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Skip Navigation LinksHome :: Back Issues :: Hypovereinsbank - Slugfest in Bavaria

December 1999

Hypovereinsbank - Slugfest in Bavaria


Two crucial meetings this month may settle the uncertain future of Bavarian giant HypoVereinsbank, in turmoil since chairman Albrecht Schmidt and merger partner Eberhard Martini had a very public row. Auditors, former board members and the Munich state prosecutor are embroiled in a high-octane war. It was born in the euphoria of German unification, brewed in the property slump of the late 1990s, and exploded into a battle of numbers that no-one can win. David Shirreff reports.




On December 9 hundreds of senior managers of HypoVereinsbank, Germany's second biggest bank, will converge on Munich to listen to their executive chairman Albrecht Schmidt.

Schmidt, known internally as "little Napoleon", will explain to them how it was not his vanity and over-vaulting ambition that paralyzed the bank for a year. Far from it. It was a necessary, if rather slow blood-letting, to purge the bank - the result of a 1998 merger between Bayerische Vereinsbank (BV), previously run by Schmidt, and Bayerische Hypotheken- und Wechselbank (Hypobank) - of its worst Hypobank elements.

Schmidt, assisted by a couple of lieutenants from McKinsey, will unveil a strategy - Kurs 125 - to take the bank into the next century, and achieve a near-doubling of the share price to €125. At the end of November it stood at around €70.

There is more than a touch of irony here. HypoVereinsbank is in play. During November there were strong rumours that it would be merged with Dresdner Bank, a wannabe global universal bank which has lost its way. Schmidt, who for nearly a decade has insisted that his bank will be a "bank of the regions", could hardly re-invent himself and come out on top of the merged Hypo-Dresdner, unless Dresdner is largely dismantled. But while the threat of a forced merger looms (the major shareholder of both banks is Munich-based insurance giant Allianz), Schmidt's standalone strategy is not convincing staff or shareholders.

"Don't underestimate Schmidt," warns a former colleague. "He's a supreme politician."

The politician appeared to blow it in October 1998, when in an emotional public outburst he announced that HypoVereinsbank would have to make extra provisions of Dm3.5 billion to cover gaping holes found in the real estate portfolio that Hypobank had brought to the merger. Schmidt said he was deeply disappointed and his "belly was full of rage".

That triggered a stand-up row with Eberhard Martini, the former chairman of Hypo then heading the supervisory board of the merged entity. Martini lashed back, saying Schmidt was consumed by vanity ( Eitelkeit) and unfit to run a bank. The battle of words ran for a week before being patched up, and was deeply damaging to the bank. Allianz begged Martini to resign, but he refused, saying his job was to protect the Hypo staff he had brought into the merger. He knew it would need a shareholders' meeting to unseat him.

Schmidt had publicly indicted the culture and risk-management practices of the old Hypobank. But he didn't follow through - maybe he wasn't strong enough - and rid the managing board there and then of its Hypobank elements. What should have been a night of the long knives turned into a battle of the beancounters.

Almost every auditor in Germany and every expert in real-estate valuation has been drawn into this wrangle, and none has covered itself in glory. The attempt to put hard numbers on a portfolio of real-estate projects, many of them conceived in the euphoria of a newly-unified Germany, seems doomed from the beginning. Yet accountant after accountant has been thrown into the fray to see if yet another valuation can convince Joe Public.

During the course of this exercise, former Hypobank's risk management practices have been laid open to ridicule; Germany's bank supervisors have lost faith - perhaps rightly - in the effectiveness of outside auditors; and the Munich state prosecutor has embarked on a lengthy criminal investigation into former Hypobank board members and their auditors on suspicion that they recklessly destroyed value in the bank.

The irony here is that the paralysis unleashed on the bank by Schmidt from October 1998 probably cost it far more, in reputation and hard cash and its share price, than any amount of poorly-performing property loans.

Hypobank's real-estate spree

Hypobank's auditors before the merger were Wedit (Wollert-Elmensdorff), local partners of Deloitte & Touche. They had watched Hypobank's property portfolio closely through the heady days of German unification, the ramp in property prices in east and west Germany, which collapsed in 1993, and the desperate work-out process which followed as developers slipped into arrears and unfinished offices and apartments stayed unlet.

Hypobank was not the only victim of the euphoria, but perhaps it had been the most gung-ho. It had even put its name to plots without secure planning permission: the legend goes that you could walk on Hypobank property from Flensburg in the north to Munich in the south. Berliner Bank, a part of Bankgesellschaft Berlin, probably has more excuse for its billions of losses, since it is based in the area most hit by the property downturn.

Hypobank set up subsidiaries Hypo-Tecta and Hypo-Real which invested in 52 property joint-ventures with local partners. It had its own investment portfolio designed to be fed into listed property funds. Guaranteeing rents for up to five years is normal practice to win critical mass for such ventures. But as the slump continued into the 1990s Hypobank staff found themselves guaranteeing rents for 25, even 30 years. Moreover, those rents were at the very top of, or even above, prevailing price bands.

Hypobank, generally a risk-happy bank, had a problem, which was largely suspected in the markets. As early as 1993 it stopped writing any new property business. The existing projects were more than enough to cope with. The entrepreneurs responsible for running such business would naturally put as optimistic a gloss on them as possible: this had been the longest property downturn in modern German history, surely the rebound would come soon. It seems that the joint ventures were beyond the scope of Hypobank's internal audit, at least at the beginning. Nor was there, in those days, much attempt to re-rate the credit standing of these property counterparties, unless they blatantly fell into arrears. Some of their debt was recapitalized to maintain interest payments. Arguably, this might be seen as natural for a bank trying to nurse its customers through a down-cycle.

But in October 1995 the bank supervisors in Berlin, BaKred, responded to market rumours by ordering a special audit of Hypobank. This is not unusual. In fact the BaKred has no audit staff of its own and under section 44 of the 1961 Banking Act sends in private auditors to do spot checks, just to keep banks on their toes. BaKred asked KPMG in Frankfurt, which had drawn the short straw, to pay special attention to Hypobank's property portfolio. KPMG gave Hypobank a clean bill of health, although such an audit isn't made public at the time.
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