank fails it can bring down five other banks and can wipe out established credit relations with other firms. If Alitalia fails no other company fails,” he says.

Further deregulation of the economy and an injection of more US-style entrepreneurialism remain essential if Europe is to raise its growth rate, he argues. “What Europe needs is more, not less, competition.”

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European Union Leaders Stop Short of Regional Plan on Bailouts

European leaders pledged to bail out their own nations' banks while stopping short of a regional rescue effort to deal with the global credit crisis. At a summit in Paris yesterday, leaders of France, Germany, Britain, Italy, Luxembourg, the European Central Bank and the European Commission agreed to ease accounting rules, seek tougher financial regulations and weaken enforcement of competition and budget laws.

"Each government will act according to its own methods and its own means but in a coordinated manner with the other European states," French President Nicolas Sarkozy, who called the meeting, told reporters. The gathering came a day after U.S. lawmakers approved a $700 billion bank-rescue package and as Europe's own initial bailout efforts began to unravel.

Germany's Hypo Real Estate Holding AG said a government-backed 35 billion-euro ($49 billion) deal collapsed yesterday when banks withdrew their support. Belgian authorities worked to shore up Fortis after the lender received an 11.2 billion-euro lifeline on Sept. 28.

Europe "is still a dwarf compared to the U.S." in terms of willingness to spend, said Laurence Boone, an economist at Barclays Capital in Paris. The statement on supporting banks "is not a progress. It's the same as before the summit." The failure to forge a consensus approach to shore up banks roiled by soaring borrowing costs reflects the divisions in the 27-nation bloc. Germany criticized a plan floated by French Finance Minister Christine Lagarde to set up a rescue fund. A chorus of opposition greeted Ireland's decision to guarantee its banks' deposits and debts.

Hours before the summit, Dominique Strauss-Kahn, managing director of the International Monetary Fund, met Sarkozy to press the need for agreement. "Collective action is even more necessary in Europe than in the U.S. because Europe is more complex than the U.S.," he told reporters. "Action must be taken quickly and in a concerted manner."

German Chancellor Angela Merkel's opposition underscored the hurdles to forging a unified front. "Each country must take its responsibilities at a national level," she told a joint press conference after the summit. The government leaders did agree on policy recommendations for the European Commission and for a global summit they're seeking to deal with the credit crisis.

They said they would seek to harmonize guarantees of deposit levels in the wake of the Irish move. The U.K. bank regulator increased its insurance ceiling to 50,000 pounds ($88,500) per account from 35,000 pounds to stem a flow of funds to Ireland. Their joint statement called for a global summit "as soon as possible" to implement "a real and complete reform of the international financial system."

Sarkozy said that "all actors" must be supervised, including rating firms and hedge funds. Executive-pay systems must also be reviewed, he said. "We want a new world to come out of this," Sarkozy said. "We want to set up the basis for a capitalism of entrepreneurs, not speculators."

Anticipating increased spending, declining tax revenue, and government bank takeovers, they called for "greater flexibility" in the application of European Union competition and budget rules. European finance ministers last month pledged to keep their budget deficits below 3 percent of gross domestic product even as the economic slowdown dented tax receipts and boosted welfare payments.

The leaders said they want to allow banks to keep some assets valued as if they'd be held until maturity, instead of having to review their value each quarter. "That's to stop the down-spiral of assets' value," Barclays' Boone said. "That's the closest thing the commission can do to what the Americans do."

They also said they want to change accounting rules that require banks to review their holdings each quarter and report losses when the values decline, the so-called mark-to-market standard. Banks worldwide have written down $587.7 billion since last year, according to data compiled by Bloomberg.

With their economies headed into recession, European leaders said the European Investment Bank will lend 30 billion euros to support small and medium-size companies that may struggle to find cash.

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France moves into recession

The French premier, Francois Fillon, today warned that the world was "on the edge of the abyss" as his country moved into an official recession. Fillon's comments, blaming an "irresponsible" financial system, came as the Dutch government seized control of bancassurer Fortis's Netherlands operations in a €16.8bn (£13.06bn) deal greed with the Belgian and Luxembourg authorities.

