the promotion of regional growthled to wheeling and dealing thatundermined rigorous bank risk man-agement

The mix of public and privateinterests in the new E200 billion-assetbank meant that while Berlinrsquosregional government owned themajority of the shares in the bankthe new institution was also publiclylisted That made it an unusualhybrid in the German banking sys-tem which generally offers a cleardivision between public banks(backed by state guarantees) andtheir private competitors

Up until late 2000 BgBrsquos seniormanagement often touted thebankrsquos unusual hybrid structure as apotential way forward for Ger-manyrsquos public banking system Butthe way the bank was structuredand managed left it vulnerable toweak controls and conflicts of inter-est

One issue was that Germanbanking law insisted on a clear sep-aration of management betweendifferent kinds of banking institu-tions BgBrsquos complex mix of busi-nesses made it difficult for the super-visory board of the listed parentinstitution to maintain control ndash andinsist on clear risk reporting andaccountability ndash from its historicallypublic subsidiaries

The bank also faced the moreprosaic problem of diversifying itsportfolio of risk Many of BgBrsquos mostimmediate growth opportunities inthe mid-1990s particularly from1994 to 1997 were associated withthe rebuilding of Berlinrsquos housinginfrastructure and cultural institu-tions ndash a process that led the worldrsquosbusiness magazines to label the cityas lsquoEuropersquos biggest building sitersquoAs it would turn out that meant the

bank lacked the wide base of com-mercial and industrial clients thathelped Germanyrsquos other majorbanks to ensure they were not tooexposed to any single business sec-tor

In this heady atmosphere ofrenewal BgBrsquos subsidiaries rushed toset up closed real estate funds thatwould allow wealthy clients ndashincluding select members of Berlinrsquospolitical and banking elite ndash toinvest in the property boom

Controversially investors in thefunds were given financial guaran-tees against much of the risk inher-ent in their investment as part of thedeal (The names of investors inthese lsquoVIP fundsrsquo were graduallymade public between 2001 and

summer 20023 embarrassing manyof Berlinrsquos political and financialindustry luminaries)

But the real economic damagebegan when the institution mar-keted the opportunity to invest insimilar property funds to a widerpublic With a product range thatoffered attractive rates of returntogether with generous rentalincome and repurchase guaran-tees BgB quickly became one ofthe leading players in Europersquos realestate investment fund market Butthe institution was buying marketshare by assuming real estate risksthat were not properly measured ormanaged

The concentration of property-related risk in BgBrsquos portfolio also

July 2002 02

ERiskcom

1999 The property bubble burstsin Berlin and surroundingregions

Late 2000 There are growingworries about the potential formounting losses from the bankrsquosreal estate portfolio but fewyet suspect the extraordinarysize of the problem

January 2001 BgB says it hasplaced assets from its realestate business into a specialvehicle Immobilien undBeteiligungen or IBAG

February 2001 Press reports inGermany fuel rumours that BgBhas lost billions of euros from itsproperty-linked funds Inside thebank there is a crisis brewing

March 2001 The bankpostpones its shareholdermeeting and annual report andis now in full crisis Seniormanagers at its subsidiaries stepdown and the bank announcesthat it will buy back andreabsorb its IBAG real estateinvestment vehicle

March ndash May There is increasingdisquiet in Berlinrsquos ruling lsquograndcoalitionrsquo over the pastconduct of the ChristianDemocrat party in relation toBgB

6 May 2001 Landowskyannounces his resignation asChristian Democratparliamentary party leader

Timeline continued

continued overleaf

lsquoThe real economic damage beganwhen the institution offered theopportunity to invest in similarfunds to a wider publicrsquo

July 2002 03

ERiskcom

arose from conventional loans toproperty developers These loansincluded the funding of a propertydevelopment company calledAubis AG in a deal that later cameto be regarded by the Berlin pressas symbolic of the bankrsquos poorlycontrolled loan approval process

In 1995-96 Aubis persuaded theBerlin Hypo controlled by veteranbank executive Klaus Landowsky toextend loans worth hundreds of mil-lions of euros to fund the refurbish-ing of Cold War period flats in theBerlin region with the aim of gener-ating premium rental income

But Landowsky was not just abank executive he had also built aparallel career as a regional politi-cal grandee and was entrenchedin the Berlin senate as the long-termleader of the Christian Democratparliamentary party which con-trolled the coalition that dominatedBerlinrsquos political life from 1991 untilthe summer of 20014

Later investigations revealed thatthe two businessmen who con-trolled Aubis (and who themselveshad strong historical links to theChristian Democrat party) hadmade a campaign donation toLandowskyrsquos party5 Landowskylater strongly maintained that thedonation had nothing to do with hisrole at the bank or with the bankrsquosdecision to grant credit to the prop-erty developers

But the Berlin Hyporsquos decision toextend credit to the property devel-oper proved expensive for the bankwhen Aubis found itself unable torent out its refurbished properties atappropriate rates In 1999 with theEast German and Berlin propertymarket in freefall and Aubis in deeptrouble BgB took over the com-panyrsquos under-performing assets

rather than force the property com-pany into bankruptcy As with manyother BgB property-linked deals therecovery rate on the loan was poor

The potential problems at thebank did not go unmarked in Berlinin the mid-1990s In 1997 a newmanagement board chairmanWolfgang Rupf took charge andthere was an opportunity to stream-line the bankrsquos organisation andimprove risk reporting But Rupf didnot succeed in uncovering the fullextent of the bankrsquos risk exposuresor in pushing through the necessarychanges

Instead the bank attempted toimprove itself in a piecemeal waywhile developing grand ambitionsto merge with other major Germaninstitutions and to acquire strategicbanking assets in emerging CentralEuropean markets such as theCzech and Polish markets BgBrsquossenior executives continued to talkpublicly of further expansion inCentral European markets until wellinto 2000 Closer to home howeverthe parent bankrsquos fate now hunglargely on how accountants andregulators chose to value the creditand investment guarantee risks thathad been embedded deep in theportfolios of its subsidiaries duringthe mid and late 1990s

In late 2000 the bank embarkedon a bold plan to re-engineer thisincreasingly ominous risk portfolioThe idea developed with invest-ment bankers was to sell off themore profitable operating businessassets of property subsidiary IBGusing an offshore investment vehi-cle called Immobilien undBeteiligungen AG (IBAG) whichcould subsequently be listed Themoney from the sale could then beused to plug the hole in the prop-

May 2001 Berlin Senateguarantees that it will back thebank for fear that theregulators will otherwise closedown the crippled institution

7 June 2001 Berlin coalitiongovernment collapses as SocialDemocrats pull out of grandcoalition in protest at handlingof bank crisis by ChristianDemocrats

16 July 2001 BgB reports amassive loss of E165 billion forthe year 2000

August 2001 Leading up to itsdelayed annual meeting forshareholders at the end ofAugust the bank announces itsplan to bring its subsidiariesback into the main structure ofthe bank to improve riskmanagement From now on itwill concentrate on its corestrength in retail banking

September 2001 Berlin pumpsE175 billion of new capital intothe bank to secure its future

October 2001 ChristianDemocrats suffer fall-out fromthe scandal with a 17 per centpoint drop in their vote inregional elections

