Tag Archives: Banking Crisis

US-BUSINESS Summary (Reuters)

Central banks poised to act

SINGAPORE/LONDON (Reuters) – Central banks are likely to launch new coordinated emergency action this week to calm panic in financial markets, which could be rocked further by data pointing to global recession. The U.S. Federal Reserve is expected to cut rates sharply following share selloffs and currency collapses in developed economies and the emerging markets of Asia and Latin America.

KeyCorp, Capital One to receive cash infusion: source

WASHINGTON (Reuters) – KeyCorp (KEY.N), Zions Bancorp (ZION.O) and Capital One Financial Corp (COF.N) are some of the banks that will receive cash under the U.S. government’s second round of capital infusions, a source familiar with the Treasury Department’s thinking said on Sunday. Four banks, including PNC Financial Services Group Inc (PNC.N), have already announced they are participating in the second round of capital injections.

 

http://www.washingtonpost.com/wp-dyn/content/article/2008/10/26/AR2008102600292.html

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The International Currency Crisis (by John Mauldin)

Many of us in the US are focused on our own woes. But this is a global credit crisis. In today’s Outside the Box, we take a look at the currency markets, which are in an historic upheaval and also look at what is going on in Europe. I suspect that Europe is in for a period of much distress, as the world begins to deleverage That is why one government after another will back the deposits of banks within their countries, for otherwise capital will flee to countries like Ireland and Germany which ARE guaranteeing the deposits for all banks in their borders. Many European banks are leveraged 50 to 1 (not a misprint). I suspect that more government will do like Belgium and the Netherlands and inject capital directly into their local banks deemed too big to fail.

I am going to give you three brief pieces which all look at a different part of the crisis, but looking at the crisis from a more international perspective. The first is from Dennis Gartman’s letter (www.thegartmanletter.com) with his views on the overnight currency markets. (Note: the yen has risen even more since he wrote!)

The second piece is a short note from my friends at GaveKal (www.gavekal.com) in which they ask can the euro survive and if so, what will it look like? Very provocative, but in line with my thoughts that the euro will one day be once again at par against the dollar.

The last piece is a column by Wolfgang Munchau writing in today’s Financial Times. Munchau argues that the fact that EU member nations managed to survive their first series of bank failures does not mean it can afford to take the risk of defaulting to continued improvisation. Munchau comes out squarely in favor of a coordinated, funded rescue program. Again, thought provoking, and as I noted in this week’s letter, something that the US could face within a few weeks as well.

Fascinating markets and times we live in. Let’s hope for a rally tomorrow.

John Mauldin, Editor
Outside the Box

First, from Dennis Gartman:

The dollar and the Japanese yen reign absolutely supreme as the world continues the rush to exit from the EUR in whatever form it now holds them. Stock markets around the world are imploding it seems, and as they do, “risk” in any form is being unwound, forcing the Yen/EUR cross to move several “Big Figures” in the shortest span of time we have seen in our years of trading. Only in the “Russian/Emerging Markets Panic” in August of several years ago have we seen movements such as these. We stand in awe and we stand in fear.

Thus to begin, we say here this morning, mincing no words whatsoever, we are more frightened now for the future of the global capital markets than we have been at any time in our thirty+ years of watching, commenting upon and taking part in them. We are fearful… and we mean this fully… that we have passed the tipping point; that things are now spinning out of control; that forces have been unleashed that cannot be stopped without some truly massive, truly strong-handed, governmental action including the closure of markets and limits upon bank withdrawals, et al. These are troubling times, and our fear is palpable and growing. Worse, these concerns are giving rise to the likelihood that the Left shall be in ascension, and that manifestly left-of-centre, interventionist government lies ahead here in the US and in Europe. Higher, rather than lower taxes will be the end result. Greater… indeed very much greater… intervention in the capital markets lies ahead. Trade and act accordingly.

To put things into proper perspective, it is reasonable to see the Yen/EUR cross move within a 1 Yen range, high to low in any twenty four hour period of time. Beyond that, the situation becomes uncommon. 1.5 Yen movements, although not rare, are unusual, and 2 yen movements in the cross as “Black Swans” indeed. Now, it seems the world is filled with black swans, looking about for the few white ones that remain, for the Yen/EUR cross, having closed near 144.50:1 on Friday afternoon… which was already rather weak for the cross was trading 156 only a bit more than a week ago…is this morning trading 140.50!