The effective nationalisation, forced upon the governments by the scale of the financial meltdown, includes Fortis's interests in Dutch bank ABN Amro. The shock decision came just days after the three governments injected €11.2bn into Fortis, Belgium's biggest bank, to keep it afloat. Fillon was speaking on the eve of today's emergency summit of EU leaders in Paris to try to find collective ways of restoring confidence.

He said that the president, Nicolas Sarkozy, who called the talks, would propose that Europe "make its banking systems secure, unfreeze credit and co-ordinate its economic and monetary strategy". "We do not rule out any option to guarantee that no banking institution will be forced into bankruptcy. The state will intervene each time it's necessary to secure our banking system," he said. However, opposition from other governments has ruled out a US-style bail-out plan.

European governments have this week mounted rescue operations for several banks. But Gordon Brown, Germany's Angela Merkel, Italy's Silvio Berlusconi and Sarkozy are expected, at most, to agree to set aside national reserves to help ailing banks. The four leaders are to discuss the option of a harmonised approach to raising guarantees for bank deposits after Ireland's controversial go-it-alone decision to offer a limitless guarantee for individual savings and business deposits at six main banks.

European commission officials indicated that the Irish government, which failed to consult it and has not yet formally notified its scheme, could be forced to rescind it under EU competition rules. Experts warned that the Irish decision could trigger a fragmentation of Europe's cross-border banks.

The Greek government, under pressure from Brussels rowed back from its decision to mimic the Irish. Current EU laws set the minimum deposit guarantee at €20,000, but pressure is on to increase this to prevent a run on banks. Today's meeting is also due to discuss changes to accounting standards to avoid under-valuing banks' risky assets and curbs on executive pay in the financial sector.

Official data said the French economy will probably contract by 0.1% in both the third and fourth quarters of 2008, following a 0.3% contraction between April and June. But the government said the economy would still register 0.9% growth for the year.

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Europe calls for global summit on bank crisis

Gordon Brown and other European Union leaders called last night for a global economic summit to 'rebuild the world's financial system' as they held emergency talks on how to prevent a repeat of the current international credit crisis.

At a hastily convened meeting in Paris, French President Nicolas Sarkozy said the heads of the EU's four biggest economies - Germany, France, the UK and Italy - were united on the need to call all leading economic nations together to create 'a new financial world just as Bretton Woods did 60 years ago'.

The summit, planned for next month, is expected to include the G8 leading industrial nations, as well as India, China, South Africa, Brazil and Mexico. Sarkozy, who called last night's meeting in his role as EU President, said it was time for governments to clamp down on speculators and restore a moral element to the heart of a regime that had failed. 'We need to literally rebuild the international financial system. We want to lay the foundations of entrepreneurial capitalism, not speculative capitalism,' he said.

As part of a rolling programme of announcements, the EU's 'big four' agreed to release £12bn of emergency aid to ailing small businesses across the EU immediately, and a further £12bn as soon as possible after that. The European Investment Bank had said the money would be released gradually over the next four years.

Calling for a more co-ordinated response to the credit crisis, Brown said international co-operation on regulation was needed. 'We are seeing, in addition to the national action we are taking, that these global problems about oil, about the credit crunch, need global solutions,' he said. 'I think in the next few weeks we have got to show how we can do more in Britain and across Europe to help small businesses, as well as households, through what is a difficult economic time but where I believe Britain can lead the way out of the difficulties.'

Action was needed, and would be taken, to protect all solvent banks in the EU. 'I want the message to go out from this meeting today that no sound solvent bank should be allowed to fail for lack of liquidity,' Brown added. The meeting's main pledges on restoring sound financial systems will be looked at next week by finance ministers from all 27 EU states during talks in Luxembourg.

Germany repeated its opposition to the use of taxpayers' funds to help ailing banks after calls from France for a European equivalent of the $700bn US bail-out agreed on Friday night. Germany's Economy Minister, Michael Glos, said such a €300bn rescue fund was a non-starter. 'I do not think it can be justified in this situation to ask the state to restore trust that has been gambled away with large-scale debt relief plans financed by tax money,' he said.

