German Government Leads Talks for Hypo Real Estate Bailout

By Hellmuth Tromm

Oct. 5 (Bloomberg) -- The German government led talks to salvage a 35 billion-euro ($49 billion) bailout plan for Hypo Real Estate Holding AG today after the ailing property lender said commercial banks withdrew their support.

``We will see how we can clean up the mess that has been presented to us,'' Finance Ministry spokesman Torsten Albig said in a phone interview in Berlin. ``Everyone involved in this is hopefully aware of their responsibilities.''

The government and the Bundesbank have said that Hypo Real Estate, the nation's second-biggest property lender, is too big to fail. The talks, which will involve private-sector banks, may last into the night, Albig said.

Hypo Real Estate's financing needs exceeded the bailout plan guarantee, Germany's Die Welt reported yesterday, citing unidentified people in the finance industry. It will need 20 billion euros by the end of next week and 50 billion euros by the end of the year, according to the newspaper. As much as 100 billion euros may be needed to shore up the bank's finances by the end of 2009, Die Welt said.

Heiner Herkenhoff, a spokesman for the German BDB banking association, and Hypo Real Estate spokesman Hans Obermeier declined to comment on the figures. Bundesbank spokesman Christian Burckhardt said Bundesbank President Axel Weber is participating as an adviser to the government in the discussions.

Hypo Real Estate's shares have declined 79 percent this year, valuing the company at 1.6 billion euros.

Funding Dries Up

The European Central Bank and the Bundesbank planned to contribute jointly 20 billion euros, and a group of unidentified banks another 15 billion euros. The plan called for Hypo Real Estate to use 42 billion euros in assets, mostly debt owed by government borrowers, as collateral.

The bank sought the lifeline after its Dublin-based Depfa Bank Plc unit, which specializes in government lending and depends on now-closed money markets for funding, failed to get short-term funding amid the credit crunch.

Failure to provide the rescue package ``may have triggered unpredictable consequences for the German financial and economic system similar to those of the collapse of U.S. financial group Lehman Brothers,'' the Bundesbank and BaFin said in a joint letter dated Sept. 29 and addressed to Finance Minister Peer Steinbrueck.

``If we had not acted, the bank's crisis wouldn't have just hurt the financial sector, but its network of business would have hurt the real economy, in Germany and beyond,'' German Finance Minister Peer Steinbrueck said the same day.

J.C. Flowers

Hypo Real Estate, run by Chief Executive Officer Georg Funke since it was spun off from HVB Group in 2003, reported writedowns on collateralized debt obligations on Jan. 15. The company said Aug. 13 that second-quarter pretax profit plunged 95 percent because of further markdowns on debt.

A group led by J.C. Flowers & Co., the buyout firm run by Christopher Flowers, bought a 24 percent stake in Hypo Real Estate for about 1.13 billion euros in June.

Former parent HVB Group is now a unit of UniCredit SpA, Italy's biggest lender, which is holding an extraordinary board meeting today to boost its regulatory capital and settle investors' concern with its finances.

The global financial crisis that prompted Lehman Brothers Holding Inc.'s Sept. 15 bankruptcy filing is weighing on Europe. Belgian authorities are exploring ``all methods'' to keep Fortis in business even after it received an 11.2 billion-euro government bailout on Sept. 28. Belgium and France on Sept. 30 threw Dexia SA a 6.4 billion-euro lifeline.

To contact the reporter on this story: Hellmuth Tromm in Berlin at htromm@bloomberg.net