We have long said that this cross relationship is the barometer of the relative health of the global capital markets, for over the course of the past several years as risk was embraced Mr. and Mrs. Watanabe would sell their Yen holdings and “swap” them for investments abroad that might return them more money. At the same time, foreign non-Japanese investors were very willing to borrow in Yen terms, take that low cost capital outside of Japan and invest elsewhere. This was the “Carry Trade” and it was one of the driving forced in the global capital market. Hedge funds around the world employed the “carry,” borrowing cheap Yen and investing into anything, anywhere around the world where the returns were larger. Once confidence began to ebb, however, and once the losses on the carry trade itself began to wane, the pressure upon those exposed grew.

Now, not only are those who borrowed Yen and bought EURs, or Aussie dollars, or Russian Rubles, or gold, or equities anywhere around the world, or debt securities of almost any kind, finding that they are losing money on the “cross” itself, they are losing more and vast sums on the investments they made. It is horror story writ large and getting larger.

Is there any fundamental investment reason to be bullish of the Japanese Yen? No there is not. The demographics of Japan are horrid as her population ages and begins to actually decline. We have written often of this demographic time-bomb that is exploding consistently over time in Japan. The country’s population is imploding and it continues to do so despite government policies aimed at changing that trend. However, once demographics as consequential as what is happening to Japan become entrenched, time… and very, very long periods of time,… decades certainly; centuries perhaps… are needed to reverse the course.

Thus, the only thing driving Yen higher is the panic liquidation of the “carry trade.” This unwinding has been going on for several months, having begun in earnest in July when the cross touched 170:1 ever-so-briefly. It took years to build the trade up as Yen was borrowed and the EUR bought since the turn of the Millennium. It may take months yet to unwind these years of accumulation. The process is not pretty. The damage wrought is enormous. The panic lies still ahead.

Moving on, the unwinding of the long EUR/short Yen cross is being made all the more dramatic as investors find reason to shun the EUR and investments in Europe generally as confusion regarding the EUR’s future has leaped dramatically to centre stage. As we pointed out last week, Dr. Milton Friedman once said regarding the EUR… in which he tended to have very little confidence…that he doubted it would last through its first real recession. His fears are being put to test today. The world is testing the very mettle of the European confederation experiment, and investors the world wide are watching to see just how well the officials in Brussels and Frankfurt can resolve their large and growing differences.

When the economic weather is mild, the “boat” that is a unified Europe runs pleasantly upon the water. The passengers may be a bit unruly, and they may argue amongst themselves, but their arguments rarely will tip the boat for at least the waters are calm. However, when the waters around the boat are riled, the least bit of unruly activity amongst the passengers is amplified and made serious. When the waters are riled, what would have passed for mere annoyance during periods of quiet become life-threatening instead. We are at that point.

The unravelling began last week when Ireland, fearful of a run on its capital markets, touched off by the frightening weakness of her stock market last Monday, moved to guarantee all deposits within the Irish banking system. The other nations of Europe, then fearful that capital would logically rush to Ireland to seek protection, said that Ireland’s decision was at best unwise, perhaps un-European and unconstitutional, and simply downright wrong. They protested. Frankfurt and Paris led the way. Mr. Trichet said that Ireland’s unilateral decision was wrong and that all decisions of this matter should be a pan-European decision, not a parochial one. Confusion, as we have always, said, breeds contempt, and with that confusion the EUR came under assault.

Matters have gotten worse… and indeed much, much worse over the weekend, for Germany, having taken Ireland to task only last week, moved to follow Ireland’s lead as Chancellor Merkel moved to guarantee all deposits in Germany. She really had no choice. Acting to stem these swift changes in the European banking landscape, the EU’s Competition Commissioner, Ms. Neelie Kroes, said that blanket guarantees on bank deposits by individual countries within the European Union shall be considered “discriminatory.” Mr. Kroes made her comments on Dutch television over the weekend.