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JP Morgan ‘brought down’ Lehman Brothers

JP Morgan has been accused by its Wall Street rivals of dealing the final hammer blow that forced Lehman Brothers into collapse in a sensational claim that threatens to spark a colossal legal battle. The giant American bank is alleged to have frozen $17 billion (£9.6 billion) of cash and securities belonging to Lehman on the Friday night before its failure.

According to Lehman’s biggest creditors, this was what precipitated the liquidity crisis that embroiled the firm, forcing it into Chapter 11 bankruptcy protection on the morning of Monday, September 15. The allegations have been raised in a filing at the bankruptcy court in New York, lodged late last week. Lehman’s biggest creditors include almost every big firm on Wall Street, most of Europe’s heavyweight banks and insurance companies as well as a slew of Japanese and Chinese institutions that are owed several hundred billion dollars.

The funding lines provided to Lehman to finance its everyday operations amount to $188 billion, according to court filings.
The creditors are now demanding that JP Morgan open up its books to the bankruptcy court to allow the transactions to be assessed.

“The creditors’ committee understands that LBHI [Lehman Brothers Holding Inc] had at least $17 billion in excess assets which were held at JPMC [JP Morgan Chase] on the Friday going into the weekend before its bankruptcy filing,” the documents said.
“The creditors’ committee further understands that, on September 12, 2008, JPMC refused to allow LBHI access to its excess assets and instead ‘froze’ LBHI’s account. In freezing LBHI’s assets, JPMC was purportedly holding all of LBHI’s assets as a potential offset against any claims JPMC may have had against LBHI.”

The filing goes on to claim that “as a result of JPMC’s actions, LBHI suffered an immediate liquidity crisis, that could have been averted by any number of events, none of which transpired”. Lehman’s collapse is fast emerging as the single biggest event of the credit crunch, sparking a number of unexpected effects. The unravelling of the firm’s prime brokerage operations has already forced a number of hedge funds out of business.

Olivant, the investment group run by former Abbey boss Luqman Arnold, revealed last week that its 2.8% stake in UBS was held through an account at Lehman in London which the firm’s administrators are refusing to release. Previous court documents have suggested that JP Morgan was owed $23 billion by Lehman in secured loans. JP Morgan said: “These assertions raised by the creditors’ panel are unfounded conjecture. We will address them at the appropriate time in bankruptcy court.”

In London, Price Waterhouse Coopers, the administrators to Lehman Brothers in Europe, is wrangling with more than 60 stock exchanges and clearing houses around the world to recoup up to $3 billion that it says is owed to the defunct bank. LCH Clearnet, the clearing house, has returned £217m to PWC in recent weeks and Eurex is also thought to have returned some funds. The cash was held as margin – money that exchanges require in case a company goes bust.

LCH is one of the largest holders of these reserves, reflecting Lehman’s standing as the biggest trader on the London Stock Exchange. An LCH spokeswoman said: “We have already given the administrators £217m of the margin we held for Lehman and it would be imprudent of us to return all the remaining margin until this has been completed.” Tony Lomas, the lead administrator at PWC, said “constructive discussions” were continuing with other exchanges.

The art on the 30th and 31st floors of Lehman’s Canary Wharf headquarters in east London has been removed after appraisers valued it and is being stored in a “safe place”, Lomas said. It will “be dealt with on another day when we have resolved more pressing matters”, he added. The works, which include oil paintings and bronze sculptures, are understood to be worth millions of pounds.

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Lehman 'may take 10 years to wind up'

The Lehman Brothers administration will not be completed until 2018 at the earliest, according to the man in charge of selling and winding down the failed bank's European assets.

Tony Lomas, the chairman of business restructuring at PricewaterhouseCoopers (PwC), said: "Based on industry experience, including cases like Polly Peck, Enron and [Robert] Maxwell, it could take a decade or more to close this administration, not least because it threatens to become bigger and more complex than any of these previous cases." Mr Lomas has been unravelling Enron's European operations for six years.