Early November BgB deniespress rumours that it faces a E1billion-plus loss for 2001following its E165 billion loss in2000 though it agrees thatlosses will be substantial

Timeline continued

continued overleaf

July 2002 04

ERiskcom

erty-linked liabilities that remainedin the bankrsquos portfolio On 2 January2001 the business press dulyreported that BgBrsquos real estate busi-ness had been transferred to IBAGin preparation for the spin-off6

But if the transaction was to bemore than a confusing piece offinancial engineering it requiredenthusiasm from investors on theone hand and some certaintyabout the level of the bankrsquos realestate liabilities on the otherNeither was forthcoming and inearly Spring an ever-widening inves-tigation by BaKred Germanyrsquos fed-eral banking supervisors forced thebank into a series of humiliatingabout-turns

In March BgB postponed itsannual shareholder meeting andadmitted it could not complete its2000 accounts because of BaKredrsquoscontinuing investigation and deepuncertainties about the potentialrisk in the property-linked portfoliosof BgBrsquos subsidiaries Soon after thebank announced that its supervisoryboard had approved the repur-chase of the IBAG vehicle andpromised to make clear the conse-quences of this buy-back in its dis-cussion of the year 2000 accountsMeanwhile a special enquiry byregulators into the bankrsquos creditapproval procedures led them toquestion the reliability of several(unnamed) senior executives

The bankrsquos growing disarray ledto a rash of resignations and depar-tures In early March 2001 KlausLandowsky stepped down as headof Berlin Hypo Other senior man-agers at the Landesbank Berlinstepped down a few days laterafter concerns that they hadallowed certain major creditorslsquofreedom from liabilityrsquo in transac-

tions without telling chairman RupfMeanwhile the political scandal

over the mismanagement of thebank linked in many Berlinersrsquominds to a much wider scandal inGermany over the funding of politi-cal parties gathered pace withcalls for the resignation ofLandowsky from his post as leaderof the Christian Democrat parlia-mentary group in the Berlin senate

In May the Berlin senate unableto accept the idea of closing BgBand aware that it could not repudi-ate many of the bankrsquos commit-ments (or easily disentangle the pri-vate and public components of theinstitution) pledged backing for thebank

But on 7 June the cityrsquos coalitiongovernment collapsed as the SocialDemocrats pulled out of the so-called lsquogrand coalitionrsquo in protest atthe handling of the bank crisis forc-ing veteran Christian Democratmayor Eberhard Diepgen ndash a closepolitical ally of Landowsky ndash to stepdown7 Diepgen who had led Berlinthrough much of the 1980s and1990s handed his successor SocialDemocrat Klaus Wowereit the taskof coping with the scandal-wearycityrsquos E36-billion debt mountain

When BgB belatedly reported itsofficial figures for 2000 on 16 July2001 it revealed a startling E165 bil-lion loss for the year 2000 and saidthat it had been obliged to setaside over E2 billion provisionsagainst losses in its property-linked

lsquoIn May the Berlin senateunable to accept the idea ofclosing BgB pledgedbacking for the bankrsquo

30 November 2001 The bankaccepts resignation ofchairman Wolfgang Rupf whois succeeded by deputy Hans-Joerg Vetter The bank plansto lay off 4000 employeesabout a quarter of its pre-crisisheadcount

December 2001 Berlinrsquosregional governmentannounces plans for a lsquoriskshieldrsquo under which the citywill assume many of the risksand liabilities of BgBrsquos realestate portfolio over the next30 years

9 April 2002 EU Commissionsays it is running a formalenquiry into the restructuringaid that the Berlin governmenthas granted to BgB

2 May 2002 US financierChristopher Flowers and TexasPacific Group join forces tobid for the 81 per cent of BgBowned by the citygovernment

June 2002 Four bidders threeof them foreign are allowedinto the lsquodata roomrsquo stage ofthe bidding process so thatthey can consult detailedrecords aboutBankgesellschaftrsquos financialcondition prior to makingoffers

2 July 2002 EU Commissioninstitutes a formal investigationinto the transfer in 1992 of a

continued overleaf

Timeline continued

July 2002 05

ERiskcom

portfolio About half the loss provi-sions were to cover property-linkedlending and the other half were tocover the rash guarantees the bankhad given to investors in its propertyfunds It was one of corporateGermanyrsquos worst-ever perform-ances and without the statersquos inter-vention would have led to thecountryrsquos worst post-war financialinstitution bankruptcy

At the much-delayed annualshareholder meeting at the end ofAugust chairman Rupf admittedthat the bank had suffered failingsin its controls management andinformation8

The bank also put forward a planto restructure itself cutting costsbringing its subsidiaries more firmlyunder control and re-focusing on itscore domestic retail and savingsbusiness But it seemed increasinglyunlikely that Rupf would see out thefive-year tenure generouslyextended to him by the supervisoryboard as recently as the beginningof the year9

The aftermathIn October 2001 the ChristianDemocrats were punished for theirperceived sins by a 17 per centpoint drop in their vote in regionalelections attributed largely to voteranger at their handling ofBankgesellschaft Berlin now morethan 80 per cent owned by the cityfollowing its recapitalisation of thebank in the previous month

In November the bank accept-ed the resignation of chairmanRupf who was succeeded bydeputy Hans-Joerg Vetter As partof its reconstruction plans the bankalso announced that it would cut4000 jobs or a quarter of its pre-cri-sis headcount10

The recapitalisation was not theend of the pain for Berlinrsquos taxpay-ers Through the autumn of 2001worries began to surface that thefull extent of BgBrsquos potential losseshad still not been uncovered InDecember 2001 the cityrsquos authori-ties felt obliged to offer the bank alsquorisk shieldrsquo (or Risikoabschirmung)that put the Berlin taxpayer on thehook for the incalculable risks asso-ciated with the bankrsquos real estatedealings for up to 30 years

The European Commission whichannounced an investigation in April2002 into whether the recapitalisa-tion of the bank and the new lsquoriskshieldrsquo contravened EU competitionregulations summed up the finan-cial implications in this way ldquoThetheoretical nominal maximumvalue of this risk shield is about E35billion That value will never in factbe reached because for legal rea-sons some risk items are coveredseveral times over and a total lossof value is not a realistic prospectBut the risks involved do amount toseveral billion So far it has not beenpossible to calculate and set a ceil-ing lower than the theoretical maxi-mum of E35 billion and it is thereforethat figure that the Commission hasto take as the value of the riskshieldrdquo11

Expert commentators think thatlikely losses should BgBrsquos historicalportfolio of risk deteriorate will fallsomewhere between E37 billion toE8 billion

The risk shield was endorsed byBerlin politicians as an essential pre-condition to the long-term restruc-turing and possible privatisation ofthe bank without it regulatorswould have obliged the bank tocontinue to put aside billions ofeuros in provisions But the risk trans-

housing loans institutionWohnungshau-Kreditanstalt tothe Landesbank Berlin (from1994 a subsidiary of BgB)which the Commission isconcerned might qualify asstate aid The Commission iseager to sort out the legality ofthe transfer as it might affectother rulings on the generalrestructuring of BgB