Ms.Kroes said that Ireland is moving to change its deposit insurance plan so that it will conform with European rules, although we have not seen in what ways Dublin is moving… or even if Dublin IS moving at all. Were we Dublin, we’d not change, for our first responsibility is to the depositors in Ireland’s banks and to the Irish capital markets, not to depositors on the Continent. Ms. Kroes said that on television that

We are now in close contact. My people were in Dublin on Friday and Saturday and returned with reports that changes will be made…. A guarantee without limits is not allowed … [but we expect] that it will be brought into a form for which we can together state that it is in line with the treaty.

Germany disagrees with Ms. Kroes and Brussels, apparently, for a spokesperson for Germany’s Finance Ministry, Mr. Torsten Albig said over the weekend that “The state guarantees private deposits in Germany” while a second spokesman said the guarantee was and can be unlimited. Now that Ireland has moved in this fashion, and now that Germany has followed, Greece has said that it shall also. Others will follow, overwhelming Brussel’s ability to protest Ireland’s and Germany’s decisions, and thus forcing Ireland to take other actions to continue to draw capital to her. Ireland’s Finance Minister, Mr. Brian Lenihan, openly defended his government’s plan to guarantee the deposits and debts of six Irish-owned banks for the next two years and pointed to the panic felt by investors over Irish financial stocks this week. We can find no fault whatsoever with Mr. Lenihan’s position. Were we he, we’d do precisely the same thing… perhaps even a bit faster.

And from my friends at Gavekal:

Was it just ten days ago that Peer Steinbruck railed at the US for the banking crisis and mentioned that, because of the pneumonia in the US, Europe may well have to endure a cold? Ten days later, a cold seems like wishful thinking. Instead, it looks as if the US pneumonia is inflicting a serious case of tuberculosis across Europe!

In the past ten days, not only have we seen European governments forced to offer blanket guarantees for depositors in banks (e.g., Ireland, Greece…) but we have also witnessed a number of banks coming hat in hands to their respective governments (Hypo Real Estate, Glitnir, Fortis, Dexia, Bradford & Bingley…). Which of course begs the question of what the respective European governments can do? Some (Finland, Holland…) with overall low government debt and small budget deficits, can afford bank bail-outs. For others, whose economies may already be in a recession (e.g., Italy, Spain, Ireland…), financing large-scale bailouts may be more of a challenge. Which brings us back to a long-standing GaveKal theme, namely how the (no) Growth and Stagnation pact (see The European Divergence Trade)  hampers EU governments from taking necessary action in the face of a banking crisis. Worse yet, in Europe, investors simply have no idea who the lender of last resort is, or if there is one. And, as we are finding out, this question is no longer a rhetorical question. After all, if the numbers bandied about by Der Spiegel of a necessary €100bn to recapitalize Hypo Real Estate (and that is just one bank!) are even close to the mark, where will the money come from? As we see it, there are two possible options:

  • The first option is that the ECB prints money aggressively to finance a European-wide bank bailout. This could prove rather inflationary for the Old Continent as wages there tend to be very sticky. It would also entail an absolute collapse in the Euro.The second option would be for the ECB to tell the various European governments that the banking mess is their own problem, and that they have to deal with it. This would most likely entail a continued divergence in the yields at which European governments borrow (currently standing at post-Euro introduction record highs).
  • And this brings us back to a long- standing GaveKal theme: for the Euro to survive, either a) it will have to be a structurally weak currency or b) some of the weakest links (i.e.: Portugal? Italy? Greece? Spain?…) may end up being forced out. The path of least resistance is, of course, for the Euro to a structurally weak currency.

Which seems to be where we are heading. Indeed, despite the baffling decision by the ECB to maintain rates unchanged last Thursday, the Euro has been in a serious freefall against the US$, CHF, Yen, etc… Of course, this weakness could also be a sign that the ECB, with its stubborn unwillingness to adjust monetary policy in the face of rapidly changing events, has seriously undermined investor confidence in the Euro area. After all, 48 hours after the ECB board met, the rescue plans for both Hypo RE and Fortis were struggling. Surely, the ECB had to know that two major banks were in dire straits? Or was the ECB board drinking the same Kool-Aid as Peer Steinbruck?

