Monday, March 23, 2009

The Finanzmarktstabilisierungsergänzungsgesetz

On March 20, the German parliament adopted the Finanzmarktstabilisierungsergänzungsgesetz bill (FMStErgG in short), or the Bank Nationalization Act, which allows the government to expropriate shareholders of systematically relevant banks in distress in order to take a more proactive role in their restructuring. To keep this simple, the bill applies only to institutions that require support under the original rescue package for the banking sector known affectionately as the Finanzmarktstabilisierungsgesetz (FMstG), which was introduced last fall. However, while the Finanzmarktstabilisierungsgesetz restricted government shareholdings to only 50%, the Finanzmarktstabilisierungsergänzungsgesetz will allow full ownership of banks to be taken by the government.

As the FMStErgG states nationalization proceedings must be initiated by June 30, 2009 at the latest, it is safe to assume that Germany will see an explosion of bank nationalizations over the next 3 months. It is speculated that the main target of the plan is Hypo Real Estate (which still has a latent 24% stake in the form of an investment by JC Flowers and several hedge funds) which has already received €102 billion in government support but will likely need at least another €5 billion in support to absorb current and future losses expected over the next couple of years according to Moody's.

However, unlike the U.S. which as of today has backlogged printing press orderbooks to buy anything and everything, Angela Merkel of Germany and the Eurozone have made it clear that for now, they have no desire to follow the U.S. in its QE goal of pumping the stock market to 2007 highs regardless of sovereign debt loads. This leads to the question is there a legal limit on how much debt the Treasury can print in any given year, and if so, when will this law need to be changed? Furthermore, unlike the U.S. which is buying its debt and bringing a daily grin to PIMCO chairman Bill Gross (who MC Cabrera pointedly asked when the public will be asking him questions about how PIMCO made over a $1 billion dollars in one day thanks to governmental market intervention), Germany's Bund auctions have been pretty consistent failures on the past several occasions leaving pundits scratching their heads on just how any country that does not being in A and end in merica will inflate its way out in the Geithner like printing press on max modus operandi.

In response to the question on the debt ceiling, Jon Hatzius of GS writes this notes earlier today:
Importantly, none of the programs announced this morning appears to require legislation. However, the issuance of Treasury securities to fund PPIF investments could eventually run up against the debt ceiling, which would require Congressional action. At least some parts of the program may be affected by the original requirements of TARP regarding issuance of warrants and potentially executive compensation. Moreover, the scale of these proposals appears limited by the availability of TARP funds, with only $75-$100bn of TARP money allocated. As the program gets underway and hopefully succeeds, the Treasury is likely to approach Congress for more funding, as suggested by the "placeholder" in the president's 2010 budget.
Does anyone venture to guess what the terms of TALF 17.3 will be? Or, alternatively, what the public response will be in two years, when hedge funds disclose 80% returns on TALF 2.0 (likely not voluntarily) while unemployment is at 15%, 30 year mortgages are -4% and there is 35 months of housing inventory available? Sphere: Related Content
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Bruce said...

I wonder if Germany's economic affairs minister, Karl Theodor Maria Nikolaus Johann Jacob Philipp Franz Joseph Sylvester Freiherr von und zu Guttenberg, was involved with this.

Advant Guard said...

The debt ceiling for the U.S. Treasury was increased to above $11 trillion dollars as part of the original TARP legislation. By my calculation, the Treasury is good until about May. Of course, Congress will, after the appropriate amount of drama, increase the debt limit, probably attached to the budget resolution.

Anonymous said...

If Hedge funds have 80% returns through TARP #2, then taxpayer has made good money as an equity holder as well, and the debt that secured the assets must have been paid back in full.

In Debt We Trust said...

The names in your article are a major reason why I never bothered learning German.

Well that and no one speaks it in the USA.

Anonymous said...

"...As the FMStErgG states nationalization proceedings must be initiated by June 30, 2009 at the latest, it is safe to assume that Germany will see an explosion of bank nationalizations over the next 3 months..."

as a german resident let me tell you the following.

there won´t be a wave of nationalizations.

to give an impression of the german banking system:

-70% is dominated by regional, stated owned Sparkassen.
these are very healthy, profitable banks that did not play in the global debt game. they don´t need any help.

-however their "mothers" the banks of the several states (i´m sure you heard of SachsenLB, BayernLB etc.) are in serious trouble.
they represent the dumb money the toxic US "AAA" assets were sold to.
but since they are already run by government they´re constantly bailed out by taxpayer money.

-the real private banks represent less than 30% market share.
but you can coun´t the on one hand:

-deutsche bank (who must be have been exploiting all accounting tricks to avoid government or fresh equity so far). i highly doubt they will be target of nationalization.

-postbank: jointly owned by deutsche post (in which the state still has a stake) and deutsche bank, who will take full control over the next years.
since the state is already in the game (via deutsche post) they should also sleep well.

-commerzbank: they are in serious trouble. not only are they weak by themselves due to high exposure to eastern europe. they also elected to buy the worst of breed - Dresdner Bank - from allianz.
weak+weaker=trouble and so there´s no wonder the state already had to take a significant stake in the bank. i think there´s more pain ahead.

-the german subsidiary of citigroup, which also has a considerable market share was sold to a french bank. no need for the german government to interfere.

->this bill was designed to take full control of Hypo Real Estate.
the government is caught between a rock and a hard place here.

the bank is systemicly important, since their debt (pfandbriefe) is widely held by life insurers.

they played way too big, like AIG did in the us.

you cannot let them fail, so you have to support them.

but JC flowers who gambled big and lost holds a 25% minority enabling him to block any further dilution.

since he is unwilling to share the pain the government had no choice but to design that bill enabling it to take control, pushing flowers aside.

the bill was subject of heavy discussions in germany.

but it has my full backing.
we´re giving away huge sums of taxpayer money. so we have to take full control of the bank.