8 July 2002 The bank namesItalyrsquos Unicredito bank aspreferred bidder for itsdominant holding inZivnostenska Banka a medium-sized retail Czech bank Itrsquos allpart of the unravelling of BgBrsquoscross-border investments as itrefocuses on its core regionalGerman business

19 July 2002 At its annualshareholderrsquos meeting BgBrsquosmanagement faces protestorswho blame the troubledinstitution for continuing cuts inBerlinrsquos social spendingChairman Vetter says BgB willmake a loss again this year

August 2002 The deadline forbids for potential purchasers ofBgB is 14 August If a bid issuccessful the bank could beprivatised by early 2003 andsenior executives havesuggested that by 2004 it couldbe making a profit But theGerman taxpayer will remaindisastrously out of pocketwhatever the future holds forthe institution

Timeline continued

July 2002 06

ERiskcom

fer also forestalled examination ofthe bankrsquos activities in the bank-ruptcy courts and ensured thatmany well-heeled fund investorswould continue to receive theirguaranteed investment returns atthe expense of Berlinrsquos socialprojects

Meanwhile Berlinrsquos public prose-cutor continues to extend a long-running investigation into the scan-dal On 13 June 2002 the Germanpress reported that the privatehomes of some 14 former top BgBmanagers had been raided

As of July 2002 BgBrsquos future isfinancially more stable but strategi-cally uncertain The bank is largelyunder new management and isimplementing its new organisationalstructure and its more modest busi-ness strategy It looks possible that itwill be privatised with an August 14deadline for bids for the bank fast

approaching though if a bid isaccepted the deal is unlikely to besealed before early 200312

On 19 July 2002 after meetingswith Berlin mayor Klaus Wowereit onthe issue the EU Commission saidthat the privatisation of BgB wouldbe a helpful sign of confidence inthe restructuring of the bank13Berlin politicians have also hintedthey will accept the breaking up ofthe bank following any successfulprivatisation suggesting that the

relationship between the city and itsflagship bank has indeed changed

In mid-July 2002 Vetter ndash chair-man since December ndash said thebank would make a modest lossagain this year and would need aconsiderable time to rebuild itsreserves (even after the helpextended to it by the taxpayer) Atshareholder meetings executivescontinue to have to face down pro-testors who blame the bank and itspast management for continuingcuts in Berlinrsquos social spending14

If the near-collapse and recon-struction of Parisrsquo Credit Lyonnais isany guide it might be a decade ormore before Berlin can hope to putbehind it both the financial costand the political reverberations ofthe BgB debacle

This case study was contributedby Rob Jameson ERisk

1 Berlin owed at least E389 billion as of 2001 and continues to have a weaker tax base than other major German regions2 A figure of E35 billion is also often quoted but this is the result of double counting some of the liabilities3 The names of many being published on the Internet by activists4 ldquoBank Collapse Points To the Many Roles Of Klaus Landowsky ndash Executive and Politician He Defined Clout in Berlin ndash CelebrityFundsrsquo Bombedrdquo Ian Johnson Cecilie Rohwedder and Marcus Walker The Wall Street Journal Europe 1 2 August 2001 5 ldquoDebt-laden Berlin Sinks into Political Crisis over Bank Lossesrdquo Geir Moulson Associated Press 5 June 20016 ldquoBankgesellschaft Tranfers Unitrdquo Dow Jones International News 2 January 2001 7 ldquoAll change Shambles in Berlin Berlins City-state Government is in a Financial Hole An Election Probablyrdquo The EconomistJune 9 20018 ldquoTroubled Berlin Bank Boosts Provisionsrdquo Haig Simonian Financial Times 30 August 20019 ldquoBerlin Mayor Says BGB Chairman Is Prepared to Quit ndash Shareholders Likely to Press For Answers About Huge Debtrdquo VanessaLiertz Handelsblatt Correspondent 29 August 2001 The Wall Street Journal Europe 210 ldquoBerlin Bank to cut 4000 jobs Tackling Losses that Toppled Long-serving Mayor Associated Press Newswires November 30 200111 ldquoCommission to Carry out Detailed Investigation of Aid to Bankgesellschaft Berlinrdquo EU Commission Press Release 4 September200212 ldquoBidders for BG Berlin Assess Banks Healthrdquo Haig Simonian Financial Times 4 June 2002 13 ldquoEU Welcomes Moves To Privatize Bankgesellschaft Berlinrdquo Dow Jones International News 19 July 200214 ldquoBerliners Protest at Troubled Banks Annual Meetingrdquo Nick Antonovics Reuters English News Service 19 July 2002

Notes

lsquoIt might be a decadeor more beforeBerlin can hope toput behind it thecost and the politicalreverberations of theBgB debaclersquo

July 2002 03

ERiskcom

arose from conventional loans toproperty developers These loansincluded the funding of a propertydevelopment company calledAubis AG in a deal that later cameto be regarded by the Berlin pressas symbolic of the bankrsquos poorlycontrolled loan approval process

In 1995-96 Aubis persuaded theBerlin Hypo controlled by veteranbank executive Klaus Landowsky toextend loans worth hundreds of mil-lions of euros to fund the refurbish-ing of Cold War period flats in theBerlin region with the aim of gener-ating premium rental income

But Landowsky was not just abank executive he had also built aparallel career as a regional politi-cal grandee and was entrenchedin the Berlin senate as the long-termleader of the Christian Democratparliamentary party which con-trolled the coalition that dominatedBerlinrsquos political life from 1991 untilthe summer of 20014

Later investigations revealed thatthe two businessmen who con-trolled Aubis (and who themselveshad strong historical links to theChristian Democrat party) hadmade a campaign donation toLandowskyrsquos party5 Landowskylater strongly maintained that thedonation had nothing to do with hisrole at the bank or with the bankrsquosdecision to grant credit to the prop-erty developers

But the Berlin Hyporsquos decision toextend credit to the property devel-oper proved expensive for the bankwhen Aubis found itself unable torent out its refurbished properties atappropriate rates In 1999 with theEast German and Berlin propertymarket in freefall and Aubis in deeptrouble BgB took over the com-panyrsquos under-performing assets

rather than force the property com-pany into bankruptcy As with manyother BgB property-linked deals therecovery rate on the loan was poor

The potential problems at thebank did not go unmarked in Berlinin the mid-1990s In 1997 a newmanagement board chairmanWolfgang Rupf took charge andthere was an opportunity to stream-line the bankrsquos organisation andimprove risk reporting But Rupf didnot succeed in uncovering the fullextent of the bankrsquos risk exposuresor in pushing through the necessarychanges

Instead the bank attempted toimprove itself in a piecemeal waywhile developing grand ambitionsto merge with other major Germaninstitutions and to acquire strategicbanking assets in emerging CentralEuropean markets such as theCzech and Polish markets BgBrsquossenior executives continued to talkpublicly of further expansion inCentral European markets until wellinto 2000 Closer to home howeverthe parent bankrsquos fate now hunglargely on how accountants andregulators chose to value the creditand investment guarantee risks thathad been embedded deep in theportfolios of its subsidiaries duringthe mid and late 1990s