However one cuts it, it is hard to escape the conclusion that Europe is not only experiencing its own credit crunch, but will experience a nasty recession. This recession will put most European government budgets into serious deficits; foreign investors may thus start to question the logic of owning the debt of governments whose balance sheets and income statements keep on deteriorating, and whose currency is free-falling? Milton Friedman once said that the Euro would likely not survive its first major “bump in the road”. We will soon find out. The great “European Divergence Trade” is no longer about theory; it is happening before our very eyes.


And from Wolfgang Munchau in today’s Financial Times:

This has been a week of self-congratulation in Europe. We have saved a handful of banks. We have, in effect, started to cut interest rates. We even had a summit of European leaders that produced warm words of solidarity. It looks as though the Europeans have reached substantive agreement that no systemically important bank should ever be allowed to fail….The rescue of Fortis and Dexia last week, two large, but not too large, cross-border European banks, should be seen as a sign that our emergency procedures are working. Look, they say, we met quickly and decided what needed to be decided. It was fast and unbureaucratic. We do not need a European rescue fund, let alone any new institutional set-up to deal with this, they say. We can do it ourselves.

I agree that the few ad hoc rescues have worked. But do not fool yourself. They worked because they were the first wave of rescues and because they involved banks such as Fortis – of just the right size, based in just the right small- to medium-sized country where political leaders are sufficiently rational not to hold each other to ransom as midnight approaches on Sunday.

But what if this had been a bank with a name of a large European country, or an acronym that refers to a large European city, banks that are simultaneously too big to fail and too big to save? I shudder to think what would happen when Silvio Berlusconi, Angela Merkel, Lech Kaczynski and the next Austrian leader have to meet to discuss the future of a large cross-border European bank.

What worked for banking rescues numbers one to five may not work for rescues number six to 50 – the estimated number of systemically important banks in Europe. And that number does not include some banks we have already rescued, which politicians judged to be important for their domestic banking system, like Germany’s IKB Bank, but with no European relevance whatsoever. We have been squandering money.

Nor does it include the likes of Hypo Real Estate, which is not even a bank at all….

The Europeans are of course right in their overall ambition not to allow systemically important banks to fail. They are also right in their scepticism about their ability to distinguish between illiquidity and insolvency during an emergency. But I fear we are still well short of a strategy. We might be lucky, and scrape through what could well become the most dangerous month of the crisis so far. If, for example, the credit default swap market were to blow up in the next couple of weeks – a non-trivial probability – we have no plan.

Nicolas Sarkozy, the French president, was therefore right when he appeared to back a €300bn rescue fund. Regular readers of this column will probably recall my somewhat constrained enthusiasm for his economic policies. But this had the makings of a good plan. He ended up distancing himself from it, when it became clear that Angela Merkel, the German chancellor, would not support it. But he was right and she was wrong. Of course, a European plan should not have been a copy of the bail-out that was finally adopted by Congress on Friday. The US plan failed to address the problem of an undercapitalised banking sector. That issue is even more important in Europe where many banks have an extremely weak capital base, with leverage ratios of 50 or more.

Europe does therefore not need any bail-out plan, but a plan that specifically addresses the capitalisation problem. Concretely, three things are needed: the first and most important is money. A sum of €300bn will not cover the EU in a worst-case scenario, but it is a sensible number to start with; secondly, you need a semi-permanent crisis committee empowered to take decisions; and finally you need a strategy to apply symmetrically and based on clear rules about when to recapitalise, and when not.

If you pursue a strategy of taking purely national decisions, you run the risk that at least one government will hit its own financial ceiling before this crisis is over, or that decisions have negative spillovers on the banking systems of other countries. Moreover, you end up with a beggar-thy-neighbour regulatory race, as we saw last week when Ireland and Greece unilaterally issued blanket guarantees for large parts of their banking sector. Last night, Germany was preparing a full deposit guarantee for its own banking system. Last but not least is the risk of violent political setback against a process that lacks transparency.

For Europe, this is more than just a banking crisis. Unlike in the US, it could develop into a monetary regime crisis. A systemic banking crisis is one of those few conceivable shocks with the potential to destroy Europe’s monetary union. The enthusiasm for creating a single currency was unfortunately never matched by an equal enthusiasm to provide the correspondingly effective institutions to handle financial crises. Most of the time, it does not matter. But it matters now. For that reason alone, the case for a European rescue plan is overwhelming.

