Why does the German tax payers money cover the loss of the IKB bank?

  Why does the German tax payers money cover the loss of the IKB bank  

INDEX

  INDEX OF TABLES  II

1  INTRODUCTION  1

2  VISUALIZE DIRECT LINK OF LENDING (IKB KFW)  2

2.1  IKB  2

2.1.1  GENERAL VIEW OF THE IKB  2

2.1.2  BUSINESS ACTIVITY OF THE IKB  2

2.1.3  SHARE STRUCTURE  2

2.1.4  IKB STOCK EXCHANGE  3

2.2  KFW BANKING GROUP  4

2.2.1  KFW IN BRIEF  4

2.2.2  BRANDS OF THE KFW AND THEIR FUNCTIONS  4

2.2.3  CAPITAL SPLITTING OF THE KFW  5

2.2.4  KFW S ALLIANCE TO THE IKB  5

3  RISK BUSINESS SPECIAL PURPOSE VEHICLE  5

3.1  SUBPRIME CRISES  5

3.2  RISK BUSINESS  5

3.3  SPECIAL PURPOSE VEHICLE (SPV)  6

3.3.1  CONDUIT AND ABCP  6

3.3.2  ADVANTAGES AND DISADVANTAGES OF A CONDUIT  7

3.3.3  RHINELAND FUNDING  7

4  ANALYSIS IKB ANNUAL REPORT  9

4.1  PUBLISHED INFORMATION  9

4.2  BLANACE SHEET FACTS  10

5  INTERVENTION IN THE IKB CRISES  11

5.1  CAUSES FOR THE INTERVENTION OF THE STATE  11

5.2  CAUSES FOR THE INTERVENTION OF THE BANKS  12

6  GENERAL CAUSES FOR AN INTERVENTION  12

6.1  DIRECT EFFECTS  13

6.2  INDIRECT EFFECTS  13

6.2.1  BANK RUN  13

6.2.1  LOSS OF RECEIVABLES IN THE INTERBANK BUSINESS  14

7  FORECAST  14

8  CONCLUSION  14

9  APPENDIX  III

APPENDIX A:  ENQUIRY THE ASSOCIATION OF GERMAN BANKS  III

APPENDIX B:  MODIFIED ANNUAL BALANCE SHEET OF THE IKB  IV

  REFERENCES  VI

I

Why does the German tax payers money cover the loss of the IKB bank?

INDEX OF TABLES

Figure 1: Shareholder diagram of the IKB Figure 2: Overall trend of the IKB shares during the past twelve months Figure 3: Outstanding ABCP-volumes of German Sponsors by the end of 2006 Figure 4: The Conduit “Rhineland Funding” Figure 5: Summary balance sheet IKB 2007-03-31 in €

II

Why does the German tax payers money cover the loss of the IKB bank?

1 Introduction

Due to the subprime crises in the USA, initiated in 2007 and the illiquidity of the ABS-bonds and ABCP-papers, the IKB and the Sachsen LB are now under threat. Therefore the banks were unable to refinance their purchased receivables. Over and above some notoriously well known German banks, other banks are also involved in this monetary dilemma. It is needful to mention the Deutsche Bank, West LB and Bayern LB and international banks such as UBS (Switzerland), Northern Rock (Great Britain), Bear Stearns (USA).

The general assumption could be that the cause of this was due to the misplaced speculation on the US money & capital market by the IKB and the above named banks, leading to their involuntary awareness in the public eye. Also innumerable hedge-funds have been closed down and liquidated.

True Sales have livened up, securitisations are in tendency and record on securitisations of credit risks hit the headlines of the economic press. The press called attention to the new financial instrument of the German economy, which was totally unknown 15 years ago in these parts ¹ .

This financial instrument has been established within German and European credit services sector. By the end of the year 2005 more than 80% of quoted European credit institutes had transacted a securitisation action, including all German major banks ² .

The aim of this research paper is to distinguish why the German taxpayers´ money should cover the losses of the IKB bank? General acceptance could be since the IKB is a “normal” bank, thus it is independent as an enterprise. However this research paper has established that the taxpayers are connected to the losses of the IKB.

Beginning with a global overview and the structure of the IKB is a good start to gain an insight into the complex sticking point. Hereafter it is illustrated how the KfW is connected to the IKB as a “safeguard”. After all, there is a need to clarify the capital split of the KfW to get the idea of the connection to the taxpayers.

Further the paper highlights the function of the KfW and the business risk of the IKB within the established conduit of the Rhineland Funding. Similarly the intervention of the IKB will be highlighted, the present causes for the intervention in the IKB crises will be illustrated and analysis will show why bankruptcy has been avoided so far. As a result direct and indirect effects concerning the customers of a bank are mentioned briefly. Topically is to fathom out the future of the IKB with reference to the present situation on the finance & capital market. The selling wave is on going ³ .

¹ Börsen-Zeitung 07.09.2006, No. 172, page 5; Handelsblatt 11.01.2007, No. 8, page 27; Frankfurter Allgemeine Zeitung 15.03.2006, No. 63, page 21.

² cp. Ricken (2007), page 147.

³ http://www.godmode-trader.de/de/boerse-nachricht/IKB-Neue-Verkaufswelle-laeuft-schon-Ziel-bei%2Ca861933.html.

