THE EVENT: German bank IKB was bailed out Monday by its state-owned largestshareholder after an off-balance-sheet funding vehicle was hit by exposure toU.S. subprime real-estate loans. The exposure hasn't been quantified.
THE BACKGROUND: The state-controlled shareholder bailing out IKB is KfW, whichwas set up to reconstruct German industry after World War II. KfW is 80% ownedby the German national government and 20% by state governments. It loansextensively to midsize German companies.
IKB, whose full name is
The subprime exposure is in special funding vehicle named Rhineland Funding.No clear details on the exposure have been released. A statement said that ithas "a large volume of structured credit investments, the majority of whichcarry very good ratings."
The sudden disclosure comes just 10 days after IKB released financial resultsthat downplayed its exposure to the sector, stating that "it is worth noticingthat the bulk of our investments are in portfolios of corporate loans."
THE FALLOUT: KfW has with immediate effect stepped in to safeguard IKB'screditworthiness, shouldering all the obligations to Rhineland Funding and someother portfolio investments.
As KfW enjoys an explicit state guarantee, this in effect puts a rock-solidguarantee behind IKB.
IKB's chief executive has quit. IKB shares have fallen nearly 25%. IKB hasalso recanted its profit forecast, saying profits for 2007 will be "significantly lower" than it said on
WHAT THEY SAID: German finance ministry spokesman Torsten Albig said: "Wesupport the KfW's involvement."
A spokeswoman for Bafin, the German financial regulator, said KfW's move "ensures that this doesn't throw the market into turmoil or that it has negativerepercussions for the German banking system."
IKB's press statement of
WHAT HAPPENDS NEXT: The news helped the the iTraxx Crossover, a benchmark ofsentiment in the credit derivatives market, move to an all-time high of 500 bpsMonday.
Traders fear more, similar disclosures - especially with many funds markingtheir portfolio to market at the end of the month.
Still, there's no evidence yet of any domino effect in other German banks.
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-By Gren Manuel, Dow Jones Newswires; 44 20 7842 9279; gren.manuel@dowjones.com
(END) Dow Jones Newswires