EU leaders make vows not plans in face of crisis

The global financial crisis forced European leaders to gather for an emergency summit in Paris. From left to right, Luxembourg's Prime Minister Jean Claude Juncker, Italian Prime Minister Silvio Berlusconi, German Chancellor Angela Merkel, French President Nicolas Sarkozy, British Prime Minister Gordon Brown, European Commission President Jose Manuel Barroso and European Central Bank President Jean Claude Trichet.

The global financial crisis forced European leaders to gather for an emergency summit in Paris. From left to right, Luxembourg's Prime Minister Jean Claude Juncker, Italian Prime Minister Silvio Berlusconi, German Chancellor Angela Merkel, French President Nicolas Sarkozy, British Prime Minister Gordon Brown, European Commission President Jose Manuel Barroso and European Central Bank President Jean Claude Trichet.

Europe’s economies to coordinate responses to help ailing banks

updated 8:18 p.m. ET, Sat., Oct. 4, 2008

PARIS – Europe’s four major powers vowed Saturday to do all they could to prevent Wall Street’s turmoil from destabilizing their banking systems — even as a $48 billion plan to save a German lender fell apart.

But aside from vague statements of intent and calls for tighter regulation, the leaders of Germany, France, Britain and Italy shied away from the sort of massive bailout passed by the U.S. Congress on Friday.

Europe’s four largest economies pledged to coordinate national responses to help banks in distress, but their failure to agree an EU-wide plan reflects divisions in Europe on how to deal with the crisis washing up on the continent’s shores from the United States.

France had mooted a multibillion-dollar EU-wide government bailout plan, but backed off after Germany said banks must find their own way out.

The EU’s failure during the past week to pull together on dealing with the crisis has caused worry. Both Ireland and Greece angered their EU neighbors by acting independently and guaranteeing to protect all savings.

The Saturday afternoon summit was arranged hastily with the aim of reassuring jittery markets and investors. A day earlier, U.S. legislators approved a $700 billion government plan to buy up bad debt from banks and help unfreeze lending.

The four leaders — French President Nicolas Sarkozy, British Prime Minister Gordon Brown, German Chancellor Angela Merkel and Italian Premier Silvio Berlusconi — vowed to ensure the soundness and stability of Europe’s banking and financial system, but they gave few specifics.

Instead, they took a swipe at European subsidy rules designed to ensure fair competition by preventing governments propping up failing companies.

Given the “exceptional circumstances,” they said, EU regulators should be flexible on laws that restrict how much governments can give companies in trouble.

European states have pumped billions of dollars into banks to keep them afloat over the last week, trying to assure savers that their money was safe and avert a panic that has frozen lending across the world.

Bank bailout fails
The latest institution to run into trouble was Germany’s No. 2 commercial property lender, Hypo Real Estate Holding AG, which said its $48 billion rescue plan had unraveled Saturday when private banks pulled out. They said they did not want to provide the bank with credit.

The European leaders also demanded more room for maneuver on EU economy rules as European growth slows sharply. A statement distributed after the meeting said guidelines for EU nations to keep budget deficits under 3 percent of GDP “should reflect the current exceptional circumstances.”

France’s deficit is veering near the limit, and other euro nations may also come close or exceed the maximum — reversing recent efforts for the 15 nations that share the currency to reduce debt and deficits.

Easier for the leaders to target were the “golden parachutes” that allow chief executives of failing firms to walk away with millions in leaving bonuses.

Sarkozy, the summit host, said all four nations “pledged that in cases of public support to banks in difficulty, the managers will be punished, and shareholders as well will bear some of the consequences.”

They pledged to help small companies seeking credit by speeding up the release of $41.5 billion in European Investment Bank loans.

Sarkozy suggested that, with the United States focused on its November presidential election, it was important that Europe act to reshape a more responsible global economy.

“We want to put down the foundations of a capitalism of the entrepreneur and not of the speculator. We want transparency, we want moralization. We want the creation of value. We want people to have confidence,” he said.

But he recognized the need for global cooperation, calling for a summit of world leaders to tighten control over hedge funds and other high-risk investment funds that don’t currently face all the same rules as banks and insurers.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

European Nations Struggle to Address Financial Crisis


05 October 2008

Governments across Europe are scrambling to save failing banks Sunday, a day after European leaders called for a more coordinated response to the global financial crisis.