PwC has more than 150 people working in Lehman Brothers' European HQ in Canary Wharf, one-third of whom are from its corporate recovery team. There are also tax, property and human resources specialists. PwC is also hiring former Lehman staff to help track down records of the firm's huge number of complicated investments.

The way share deals are structured, whereby Lehman effectively acted as an intermediary, has left hundreds of firms' investments stranded. Olivant, the fund run by former Abbey chief Luqman Arnold, has a 2.78 per cent stake in UBS worth $1.4bn (£719m) that has gone missing.

Unravelling where all these investments have gone is one of the reasons the administration is "more complicated than Enron", said a source who has worked on the administration since Lehman went under last month. "There are hundreds of thousands of records to investigate," the source added. "This will take many years to sort out. The bulk of the asset recovery should be completed in the first year or two, and there will be interim distribution of proceeds paid to creditors."

PwC will look to recover around $1bn in financial assets that Lehman holds in more than 60 stock exchanges worldwide. It will start by looking at positions in London, Germany and France. PwC has been frantically trying to save jobs to ensure that there are staff available to help advise administrators on key files. One reason for the quick sale of Lehman's investment banking and equities businesses in the UK and Europe to Japanese rival Nomura was to offer job security to 2,500 employees.

PwC hopes the staff will stay, and administrators are negotiating with Nomura over the access they will get to these employees. The Nomura transaction is unlikely to complete formally for three to four weeks. However, 750 Lehman staff in Europe were made redundant last week as part of what Mr Lomas described as a "necessary restructure".

PwC must call a meeting with creditors by the end of November under British law. Mr Lomas hopes to be able to offer a detailed position on relevant financial information by that point. In March, PwC sold Enron's last major European asset, the Teesside Gas Transportation project, to Deutsche Bank for a reported £100m.

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Irish finance ministry says unaware of Hypo unit pledge

Ireland's finance ministry is unaware of any commitment to Hypo Real Estate's Irish unit Depfa Bank, a ministry spokesman said on Sunday.

Earlier on Sunday a Hypo Real Estate spokesman said the Irish government was considering providing liquidity assistance to Depfa Bank. "The department is unaware of any such commitment," the Irish finance ministry spokesman said in response.

A 35 billion euro ($48.50 billion) German government-led rescue plan for Hypo Real Estate fell apart on Saturday as German banks and insurers withdrew their support for the bailout but talks were continuing on Sunday to revive the rescue.

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Belgium Is Exploring 'All Methods' for Fortis

Belgium is exploring "all methods" to keep Fortis in business after the financial-services company's operations in the Netherlands were taken over by the Dutch government, Finance Minister Didier Reynders said.

"We are continuing to work on all methods to see to it that this group is more and more capable of guaranteeing the depositors," Reynders told reporters before a meeting of key Belgian cabinet ministers in Brussels today. He declined to comment on a De Tijd report that Belgium may nationalize Fortis' Belgian activities or broker a sale to one of three or four private bidders.

The Netherlands bought Fortis's Dutch operations yesterday for 16.8 billion euros ($23 billion) after an earlier rescue plan failed. Fortis, Belgium's largest financial-services company, ran short of funds after spending 24.2 billion euros buying ABN Amro Holding NV assets last year just as the U.S. subprime-mortgage market collapsed and credit markets froze.

"It would be irresponsible for the regulator to allow trading in Fortis shares on Monday, since we don't know how much of the liabilities have been transferred to the Dutch government," said Patrick Millecam, a managing director at Ghent, Belgium-based Value Square, which manages more than 100 million euros.

Today's meeting of Belgian Prime Minister Yves Leterme and the heads of key cabinet departments was called to discuss the country's 2009 budget. Fortis may also be discussed, Peter Poulussen, a spokesman for Leterme said. Fortis spokesman Wilfried Remans declined to comment when contacted by Bloomberg. Leterme didn't exclude the possibility of the state increasing its 49.9 percent stake in Fortis in a television interview Oct. 3. "You have to use all means" to guarantee the savings of all the people in the country, he said.