In late 2000 the bank embarkedon a bold plan to re-engineer thisincreasingly ominous risk portfolioThe idea developed with invest-ment bankers was to sell off themore profitable operating businessassets of property subsidiary IBGusing an offshore investment vehi-cle called Immobilien undBeteiligungen AG (IBAG) whichcould subsequently be listed Themoney from the sale could then beused to plug the hole in the prop-

May 2001 Berlin Senateguarantees that it will back thebank for fear that theregulators will otherwise closedown the crippled institution

7 June 2001 Berlin coalitiongovernment collapses as SocialDemocrats pull out of grandcoalition in protest at handlingof bank crisis by ChristianDemocrats

16 July 2001 BgB reports amassive loss of E165 billion forthe year 2000

August 2001 Leading up to itsdelayed annual meeting forshareholders at the end ofAugust the bank announces itsplan to bring its subsidiariesback into the main structure ofthe bank to improve riskmanagement From now on itwill concentrate on its corestrength in retail banking

September 2001 Berlin pumpsE175 billion of new capital intothe bank to secure its future

October 2001 ChristianDemocrats suffer fall-out fromthe scandal with a 17 per centpoint drop in their vote inregional elections

Early November BgB deniespress rumours that it faces a E1billion-plus loss for 2001following its E165 billion loss in2000 though it agrees thatlosses will be substantial

Timeline continued

continued overleaf

July 2002 04

ERiskcom

erty-linked liabilities that remainedin the bankrsquos portfolio On 2 January2001 the business press dulyreported that BgBrsquos real estate busi-ness had been transferred to IBAGin preparation for the spin-off6

But if the transaction was to bemore than a confusing piece offinancial engineering it requiredenthusiasm from investors on theone hand and some certaintyabout the level of the bankrsquos realestate liabilities on the otherNeither was forthcoming and inearly Spring an ever-widening inves-tigation by BaKred Germanyrsquos fed-eral banking supervisors forced thebank into a series of humiliatingabout-turns

In March BgB postponed itsannual shareholder meeting andadmitted it could not complete its2000 accounts because of BaKredrsquoscontinuing investigation and deepuncertainties about the potentialrisk in the property-linked portfoliosof BgBrsquos subsidiaries Soon after thebank announced that its supervisoryboard had approved the repur-chase of the IBAG vehicle andpromised to make clear the conse-quences of this buy-back in its dis-cussion of the year 2000 accountsMeanwhile a special enquiry byregulators into the bankrsquos creditapproval procedures led them toquestion the reliability of several(unnamed) senior executives

The bankrsquos growing disarray ledto a rash of resignations and depar-tures In early March 2001 KlausLandowsky stepped down as headof Berlin Hypo Other senior man-agers at the Landesbank Berlinstepped down a few days laterafter concerns that they hadallowed certain major creditorslsquofreedom from liabilityrsquo in transac-

tions without telling chairman RupfMeanwhile the political scandal

over the mismanagement of thebank linked in many Berlinersrsquominds to a much wider scandal inGermany over the funding of politi-cal parties gathered pace withcalls for the resignation ofLandowsky from his post as leaderof the Christian Democrat parlia-mentary group in the Berlin senate

In May the Berlin senate unableto accept the idea of closing BgBand aware that it could not repudi-ate many of the bankrsquos commit-ments (or easily disentangle the pri-vate and public components of theinstitution) pledged backing for thebank

But on 7 June the cityrsquos coalitiongovernment collapsed as the SocialDemocrats pulled out of the so-called lsquogrand coalitionrsquo in protest atthe handling of the bank crisis forc-ing veteran Christian Democratmayor Eberhard Diepgen ndash a closepolitical ally of Landowsky ndash to stepdown7 Diepgen who had led Berlinthrough much of the 1980s and1990s handed his successor SocialDemocrat Klaus Wowereit the taskof coping with the scandal-wearycityrsquos E36-billion debt mountain

When BgB belatedly reported itsofficial figures for 2000 on 16 July2001 it revealed a startling E165 bil-lion loss for the year 2000 and saidthat it had been obliged to setaside over E2 billion provisionsagainst losses in its property-linked

lsquoIn May the Berlin senateunable to accept the idea ofclosing BgB pledgedbacking for the bankrsquo

30 November 2001 The bankaccepts resignation ofchairman Wolfgang Rupf whois succeeded by deputy Hans-Joerg Vetter The bank plansto lay off 4000 employeesabout a quarter of its pre-crisisheadcount

December 2001 Berlinrsquosregional governmentannounces plans for a lsquoriskshieldrsquo under which the citywill assume many of the risksand liabilities of BgBrsquos realestate portfolio over the next30 years

9 April 2002 EU Commissionsays it is running a formalenquiry into the restructuringaid that the Berlin governmenthas granted to BgB

2 May 2002 US financierChristopher Flowers and TexasPacific Group join forces tobid for the 81 per cent of BgBowned by the citygovernment

June 2002 Four bidders threeof them foreign are allowedinto the lsquodata roomrsquo stage ofthe bidding process so thatthey can consult detailedrecords aboutBankgesellschaftrsquos financialcondition prior to makingoffers

2 July 2002 EU Commissioninstitutes a formal investigationinto the transfer in 1992 of a

continued overleaf

Timeline continued

July 2002 05

ERiskcom

portfolio About half the loss provi-sions were to cover property-linkedlending and the other half were tocover the rash guarantees the bankhad given to investors in its propertyfunds It was one of corporateGermanyrsquos worst-ever perform-ances and without the statersquos inter-vention would have led to thecountryrsquos worst post-war financialinstitution bankruptcy

At the much-delayed annualshareholder meeting at the end ofAugust chairman Rupf admittedthat the bank had suffered failingsin its controls management andinformation8

The bank also put forward a planto restructure itself cutting costsbringing its subsidiaries more firmlyunder control and re-focusing on itscore domestic retail and savingsbusiness But it seemed increasinglyunlikely that Rupf would see out thefive-year tenure generouslyextended to him by the supervisoryboard as recently as the beginningof the year9

The aftermathIn October 2001 the ChristianDemocrats were punished for theirperceived sins by a 17 per centpoint drop in their vote in regionalelections attributed largely to voteranger at their handling ofBankgesellschaft Berlin now morethan 80 per cent owned by the cityfollowing its recapitalisation of thebank in the previous month

In November the bank accept-ed the resignation of chairmanRupf who was succeeded bydeputy Hans-Joerg Vetter As partof its reconstruction plans the bankalso announced that it would cut4000 jobs or a quarter of its pre-cri-sis headcount10

The recapitalisation was not theend of the pain for Berlinrsquos taxpay-ers Through the autumn of 2001worries began to surface that thefull extent of BgBrsquos potential losseshad still not been uncovered InDecember 2001 the cityrsquos authori-ties felt obliged to offer the bank alsquorisk shieldrsquo (or Risikoabschirmung)that put the Berlin taxpayer on thehook for the incalculable risks asso-ciated with the bankrsquos real estatedealings for up to 30 years

The European Commission whichannounced an investigation in April2002 into whether the recapitalisa-tion of the bank and the new lsquoriskshieldrsquo contravened EU competitionregulations summed up the finan-cial implications in this way ldquoThetheoretical nominal maximumvalue of this risk shield is about E35billion That value will never in factbe reached because for legal rea-sons some risk items are coveredseveral times over and a total lossof value is not a realistic prospectBut the risks involved do amount toseveral billion So far it has not beenpossible to calculate and set a ceil-ing lower than the theoretical maxi-mum of E35 billion and it is thereforethat figure that the Commission hasto take as the value of the riskshieldrdquo11