In Germany today, government and business leaders met to discuss efforts to save the troubled commercial property lender, Hypo Real Estate AG.  A $48 billion rescue plan to salvage the German company fell through Saturday.

German Chancellor Angela Merkel said officials are working hard to secure the lending company.  She said Berlin will not allow the distress of one financial institution to distress the entire system.

In Belgium, financial officials struggled to find a buyer for Fortis, a Belgian and Dutch banking and insurance group.  The Netherlands recently nationalized the group’s Dutch operations.

French President Nicolas Sarkozy (l), and the head of the International Monetary Fund Dominique Strauss-Kahn following their meeting at the Elysee Palace in Paris, 04 Oct 2008

The leaders of France, Britain, Germany and Italy met Saturday in Paris and agreed to sign a formal pact to support their individual banking sectors.

Europe’s financial system has been hard hit by the U.S. economic crisis.

In the United States, banking giant Citigroup announced today that a judge has agreed to temporarily block the sale of troubled Wachovia Bank to rival Wells Fargo Bank.  Citigroup says the deal violates an earlier agreement it had reached to take over Wachovia.

U.S. lawmakers approved $700 billion financial bailout plan on Friday.  The plan allows the U.S. government to buy failing investments from troubled financial companies in an effort to restore lender and investor confidence, and to restart economic growth.

Germany guarantees bank deposits

Chancellor Angela Merkel and Finance Minister Peer Steinbrück announcing their plan for Hypo Real Estate in Berlin on Sunday. (Pool photo by Rainer Jensen)

Chancellor Angela Merkel and Finance Minister Peer Steinbrück announcing their plan for Hypo Real Estate in Berlin on Sunday. (Pool photo by Rainer Jensen)

 

FRANKFURT: As German leaders and bankers worked feverishly to rescue a lender considered too big to fail, the government announced Sunday that it would guarantee all private savings accounts in Germany – worth about €500 billion – in an effort to reinforce increasingly shaky confidence in the financial system.

Officials in Berlin were frantically trying to salvage a €35 billion, or $48 billion, bailout devised just a week ago for Hypo Real Estate, a major German property lender based in Munich and member of the benchmark stock index, after commercial banks withdrew their support, fearing greater losses.

The Belgian authorities, meanwhile, were looking for ways to secure the future of Fortis operations in Belgium, after its Dutch operations had been nationalized by the Netherlands on  Friday.

In Iceland, where the government seized control of a bank last week, officials were considering more sweeping measures to stabilize finances there as well.

And the board of UniCredit, which is based in Milan and also operates in Germany and much of Eastern Europe, met to consider a capital increase after being buffeted by a week of speculation about its solvency. A nightmare outcome for Europe would be the failure of a major, border-straddling bank like Unicredit.

Much of the weekend activity was undertaken with a view toward having solutions in place by the time financial markets opened Monday in Asia, a trigger point that officials around the world have come to view warily.

With memories of how the bankruptcy of Lehman Brothers put the crisis into high gear three weeks ago, officials fear letting investors wake up to a festering problem. That could easily provoke new losses in stock markets and test the limits of tight credit markets, the core of the crisis.

Worried that the continued turmoil at Hypo Real Estate would lead to a depositors’ panic at other German banks, Chancellor Angela Merkel and Finance Minister Peer Steinbrück made a rare Sunday appearance before television cameras in Berlin on the steps of the Chancellery to assure a jittery public about the safety of their savings.

The government first promised the deposit guarantee obliquely and later added a more explicit promise, with plans to seek any necessary legislation to carry it out.

“This is an important signal,” Steinbrück said, “so that it comes to some calming down, not to reactions that would be out of proportion and would make our crisis management and crisis prevention that much more difficult.”

Mindful of the rising public anger at the use of public money to buttress the business of high-earning bankers, Merkel promised a day of reckoning for them as well.

“We are also saying that those who engaged in irresponsible behavior will be held responsible,” Merkel said. “The government will ensure that. We owe it to taxpayers.”

German deposits are already guaranteed through a mixture of deposit insurance plans, with the first line of defense being a state fund.