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Why does the German tax payers money cover the loss of the IKB bank?

2 Visualize direct link of lending (IKB & KfW)

2. 1 IKB

2. 1. 1 General view of the IKB Founded in 1924 the IKB ⁴ - Deutsche Industriebank AG – is a credit institution, which is primarily specialized in medium and long-term financing for medium-sized companies ⁵ . With a balance sheet total of € 63.5 billions on March 31, 2007 ⁶ and more than 1,838 employees in 23 subsidiaries in Germany, Europe and USA ⁷ , the IKB is present in eight countries of the world. According to the facts and figures the IKB distinguishes medium-sized structures. By comparison with other involved German banks mentioned above, the IKB balance sheet total in 2007 is of minor significance. In comparison other banks have a far greater balance sheet, € 2,020 billion (Deutsche Bank) ⁸ , € 295.9 billion (West LB) ⁹ , € 576 billion (Bayern LB) ¹⁰ .

Moreover the IKB, as a market leader in that sector in Germany has more than 80 years of experience. Customer Service and partnerships over decades is the settled direction of Dr. Günther Bräunig, the present Chief Executive Officer (CEO) of the bank ¹¹ .

2. 1. 2 Business activity of the IKB

Their business activity covers various kinds of international financing issues, such as longterm credits, venture, equity and infrastructure financing. Further financial products of the medium-sized bank are derivates, leasing, participations interests and asset-backed securitizations, to mention a wide range of their area of operations ¹² .

2. 1. 3 Share structure

Due to the IKB is quoted several enterprises holding shares in that business. With less than the majority, the principal shareholder is the KfW ¹³ , which is a government banking group. Thus the greatest interest belongs to the strategic partner of the IKB. The structure and purpose of the KfW will be illustrated accurately at another point.

39.3 % is owned by institutional and private investors, which have the second biggest interest in the IKB, such as private individuals’ respectively particular trade companies. A foundation which undertakes industry research holds 10.7% of shares. Stiftung Industrieforschung is a non-profit-organization with its place of business in Cologne ¹⁴ .

⁴ http://www.ikb.de/content/de/metanavigation/suchergebnis.jsp?query=gr%C3%BCndung&x=0&y=0 (IKB presentation, page 6.

⁵ http://www.ikb.de/content/de/.

⁶ http://www.finanznachrichten.de/nachrichten-2008-02/artikel-10137508.asp.

⁷ http://www.ikb.de/content/de/ueber_uns/die_bank/adressen/index.jsp.

⁸ http://geschaeftsbericht.deutsche-bank.de/2007/gb/lagebericht.html.

⁹ http://www.westlb.de/cms/sitecontent/westlb/ir/de/irreleases/ArchiveIRReleases/ArchiveIRReleases /ir07.standard.gid-N2FkNDZmMzU4OWFmYTIyMWM3N2Q2N2Q0YmU1NmI0OGU_.html.

¹⁰ www.bayernlb.de/ar/Internet/de/Downloads/0100_CorporateCenter/1320Kommunikation/2007/ Einzelabschluss_07_D.pdf.

¹¹ http://www.ikb.de/content/de/metanavigation/impressum.jsp.

¹² http://www.ikb.de/content/de/produkte/inland/index.jsp.

¹³ http://www.ikb.de/content/de/ir/aktie/allgemeine_infos/index.jsp.

¹⁴ http://www.stiftung-industrieforschung.de/seiten/hauptframe_neu.html.

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Why does the German tax payers money cover the loss of the IKB bank?

The foundation has been developed with the assets of the IKB. They are participating on the nominal capital of the IKB. The development funds come from dividends.

Finally shares of 4.5 % are owned by Sal Oppenheim (Cologne). The key aspects of activity of the private bank are principally focused on fund management and investment banking. The banking house administrates corporate assets, private means and the capital of foundations. Sal Oppenheim is one of the leading private banks in Europe concerning this main sector. 15

Consequently almost 55% of the IKB are in private holdings ¹⁶ .

2. 1. 4 IKB Stock exchange

Usually the money lender carefully examines the company which they wish to invest money in. Below the chart shows the trend for the share price of the Deutsche Industriebank during preceding one year.

At the beginning in June 2007 the exchange rate was quite stable. One share had a value of about € 30 ¹⁸ . Coming back to the subprime crises in August 2007 a huge devaluation is recognizable. Currently the exchange rate is positioned at € 3.75 ¹⁹ .

IKB equity holders lost a substantial amount of money ²⁰ . The present day value is one tenth of its value in May 2007. Obviously the trend is continuing, because of the doubtful prospects of the IKB, which will be focused upon in the conclusion.

¹⁵ http://www.oppenheim.de/de/01_unternehmen/01_wir_ueber_uns/01_01.htm.

¹⁶ http://www.ikb.de/content/de/ir/aktie/allgemeine_infos/index.jsp.

¹⁷ http://www.ikb.de/content/de/ir/aktie/allgemeine_infos/aktionaersstruktur.pdf.

¹⁸ http://aktien.onvista.de/snapshot.html?ID_OSI=83156 /.

¹⁹ http://www.ikb.de/content/de/ (at 13.30 stock exchange on May 31, 2005).

²⁰ http://frontal21.zdf.de/ZDFde/inhalt/9/0,1872,7186057,00.html.

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