Expert commentators think thatlikely losses should BgBrsquos historicalportfolio of risk deteriorate will fallsomewhere between E37 billion toE8 billion

The risk shield was endorsed byBerlin politicians as an essential pre-condition to the long-term restruc-turing and possible privatisation ofthe bank without it regulatorswould have obliged the bank tocontinue to put aside billions ofeuros in provisions But the risk trans-

housing loans institutionWohnungshau-Kreditanstalt tothe Landesbank Berlin (from1994 a subsidiary of BgB)which the Commission isconcerned might qualify asstate aid The Commission iseager to sort out the legality ofthe transfer as it might affectother rulings on the generalrestructuring of BgB

8 July 2002 The bank namesItalyrsquos Unicredito bank aspreferred bidder for itsdominant holding inZivnostenska Banka a medium-sized retail Czech bank Itrsquos allpart of the unravelling of BgBrsquoscross-border investments as itrefocuses on its core regionalGerman business

19 July 2002 At its annualshareholderrsquos meeting BgBrsquosmanagement faces protestorswho blame the troubledinstitution for continuing cuts inBerlinrsquos social spendingChairman Vetter says BgB willmake a loss again this year

August 2002 The deadline forbids for potential purchasers ofBgB is 14 August If a bid issuccessful the bank could beprivatised by early 2003 andsenior executives havesuggested that by 2004 it couldbe making a profit But theGerman taxpayer will remaindisastrously out of pocketwhatever the future holds forthe institution

Timeline continued

July 2002 06

ERiskcom

fer also forestalled examination ofthe bankrsquos activities in the bank-ruptcy courts and ensured thatmany well-heeled fund investorswould continue to receive theirguaranteed investment returns atthe expense of Berlinrsquos socialprojects

Meanwhile Berlinrsquos public prose-cutor continues to extend a long-running investigation into the scan-dal On 13 June 2002 the Germanpress reported that the privatehomes of some 14 former top BgBmanagers had been raided

As of July 2002 BgBrsquos future isfinancially more stable but strategi-cally uncertain The bank is largelyunder new management and isimplementing its new organisationalstructure and its more modest busi-ness strategy It looks possible that itwill be privatised with an August 14deadline for bids for the bank fast

approaching though if a bid isaccepted the deal is unlikely to besealed before early 200312

On 19 July 2002 after meetingswith Berlin mayor Klaus Wowereit onthe issue the EU Commission saidthat the privatisation of BgB wouldbe a helpful sign of confidence inthe restructuring of the bank13Berlin politicians have also hintedthey will accept the breaking up ofthe bank following any successfulprivatisation suggesting that the

relationship between the city and itsflagship bank has indeed changed

In mid-July 2002 Vetter ndash chair-man since December ndash said thebank would make a modest lossagain this year and would need aconsiderable time to rebuild itsreserves (even after the helpextended to it by the taxpayer) Atshareholder meetings executivescontinue to have to face down pro-testors who blame the bank and itspast management for continuingcuts in Berlinrsquos social spending14

If the near-collapse and recon-struction of Parisrsquo Credit Lyonnais isany guide it might be a decade ormore before Berlin can hope to putbehind it both the financial costand the political reverberations ofthe BgB debacle

This case study was contributedby Rob Jameson ERisk

1 Berlin owed at least E389 billion as of 2001 and continues to have a weaker tax base than other major German regions2 A figure of E35 billion is also often quoted but this is the result of double counting some of the liabilities3 The names of many being published on the Internet by activists4 ldquoBank Collapse Points To the Many Roles Of Klaus Landowsky ndash Executive and Politician He Defined Clout in Berlin ndash CelebrityFundsrsquo Bombedrdquo Ian Johnson Cecilie Rohwedder and Marcus Walker The Wall Street Journal Europe 1 2 August 2001 5 ldquoDebt-laden Berlin Sinks into Political Crisis over Bank Lossesrdquo Geir Moulson Associated Press 5 June 20016 ldquoBankgesellschaft Tranfers Unitrdquo Dow Jones International News 2 January 2001 7 ldquoAll change Shambles in Berlin Berlins City-state Government is in a Financial Hole An Election Probablyrdquo The EconomistJune 9 20018 ldquoTroubled Berlin Bank Boosts Provisionsrdquo Haig Simonian Financial Times 30 August 20019 ldquoBerlin Mayor Says BGB Chairman Is Prepared to Quit ndash Shareholders Likely to Press For Answers About Huge Debtrdquo VanessaLiertz Handelsblatt Correspondent 29 August 2001 The Wall Street Journal Europe 210 ldquoBerlin Bank to cut 4000 jobs Tackling Losses that Toppled Long-serving Mayor Associated Press Newswires November 30 200111 ldquoCommission to Carry out Detailed Investigation of Aid to Bankgesellschaft Berlinrdquo EU Commission Press Release 4 September200212 ldquoBidders for BG Berlin Assess Banks Healthrdquo Haig Simonian Financial Times 4 June 2002 13 ldquoEU Welcomes Moves To Privatize Bankgesellschaft Berlinrdquo Dow Jones International News 19 July 200214 ldquoBerliners Protest at Troubled Banks Annual Meetingrdquo Nick Antonovics Reuters English News Service 19 July 2002

Notes

lsquoIt might be a decadeor more beforeBerlin can hope toput behind it thecost and the politicalreverberations of theBgB debaclersquo

July 2002 04

ERiskcom

erty-linked liabilities that remainedin the bankrsquos portfolio On 2 January2001 the business press dulyreported that BgBrsquos real estate busi-ness had been transferred to IBAGin preparation for the spin-off6

But if the transaction was to bemore than a confusing piece offinancial engineering it requiredenthusiasm from investors on theone hand and some certaintyabout the level of the bankrsquos realestate liabilities on the otherNeither was forthcoming and inearly Spring an ever-widening inves-tigation by BaKred Germanyrsquos fed-eral banking supervisors forced thebank into a series of humiliatingabout-turns

In March BgB postponed itsannual shareholder meeting andadmitted it could not complete its2000 accounts because of BaKredrsquoscontinuing investigation and deepuncertainties about the potentialrisk in the property-linked portfoliosof BgBrsquos subsidiaries Soon after thebank announced that its supervisoryboard had approved the repur-chase of the IBAG vehicle andpromised to make clear the conse-quences of this buy-back in its dis-cussion of the year 2000 accountsMeanwhile a special enquiry byregulators into the bankrsquos creditapproval procedures led them toquestion the reliability of several(unnamed) senior executives

The bankrsquos growing disarray ledto a rash of resignations and depar-tures In early March 2001 KlausLandowsky stepped down as headof Berlin Hypo Other senior man-agers at the Landesbank Berlinstepped down a few days laterafter concerns that they hadallowed certain major creditorslsquofreedom from liabilityrsquo in transac-

tions without telling chairman RupfMeanwhile the political scandal

over the mismanagement of thebank linked in many Berlinersrsquominds to a much wider scandal inGermany over the funding of politi-cal parties gathered pace withcalls for the resignation ofLandowsky from his post as leaderof the Christian Democrat parlia-mentary group in the Berlin senate