A second line is the programs to which Germany’s public, private and community banks contribute. The Finance Ministry said the new blanket guarantee would be effective immediately, although it was unclear whether new legislation would be needed.

“We think this will create the confidence we need,” said a ministry spokesman, Stefan Olbermann. “That means the cost could be nothing.”

Reports about the banking crisis had created “great uncertainty” among ordinary Germans, prompting the guarantee, Olbermann said. Over the past week, the German media have engaged in an angst-ridden discussion about the safety of private savings.

However radical, the German move stops short of what Ireland did with its banks last week. The Irish government backstopped savings accounts as well as other liabilities of six domestic banks, a step that effectively lent a sovereign guarantee to creditors of the banks and ensured their solvency.

Senior German officials meeting in the chancellor’s office Sunday morning were joined by Josef Ackermann, chief executive of Deutsche Bank, and Klaus-Peter Müller, chairman of the Association of German banks and Commerzbank, a large retail and corporate bank.

The Hypo Real Estate rescue plan, announced last Monday, quickly fell apart over the company’s liabilities, which are linked to the U.S. municipal bond market, according to a person briefed on the talks, who requested anonymity because the outcome was still unclear.

Talk in Berlin of winding the bank’s operations down as the price for the bailout had accelerated its problems – and further depressed its share price – over the past week, said a Hypo spokesman, Hans Obermaier.

Depfa Bank, a Dublin-based lender that was acquired by Hypo last year and specializes in government lending, is at the center of its problems. Depfa underwrote a package of U.S. municipal bonds that were subsequently downgraded by ratings agencies. That step obliged Depfa to buy the bonds back, a contractual requirement that would create almost immediate liquidity problems at Hypo itself, given the difficulty of getting short-term funding in today’s credit markets.

Banks from outside Hypo uncovered the problem after the bailout plan was completed last week, and they soon realized that the €35 billion that was supposed to sustain the bank through the end of 2009 was inadequate. Instead, it would need €50 billion by the end of this year and €10 billion in 2009.

After the magnitude of the problem became clear, the banks – which were not publicly identified – revoked their participation in the plan, which had been a joint public-private deal.

One option now might be to allow Hypo to use the bonds as collateral for drawing liquidity from the European Central Bank, the person briefed on the talks said.

“The problem is not outrageous,” the person said. “You can get a solution, but you need the assistance of the government.”

 

Wachovia Says Court Order Doesn’t Invalidate Wells Fargo Bid

By Rick Green

Oct. 5 (Bloomberg) — Wachovia Corp., the North Carolina bank that’s received bids from two suitors, said a court order preserving Citigroup Inc.’s exclusive right to negotiate hasn’t derailed a higher offer from Wells Fargo & Co.

The order by New York State Supreme Court Judge Charles Ramos yesterday doesn’t have “any effect on the validity of the Wells Fargo agreement,” Charlotte-based Wachovia said today in a statement distributed by PR Newswire, adding that the latter deal requires no government assistance. “The agreement is in the best interests of shareholders, employees, creditors and retirees as well as the American taxpayers.”

Citigroup, the biggest U.S. bank by assets, is bidding for Wachovia while trying to rebuild after losses tied to the collapse of mortgage markets. The New York-based bank wants to buy parts of Wachovia for about $2.16 billion, and San Francisco-based Wells Fargo is offering about $15 billion for the whole company.

Last Updated: October 5, 2008 13:44 EDT

Reversal of fortune: House approves $700-billion bailout bill

Traders pause to watch the House vote on television on the floor of the New York Stock Exchange today in New York City. The U.S. House of Representatives approved a $700-billion bailout of the U.S. financial system.

 Four days after rejecting a similar plan, the House of Representatives approves the measure by a 263-171 vote. Bush quickly signs the bill into law.

By Richard Simon and Nicole Gaouette, Los Angeles Times Staff Writers
October 4, 2008
WASHINGTON — The House of Representatives approved the $700-billion Wall Street bailout Friday, setting in motion the biggest government intervention in the financial system since the Great Depression.

President Bush quickly signed the bill, and Treasury Department officials vowed to move swiftly to use sweeping new powers to try to stabilize financial markets and ease deepening fears about the economy.

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