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Viewing cable 09FRANKFURT429, Stuttgart Rebellion Threatens LBBW Bailout and Merger

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Reference ID Created Released Classification Origin
09FRANKFURT429 2009-02-11 09:35 2011-08-24 01:00 UNCLASSIFIED Consulate Frankfurt
VZCZCXRO8235
RR RUEHAG RUEHDF RUEHLZ
DE RUEHFT #0429/01 0420935
ZNR UUUUU ZZH
R 110935Z FEB 09
FM AMCONSUL FRANKFURT
TO RUEHC/SECSTATE WASHDC 9665
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCNFRG/FRG COLLECTIVE
UNCLAS SECTION 01 OF 02 FRANKFURT 000429 
 
STATE FOR EEB(NELSON),EEB/OMA(SAKAUE, WHITTINGTON), DRL/ILCSR AND 
EUR/AGS 
TREASURY FOR ICN(KOHLER),IMB(MURDEN,MONROE,CARNES),OASIA 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN GM
SUBJECT: Stuttgart Rebellion Threatens LBBW Bailout and Merger 
 
REF: 08 FRANKFURT 3553 
 
ENTIRE TEXT IS SENSITIVE BUT UNCLASSIFIED.  NOT FOR INTERNET 
DISTRIBUTION 
 
1.  SUMMARY: Plans to inject capital into Landesbank 
Baden-Wuerttemberg (LBBW) and merge it with Bavarian counterpart 
BayernLB have hit a roadblock as one owner, the city of Stuttgart, 
has said it will not support risking taxpayer money to fund a bank 
that is losing money.  Stuttgart has split with LBBW's other two 
owners, the state government and the association of savings banks, 
who are in favor of helping LBBW.  The city's reluctance to chase 
bad money with good is a rare example to date of elected officials 
questioning the wisdom of using state funds to help banks.  END 
SUMMARY. 
 
Stuttgart Balks at Capital Injection and Merger 
--------------------------------------------- -- 
 
2.  After announcing a 5 billion euro ($6.45 billion) capital 
injection for LBBW in November, the bank's three owners, the state 
of Baden-Wuerttemberg (B-W), the B-W savings banks and the City of 
Stuttgart have yet to deliver on the announced funds.  The capital 
injection would boost LBBW's capital ratio up from a dangerously low 
6.8% and allow it to go forward with a merger with BayernLB. 
Stuttgart Lord Mayor Wolfgang Schuster (CDU) faces a hostile city 
council, which opposes the city's 950 million euro ($1.2 billion) 
share of the package.  SPD city council member Andreas Reissig told 
Econ Spec that his party will recommend the city sell its 18.9% 
share to the state government, rather than give any taxpayer money 
to LBBW. 
 
3.  Meanwhile, B-W Minister-President Guenther Oettinger (CDU) and 
his Bavarian counterpart Horst Seehofer (CSU) have met several times 
since the beginning of the year to discuss a possible merger of LBBW 
with BayernLB.  Lord Mayor Schuster was apparently shocked to learn 
of the "secret" meetings, insinuating that Oettinger was acting in a 
high-handed way and taking the city's support for granted.  Schuster 
has since come out saying both banks need to get their houses in 
order or else he will veto a merger.  Schuster argued that LBBW is 
already sufficiently burdened with bad assets from its takeovers of 
Sachsen LB and Landesbank Rheinland-Pfalz. 
 
4.  Financial conditions have also worsened in recent months and 
LBBW officials have said that even the 5 billion euro injections may 
not be enough.  Year-end reports are still pending, fueling 
speculation that LBBW's losses will exceed previously announced 2 
billion euros ($2.6 billion).  (Note: State banks are only required 
to report on an annual basis but generally provide voluntary 
quarterly reports.)  Meanwhile, BayernLB losses are a catastrophic 5 
billion euros ($6.45 billion), up from an earlier expected loss of 3 
billion euros ($3.87 billion), leading many to question the wisdom 
of the merger. 
 
State Government in Favor but Faces Difficulties 
--------------------------------------------- --- 
 
5.  Minister President Oettinger faces difficulties with the merger. 
 The CDU-FDP majority state parliament must pass a budget by the end 
of February, before year-end reporting from LBBW in March reveals 
how deep losses at the bank go and how much capital will be 
required.  Opposition SPD caucus chief Claus Schmiedel has also 
spoken out against the bank merger, saying it makes little sense for 
two banks that are losing money to merge.  Opposition politicians 
also criticize LBBW for concealing the true extent of its losses. 
 
6.  Oettinger, however, remains strongly in favor of moving forward. 
 Reissig argued that Oettinger's main motivations were political: he 
wanted to mitigate federal interference by keeping LBBW out of the 
federal rescue package while at the same time expanding the bank's 
operations, and thereby the state's influence as owner, into 
Bavaria.  The B-W savings banks also stand to benefit from the deal 
as they would gain access to new business in Bavaria.  Oettinger has 
recently suggested that LBBW and BayernLB pool their non-performing 
assets into a separate "bad bank" to allow the merger to go forward. 
 
 
7.  COMMENT:  While B-W state officials see an opportunity in the 
crisis to expand their own reach through a merger, the city of 
Stuttgart has questioned how wise it is to fund banks whose outlook 
is only worsening.  At the federal level, there has been little 
debate about whether taxpayer money should be used to fund troubled 
banks such as Hypo Real Estate and Commerzbank, as politicians have 
been primarily concerned with stabilizing the financial sector, 
rather than making sound investments.  The mood in Stuttgart has, 
however, changed, with city officials and opposition parties balking 
at what may be a bad deal for the taxpayer.  END COMMENT. 
 
 
FRANKFURT 00000429  002 OF 002 
 
 
8.  This cable was coordinated with Embassy Berlin and ConGen 
Munich. 
POWELL