In May the Berlin senate unableto accept the idea of closing BgBand aware that it could not repudi-ate many of the bankrsquos commit-ments (or easily disentangle the pri-vate and public components of theinstitution) pledged backing for thebank

But on 7 June the cityrsquos coalitiongovernment collapsed as the SocialDemocrats pulled out of the so-called lsquogrand coalitionrsquo in protest atthe handling of the bank crisis forc-ing veteran Christian Democratmayor Eberhard Diepgen ndash a closepolitical ally of Landowsky ndash to stepdown7 Diepgen who had led Berlinthrough much of the 1980s and1990s handed his successor SocialDemocrat Klaus Wowereit the taskof coping with the scandal-wearycityrsquos E36-billion debt mountain

When BgB belatedly reported itsofficial figures for 2000 on 16 July2001 it revealed a startling E165 bil-lion loss for the year 2000 and saidthat it had been obliged to setaside over E2 billion provisionsagainst losses in its property-linked

lsquoIn May the Berlin senateunable to accept the idea ofclosing BgB pledgedbacking for the bankrsquo

30 November 2001 The bankaccepts resignation ofchairman Wolfgang Rupf whois succeeded by deputy Hans-Joerg Vetter The bank plansto lay off 4000 employeesabout a quarter of its pre-crisisheadcount

December 2001 Berlinrsquosregional governmentannounces plans for a lsquoriskshieldrsquo under which the citywill assume many of the risksand liabilities of BgBrsquos realestate portfolio over the next30 years

9 April 2002 EU Commissionsays it is running a formalenquiry into the restructuringaid that the Berlin governmenthas granted to BgB

2 May 2002 US financierChristopher Flowers and TexasPacific Group join forces tobid for the 81 per cent of BgBowned by the citygovernment

June 2002 Four bidders threeof them foreign are allowedinto the lsquodata roomrsquo stage ofthe bidding process so thatthey can consult detailedrecords aboutBankgesellschaftrsquos financialcondition prior to makingoffers

2 July 2002 EU Commissioninstitutes a formal investigationinto the transfer in 1992 of a

continued overleaf

Timeline continued

July 2002 05

ERiskcom

portfolio About half the loss provi-sions were to cover property-linkedlending and the other half were tocover the rash guarantees the bankhad given to investors in its propertyfunds It was one of corporateGermanyrsquos worst-ever perform-ances and without the statersquos inter-vention would have led to thecountryrsquos worst post-war financialinstitution bankruptcy

At the much-delayed annualshareholder meeting at the end ofAugust chairman Rupf admittedthat the bank had suffered failingsin its controls management andinformation8

The bank also put forward a planto restructure itself cutting costsbringing its subsidiaries more firmlyunder control and re-focusing on itscore domestic retail and savingsbusiness But it seemed increasinglyunlikely that Rupf would see out thefive-year tenure generouslyextended to him by the supervisoryboard as recently as the beginningof the year9

The aftermathIn October 2001 the ChristianDemocrats were punished for theirperceived sins by a 17 per centpoint drop in their vote in regionalelections attributed largely to voteranger at their handling ofBankgesellschaft Berlin now morethan 80 per cent owned by the cityfollowing its recapitalisation of thebank in the previous month

In November the bank accept-ed the resignation of chairmanRupf who was succeeded bydeputy Hans-Joerg Vetter As partof its reconstruction plans the bankalso announced that it would cut4000 jobs or a quarter of its pre-cri-sis headcount10

The recapitalisation was not theend of the pain for Berlinrsquos taxpay-ers Through the autumn of 2001worries began to surface that thefull extent of BgBrsquos potential losseshad still not been uncovered InDecember 2001 the cityrsquos authori-ties felt obliged to offer the bank alsquorisk shieldrsquo (or Risikoabschirmung)that put the Berlin taxpayer on thehook for the incalculable risks asso-ciated with the bankrsquos real estatedealings for up to 30 years

The European Commission whichannounced an investigation in April2002 into whether the recapitalisa-tion of the bank and the new lsquoriskshieldrsquo contravened EU competitionregulations summed up the finan-cial implications in this way ldquoThetheoretical nominal maximumvalue of this risk shield is about E35billion That value will never in factbe reached because for legal rea-sons some risk items are coveredseveral times over and a total lossof value is not a realistic prospectBut the risks involved do amount toseveral billion So far it has not beenpossible to calculate and set a ceil-ing lower than the theoretical maxi-mum of E35 billion and it is thereforethat figure that the Commission hasto take as the value of the riskshieldrdquo11

Expert commentators think thatlikely losses should BgBrsquos historicalportfolio of risk deteriorate will fallsomewhere between E37 billion toE8 billion

The risk shield was endorsed byBerlin politicians as an essential pre-condition to the long-term restruc-turing and possible privatisation ofthe bank without it regulatorswould have obliged the bank tocontinue to put aside billions ofeuros in provisions But the risk trans-

housing loans institutionWohnungshau-Kreditanstalt tothe Landesbank Berlin (from1994 a subsidiary of BgB)which the Commission isconcerned might qualify asstate aid The Commission iseager to sort out the legality ofthe transfer as it might affectother rulings on the generalrestructuring of BgB

8 July 2002 The bank namesItalyrsquos Unicredito bank aspreferred bidder for itsdominant holding inZivnostenska Banka a medium-sized retail Czech bank Itrsquos allpart of the unravelling of BgBrsquoscross-border investments as itrefocuses on its core regionalGerman business

19 July 2002 At its annualshareholderrsquos meeting BgBrsquosmanagement faces protestorswho blame the troubledinstitution for continuing cuts inBerlinrsquos social spendingChairman Vetter says BgB willmake a loss again this year

August 2002 The deadline forbids for potential purchasers ofBgB is 14 August If a bid issuccessful the bank could beprivatised by early 2003 andsenior executives havesuggested that by 2004 it couldbe making a profit But theGerman taxpayer will remaindisastrously out of pocketwhatever the future holds forthe institution

Timeline continued

July 2002 06

ERiskcom

fer also forestalled examination ofthe bankrsquos activities in the bank-ruptcy courts and ensured thatmany well-heeled fund investorswould continue to receive theirguaranteed investment returns atthe expense of Berlinrsquos socialprojects

Meanwhile Berlinrsquos public prose-cutor continues to extend a long-running investigation into the scan-dal On 13 June 2002 the Germanpress reported that the privatehomes of some 14 former top BgBmanagers had been raided

As of July 2002 BgBrsquos future isfinancially more stable but strategi-cally uncertain The bank is largelyunder new management and isimplementing its new organisationalstructure and its more modest busi-ness strategy It looks possible that itwill be privatised with an August 14deadline for bids for the bank fast

approaching though if a bid isaccepted the deal is unlikely to besealed before early 200312