BNP Paribas SA is one of "three or four" possible buyers of the Belgian arm of Fortis, De Tijd said. Societe Generale SA and BNP are the most likely candidates to buy Fortis Bank Belgium, Dutch newspaper De Telegraaf reported today, without citing anyone.

"We are ready to discuss with others how to arrange things in a definite way and this will be done very soon," Luxembourg Prime Minister Jean-Claude Juncker said today after a meeting of European leaders in Paris. His government bought 49 percent of Fortis' Luxembourg unit in the initial bailout.

A purchase of Fortis's Luxembourg units by BNP is "is one among many options" that the Luxembourg government is considering, Luxembourg Economy Minister Jeannot Krecke said in an RTL radio interview today. "We have to find a solid partner" for the Luxembourg unit, he said. "We will try to find a solution this weekend." The Belgian government currently is the "main shareholder" in Fortis Luxembourg, Krecke said.

On Sept. 28, the Netherlands, Belgium and Luxembourg agreed to inject 11.2 billion euros into Fortis by purchasing minority stakes in the banking units in each country. The Dutch government's portion was to have amounted to 4 billion euros. Fortis also planned to sell ABN Amro's private-banking and Dutch retail banking units, neither of which had been integrated.

In a change of plans yesterday, the Netherlands agreed to buy Fortis Bank Nederland Holding NV, Fortis Insurance Netherlands NV and Fortis Corporate Insurance NV, and become owner of the company's holding in ABN Amro. The integration of ABN Amro and Fortis Bank Nederland will continue again, with the potential financial benefit being as much as 1 billion euros a year, De Telegraaf cited Dutch Central Bank Governor Nout Wellink as saying.

"Further steps proved necessary," Dutch Prime Minister Jan Peter Balkenende said yesterday. The government took action after clients kept withdrawing money and banks remained reluctant to lend to Fortis, leading to "increasing liquidity problems" for the lender, Dutch Finance Minister Wouter Bos said.

Reynders welcomed the nationalization of the Dutch assets of Fortis, saying this "reinforces the group today." "The decisive action by the Dutch government shows that it stands behind the Dutch savers," said Nanne Bos, a spokesman for Amsterdam-based ING Groep NV. ING, the biggest Dutch financial-services company, said Sept. 29 it wouldn't bid for ABN Amro's Dutch units because a purchase wouldn't meet the company's "financial requirements."

European governments are stepping in to protect banks as the financial crisis that drove New York-based Lehman Brothers Holdings Inc. and Seattle-based Washington Mutual Inc. into bankruptcy spreads. Ireland's government is guaranteeing banks' deposits and debts for two years, seeking to restore confidence in the country's financial industry. Also this past week, Belgium and France threw Dexia SA a 6.4 billion-euro lifeline, Britain seized Bradford & Bingley Plc, the U.K.'s biggest lender to landlords.

"I've always said that the Dutch state wouldn't just let go of a `systemic bank' like Fortis," Dutch newspaper NRC Handelsblad cited Rabobank Groep NV Chairman Bert Heemskerk as saying today. Heemskerk supports rescue operations such as the ones at Dexia and Fortis, NRC said. "Only retail banks need to be saved," Heemskerk was cited as saying.
Rabobank, the biggest Dutch mortgage lender, is based in the Dutch city of Utrecht.

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Judge tells Wachovia to negotiate only with Citi

Citigroup Inc said on Saturday that a judge ordered Wachovia Corp to refrain from negotiating with other parties, a day after Wachovia backed out of a plan to sell its banking operations to Citigroup and instead said it was selling all its assets to Wells Fargo & Co.

Citigroup said a New York state judge granted emergency injunctive relief to extend its exclusivity agreement with Wachovia. The exclusivity agreement bars Wachovia from negotiating with other parties.

Citigroup said on Monday it had preliminarily agreed to buy Wachovia's banking assets for $2.2 billion in a government-backed deal. On Friday, Wells Fargo said it had signed an agreement to buy the whole of Wachovia, including its asset management unit and retail brokerage, for about $15 billion.

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