Subprime Consequences
January 21, 2008
Just a few months ago WestLB issued a statement assuring investors that its exposure to subprime securities in the United States was "relatively limited."
But the bank was much more vulnerable than it first admitted. Following a meeting of its owners late Sunday, Jan. 20, WestLB bank said the bank will need a bailout from stakeholders to offset a 1 billion euro loss. The losses were caused in part by exposure to the subprime mortgage crisis in the United States.
"The owners agree that in addition to the measures decided today, restructuring needs to be implemented and the bank's refocusing should be accelerated," WestLB said in a statement.
Bank will face cuts
WestLB is majority owned by the western German state of North Rhine-Westphalia. WestLB announced it was continuing talks to merge with state-owned Helaba Bank, a smaller Frankfurt-based competitor. The merger would create Germany's biggest state-owned bank.
"Our owners have proven that they stand fully behind the bank," said WestLB chief Alexander Stuhlmann.
In a letter to investors Stuhlmann said the bank could not exclude the possibility of additional losses in the future.
The bank has said it will act quickly to reduce costs. While media reports have said the bank plans to ax 2,000 jobs, a spokesman for WestLB said the bank had not yet determined how it would go about reducing costs.
"The exact form of the measures and their timetable will be decided quickly," WestLB said.
The bank said Monday it wanted to reorganize its operations to focus more on mid-sized corporate clients.
Little initial concern
In August 2007, WestLB said there was little reason for concern that it would get caught up in the US subprime crisis as 98 percent of the bank's securities were rated "A" or better.
"The commitment is relatively limited, and its rating is very high, which signals that we do not have to be too concerned," a spokesman said.
Yet the bank did end up getting caught in the US subprime crisis, as did many other German institutions. WestLB's announcement added to the concern on European stock markets about the scale of the fallout from the US housing market crisis with financial stocks leading big falls across Europe Monday.
German market slips
European stocks sank 2.2 percent in early trade on Monday, trading just above the lowest level since August 2006. Fears of a US recession and concerns over write-downs made investors nervous about banking stocks.
German stocks fell for a fifth day Monday. Commerzbank led declines, dropping 87 cents to 20.21 euros on news that it was also being downgraded due to losses related to the subprime market tension. The bank's losses are expected to be about 210 million euros for the fourth quarter of 2007, according to US investment bank Bear Stearns.
"The situation remains tense," Michael Scholz, an equity strategist with WestLB AG told Bloomberg Television. "January has been a disaster for share prices so far. If this continues, we'll have a problem this quarter."
The German government is still counting on the economy to grow in 2008 despite losses due to the financial markets crisis, a spokesman said on Monday.
"We think Germany will continue to evolve positively" Ulrich Wilhelm told reporters. "The euro zone is still in a growth phase, despite the negative data."