On 19 July 2002 after meetingswith Berlin mayor Klaus Wowereit onthe issue the EU Commission saidthat the privatisation of BgB wouldbe a helpful sign of confidence inthe restructuring of the bank13Berlin politicians have also hintedthey will accept the breaking up ofthe bank following any successfulprivatisation suggesting that the

relationship between the city and itsflagship bank has indeed changed

In mid-July 2002 Vetter ndash chair-man since December ndash said thebank would make a modest lossagain this year and would need aconsiderable time to rebuild itsreserves (even after the helpextended to it by the taxpayer) Atshareholder meetings executivescontinue to have to face down pro-testors who blame the bank and itspast management for continuingcuts in Berlinrsquos social spending14

If the near-collapse and recon-struction of Parisrsquo Credit Lyonnais isany guide it might be a decade ormore before Berlin can hope to putbehind it both the financial costand the political reverberations ofthe BgB debacle

This case study was contributedby Rob Jameson ERisk

1 Berlin owed at least E389 billion as of 2001 and continues to have a weaker tax base than other major German regions2 A figure of E35 billion is also often quoted but this is the result of double counting some of the liabilities3 The names of many being published on the Internet by activists4 ldquoBank Collapse Points To the Many Roles Of Klaus Landowsky ndash Executive and Politician He Defined Clout in Berlin ndash CelebrityFundsrsquo Bombedrdquo Ian Johnson Cecilie Rohwedder and Marcus Walker The Wall Street Journal Europe 1 2 August 2001 5 ldquoDebt-laden Berlin Sinks into Political Crisis over Bank Lossesrdquo Geir Moulson Associated Press 5 June 20016 ldquoBankgesellschaft Tranfers Unitrdquo Dow Jones International News 2 January 2001 7 ldquoAll change Shambles in Berlin Berlins City-state Government is in a Financial Hole An Election Probablyrdquo The EconomistJune 9 20018 ldquoTroubled Berlin Bank Boosts Provisionsrdquo Haig Simonian Financial Times 30 August 20019 ldquoBerlin Mayor Says BGB Chairman Is Prepared to Quit ndash Shareholders Likely to Press For Answers About Huge Debtrdquo VanessaLiertz Handelsblatt Correspondent 29 August 2001 The Wall Street Journal Europe 210 ldquoBerlin Bank to cut 4000 jobs Tackling Losses that Toppled Long-serving Mayor Associated Press Newswires November 30 200111 ldquoCommission to Carry out Detailed Investigation of Aid to Bankgesellschaft Berlinrdquo EU Commission Press Release 4 September200212 ldquoBidders for BG Berlin Assess Banks Healthrdquo Haig Simonian Financial Times 4 June 2002 13 ldquoEU Welcomes Moves To Privatize Bankgesellschaft Berlinrdquo Dow Jones International News 19 July 200214 ldquoBerliners Protest at Troubled Banks Annual Meetingrdquo Nick Antonovics Reuters English News Service 19 July 2002

Notes

lsquoIt might be a decadeor more beforeBerlin can hope toput behind it thecost and the politicalreverberations of theBgB debaclersquo

July 2002 05

ERiskcom

portfolio About half the loss provi-sions were to cover property-linkedlending and the other half were tocover the rash guarantees the bankhad given to investors in its propertyfunds It was one of corporateGermanyrsquos worst-ever perform-ances and without the statersquos inter-vention would have led to thecountryrsquos worst post-war financialinstitution bankruptcy

At the much-delayed annualshareholder meeting at the end ofAugust chairman Rupf admittedthat the bank had suffered failingsin its controls management andinformation8

The bank also put forward a planto restructure itself cutting costsbringing its subsidiaries more firmlyunder control and re-focusing on itscore domestic retail and savingsbusiness But it seemed increasinglyunlikely that Rupf would see out thefive-year tenure generouslyextended to him by the supervisoryboard as recently as the beginningof the year9

The aftermathIn October 2001 the ChristianDemocrats were punished for theirperceived sins by a 17 per centpoint drop in their vote in regionalelections attributed largely to voteranger at their handling ofBankgesellschaft Berlin now morethan 80 per cent owned by the cityfollowing its recapitalisation of thebank in the previous month

In November the bank accept-ed the resignation of chairmanRupf who was succeeded bydeputy Hans-Joerg Vetter As partof its reconstruction plans the bankalso announced that it would cut4000 jobs or a quarter of its pre-cri-sis headcount10

The recapitalisation was not theend of the pain for Berlinrsquos taxpay-ers Through the autumn of 2001worries began to surface that thefull extent of BgBrsquos potential losseshad still not been uncovered InDecember 2001 the cityrsquos authori-ties felt obliged to offer the bank alsquorisk shieldrsquo (or Risikoabschirmung)that put the Berlin taxpayer on thehook for the incalculable risks asso-ciated with the bankrsquos real estatedealings for up to 30 years

The European Commission whichannounced an investigation in April2002 into whether the recapitalisa-tion of the bank and the new lsquoriskshieldrsquo contravened EU competitionregulations summed up the finan-cial implications in this way ldquoThetheoretical nominal maximumvalue of this risk shield is about E35billion That value will never in factbe reached because for legal rea-sons some risk items are coveredseveral times over and a total lossof value is not a realistic prospectBut the risks involved do amount toseveral billion So far it has not beenpossible to calculate and set a ceil-ing lower than the theoretical maxi-mum of E35 billion and it is thereforethat figure that the Commission hasto take as the value of the riskshieldrdquo11

Expert commentators think thatlikely losses should BgBrsquos historicalportfolio of risk deteriorate will fallsomewhere between E37 billion toE8 billion

The risk shield was endorsed byBerlin politicians as an essential pre-condition to the long-term restruc-turing and possible privatisation ofthe bank without it regulatorswould have obliged the bank tocontinue to put aside billions ofeuros in provisions But the risk trans-

housing loans institutionWohnungshau-Kreditanstalt tothe Landesbank Berlin (from1994 a subsidiary of BgB)which the Commission isconcerned might qualify asstate aid The Commission iseager to sort out the legality ofthe transfer as it might affectother rulings on the generalrestructuring of BgB

8 July 2002 The bank namesItalyrsquos Unicredito bank aspreferred bidder for itsdominant holding inZivnostenska Banka a medium-sized retail Czech bank Itrsquos allpart of the unravelling of BgBrsquoscross-border investments as itrefocuses on its core regionalGerman business

19 July 2002 At its annualshareholderrsquos meeting BgBrsquosmanagement faces protestorswho blame the troubledinstitution for continuing cuts inBerlinrsquos social spendingChairman Vetter says BgB willmake a loss again this year

August 2002 The deadline forbids for potential purchasers ofBgB is 14 August If a bid issuccessful the bank could beprivatised by early 2003 andsenior executives havesuggested that by 2004 it couldbe making a profit But theGerman taxpayer will remaindisastrously out of pocketwhatever the future holds forthe institution

Timeline continued

July 2002 06

ERiskcom

fer also forestalled examination ofthe bankrsquos activities in the bank-ruptcy courts and ensured thatmany well-heeled fund investorswould continue to receive theirguaranteed investment returns atthe expense of Berlinrsquos socialprojects

Meanwhile Berlinrsquos public prose-cutor continues to extend a long-running investigation into the scan-dal On 13 June 2002 the Germanpress reported that the privatehomes of some 14 former top BgBmanagers had been raided

As of July 2002 BgBrsquos future isfinancially more stable but strategi-cally uncertain The bank is largelyunder new management and isimplementing its new organisationalstructure and its more modest busi-ness strategy It looks possible that itwill be privatised with an August 14deadline for bids for the bank fast

approaching though if a bid isaccepted the deal is unlikely to besealed before early 200312

On 19 July 2002 after meetingswith Berlin mayor Klaus Wowereit onthe issue the EU Commission saidthat the privatisation of BgB wouldbe a helpful sign of confidence inthe restructuring of the bank13Berlin politicians have also hintedthey will accept the breaking up ofthe bank following any successfulprivatisation suggesting that the

relationship between the city and itsflagship bank has indeed changed

In mid-July 2002 Vetter ndash chair-man since December ndash said thebank would make a modest lossagain this year and would need aconsiderable time to rebuild itsreserves (even after the helpextended to it by the taxpayer) Atshareholder meetings executivescontinue to have to face down pro-testors who blame the bank and itspast management for continuingcuts in Berlinrsquos social spending14

If the near-collapse and recon-struction of Parisrsquo Credit Lyonnais isany guide it might be a decade ormore before Berlin can hope to putbehind it both the financial costand the political reverberations ofthe BgB debacle

This case study was contributedby Rob Jameson ERisk

1 Berlin owed at least E389 billion as of 2001 and continues to have a weaker tax base than other major German regions2 A figure of E35 billion is also often quoted but this is the result of double counting some of the liabilities3 The names of many being published on the Internet by activists4 ldquoBank Collapse Points To the Many Roles Of Klaus Landowsky ndash Executive and Politician He Defined Clout in Berlin ndash CelebrityFundsrsquo Bombedrdquo Ian Johnson Cecilie Rohwedder and Marcus Walker The Wall Street Journal Europe 1 2 August 2001 5 ldquoDebt-laden Berlin Sinks into Political Crisis over Bank Lossesrdquo Geir Moulson Associated Press 5 June 20016 ldquoBankgesellschaft Tranfers Unitrdquo Dow Jones International News 2 January 2001 7 ldquoAll change Shambles in Berlin Berlins City-state Government is in a Financial Hole An Election Probablyrdquo The EconomistJune 9 20018 ldquoTroubled Berlin Bank Boosts Provisionsrdquo Haig Simonian Financial Times 30 August 20019 ldquoBerlin Mayor Says BGB Chairman Is Prepared to Quit ndash Shareholders Likely to Press For Answers About Huge Debtrdquo VanessaLiertz Handelsblatt Correspondent 29 August 2001 The Wall Street Journal Europe 210 ldquoBerlin Bank to cut 4000 jobs Tackling Losses that Toppled Long-serving Mayor Associated Press Newswires November 30 200111 ldquoCommission to Carry out Detailed Investigation of Aid to Bankgesellschaft Berlinrdquo EU Commission Press Release 4 September200212 ldquoBidders for BG Berlin Assess Banks Healthrdquo Haig Simonian Financial Times 4 June 2002 13 ldquoEU Welcomes Moves To Privatize Bankgesellschaft Berlinrdquo Dow Jones International News 19 July 200214 ldquoBerliners Protest at Troubled Banks Annual Meetingrdquo Nick Antonovics Reuters English News Service 19 July 2002

Notes

lsquoIt might be a decadeor more beforeBerlin can hope toput behind it thecost and the politicalreverberations of theBgB debaclersquo

July 2002 06

ERiskcom

fer also forestalled examination ofthe bankrsquos activities in the bank-ruptcy courts and ensured thatmany well-heeled fund investorswould continue to receive theirguaranteed investment returns atthe expense of Berlinrsquos socialprojects

Meanwhile Berlinrsquos public prose-cutor continues to extend a long-running investigation into the scan-dal On 13 June 2002 the Germanpress reported that the privatehomes of some 14 former top BgBmanagers had been raided

As of July 2002 BgBrsquos future isfinancially more stable but strategi-cally uncertain The bank is largelyunder new management and isimplementing its new organisationalstructure and its more modest busi-ness strategy It looks possible that itwill be privatised with an August 14deadline for bids for the bank fast

approaching though if a bid isaccepted the deal is unlikely to besealed before early 200312

On 19 July 2002 after meetingswith Berlin mayor Klaus Wowereit onthe issue the EU Commission saidthat the privatisation of BgB wouldbe a helpful sign of confidence inthe restructuring of the bank13Berlin politicians have also hintedthey will accept the breaking up ofthe bank following any successfulprivatisation suggesting that the

relationship between the city and itsflagship bank has indeed changed

In mid-July 2002 Vetter ndash chair-man since December ndash said thebank would make a modest lossagain this year and would need aconsiderable time to rebuild itsreserves (even after the helpextended to it by the taxpayer) Atshareholder meetings executivescontinue to have to face down pro-testors who blame the bank and itspast management for continuingcuts in Berlinrsquos social spending14

If the near-collapse and recon-struction of Parisrsquo Credit Lyonnais isany guide it might be a decade ormore before Berlin can hope to putbehind it both the financial costand the political reverberations ofthe BgB debacle

This case study was contributedby Rob Jameson ERisk

1 Berlin owed at least E389 billion as of 2001 and continues to have a weaker tax base than other major German regions2 A figure of E35 billion is also often quoted but this is the result of double counting some of the liabilities3 The names of many being published on the Internet by activists4 ldquoBank Collapse Points To the Many Roles Of Klaus Landowsky ndash Executive and Politician He Defined Clout in Berlin ndash CelebrityFundsrsquo Bombedrdquo Ian Johnson Cecilie Rohwedder and Marcus Walker The Wall Street Journal Europe 1 2 August 2001 5 ldquoDebt-laden Berlin Sinks into Political Crisis over Bank Lossesrdquo Geir Moulson Associated Press 5 June 20016 ldquoBankgesellschaft Tranfers Unitrdquo Dow Jones International News 2 January 2001 7 ldquoAll change Shambles in Berlin Berlins City-state Government is in a Financial Hole An Election Probablyrdquo The EconomistJune 9 20018 ldquoTroubled Berlin Bank Boosts Provisionsrdquo Haig Simonian Financial Times 30 August 20019 ldquoBerlin Mayor Says BGB Chairman Is Prepared to Quit ndash Shareholders Likely to Press For Answers About Huge Debtrdquo VanessaLiertz Handelsblatt Correspondent 29 August 2001 The Wall Street Journal Europe 210 ldquoBerlin Bank to cut 4000 jobs Tackling Losses that Toppled Long-serving Mayor Associated Press Newswires November 30 200111 ldquoCommission to Carry out Detailed Investigation of Aid to Bankgesellschaft Berlinrdquo EU Commission Press Release 4 September200212 ldquoBidders for BG Berlin Assess Banks Healthrdquo Haig Simonian Financial Times 4 June 2002 13 ldquoEU Welcomes Moves To Privatize Bankgesellschaft Berlinrdquo Dow Jones International News 19 July 200214 ldquoBerliners Protest at Troubled Banks Annual Meetingrdquo Nick Antonovics Reuters English News Service 19 July 2002

Notes

lsquoIt might be a decadeor more beforeBerlin can hope toput behind it thecost and the politicalreverberations of theBgB debaclersquo