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Neuber: rearguard action against the European Commission |
The party was modest enough, a few glasses of German sparkling wine gulped down in a sixth-floor office on a sticky Thursday afternoon in Berlin. There weren’t even any nuts to nibble. But three weeks later, Commerzbank chairman Martin Kohlhaussen was denying it ever took place. The head of the private-sector German Banking Association (BdB) knows there is nothing to celebrate.
It was lunchtime on July 8 1999 when the European Commission delivered its damning verdict on WestLB’s 1991 scheme to increase core capital by incorporating a state-owned housing corporation, and paying interest of just 1.1% a year. Opponents crowed that the order from Brussels to repay Dm1.6 billion ($884 million) in outstanding interest, plus a further Dm589 million every year, marked the beginning of the end for the Landesbanken as state-guaranteed and state-owned institutions.
“At the heart of this dispute is [the principle] that banking business should be done on a level playing field,” said Kohlhaussen. “This decision has removed a huge competitive disadvantage which goes back many years and reveals the enormous competitive boost WestLB has enjoyed over the past few years,” a BdB statement added.
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Kohlhaussen: “A lot to say about this yet” |
This historic victory should give the private-sector banks – besides Commerzbank, they include Deutsche, Dresdner and HypoVereinsbank – the self-confidence to bring a formal complaint against the German state guarantee (Gewährträgerhaftung). This gives all Landesbanken AAA or AA+ credit ratings rather than the single As they would earn on their own merits and is the basis for their energetic and expansionary policies as borrowers, lenders and counterparties.
Both sides in this bitter dispute say that Gewährträgerhaftung is the real bias against fair competition in German banking. An appeal against the guarantee is the obvious next step. “We have to use this momentum and follow up,” says a bank treasurer who is trying to persuade his chief executive to take the initiative.
Private banks run scared
Yet neither Kohlhaussen of Commerzbank; Rolf Breuer, speaker of the board of Deutsche Bank; Albrecht Schmidt, chairman of HypoVereinsbank; nor any of their private-sector peers has even whispered a call to arms. It seems they simply have too much to lose. There’s a nagging suspicion that their stubbornness over WestLB’s capital may have shot away chances of winning public mandates and getting a friendlier hearing from the government on tax reform and other pressing concerns.
It all started back in 1990, in the obscure northern province of Schleswig-Holstein. Little Landesbank Schleswig-Holstein (LSH) was strapped for capital and somehow needed to meet the stricter Basel capital regulations.
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Arnold: led the private banks’ campaign |
By taking over a state-owned housing corporation, LSH instantly accrued Dm1.5 billion in new core capital to improve its ratios, for which it paid interest of just 1%. Since both companies involved were owned by the state of Schleswig-Holstein, LSH was under no pressure from the donor to pay a market rate. WestLB did a larger deal 12 months later; ultimately a total of Dm11.4 billion of capital reached six Landesbanken in this way.
It was the perfect pretext the private-sector banks needed to declare war on their rivals, which had enjoyed lucrative state guarantees and cosy relationships with the state over decades and were now getting capital on the cheap too. “Ever since 1989, when there was a plan to award the Sparkassen an additional state guarantee, we have been taking on the government,” says Wolfgang Arnold, the deputy managing director of the BdB who fought the campaign from start to finish.
First the BdB complained to Bonn, and immediately felt the displeasure of chancellor Helmut Kohl, a passionate defender of the Landesbanken and the Sparkassen, the publicly owned retail banks.
After getting nowhere in Bonn, the BdB went to Brussels in 1993, arguing that the capital injection was incompatible with Gewährträgerhaftung under the terms of the new EU capital directive. Staff at the European Commission were initially sceptical. But Arnold was determined. “I got two of my staff and told them to turn up at the Commission every single week until they listened properly.”
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Breuer: public-sector banks are “a cancer” |
Nevertheless that first complaint was killed by political pressure on the Commission, according to the BdB. “The experts were all in favour, but their decision was reversed for political reasons.”
At that point some senior private bankers wanted to drop the campaign, fearful of further flak from Bonn. In fact, at almost every step of the way the private banks have hesitated to go on, afraid to damage their standing with the German government. Yet the BdB received a mandate to continue.
Brussels intervenes
In November 1994, the BdB returned to its original line of argument and brought a formal complaint to the Commission that WestLB was not paying a fair return on the capital.
At that point the Bonn government started to take the matter seriously. The BdB’s president, Karlheinz Wessel, who was succeeded by Kohlhaussen in 1997, and its chief executive, Manfred Weber, met Friedel Neuber face-to-face in several acrimonious discussions.
There seemed no doubt that government officials were on WestLB’s side. One meeting was attended by three state secretaries (senior officials one grade below cabinet minister), their very presence representing a clear warning to the private bankers. Their role in the negotiations also made clear they were on the side of the Landesbanken.
Neuber counters, less convincingly, that there was political bias against his bank in Brussels. He points out that Alexander Schaub, the German public servant who heads the competition commission – formerly under Karel van Miert, now under Mario Monti – was a senior aide to German economics minister Otto Graf Lambsdorff during the privatizations of the 1980s. Therefore, according to Neuber, Schaub evidently wants to force-privatize the Landesbanken too.
Meanwhile, the Landesbanken’s elbows were getting sharper. In the mid-1990s Deutsche Bank, Dresdner Bank and Bayerische Vereinsbank (now HypoVereinsbank) all lost their AAA ratings and found themselves borrowing at a higher cost than the Landesbanken, even though they were clearly financially stronger.
“Three years ago we had a 3-basis-point advantage over the Landesbanks; now we pay 10bp to 15bp more in the 10-year maturity,” says Michael Reuther, treasurer at Deutsche Bank. “Now that the private banks have lower ratings the genuine, quantifiable disadvantage we suffer is plain to see.”
In March 1997, the BdB took the portentous step of refusing to participate in any more talks in Bonn and decided to wait for a decision from Brussels.
Now the conflict broke out into the open. Sparkassen president Horst Köhler threatened that the Sparkassen would refuse to support the euro unless the government backed it on the capital issue and tried to prevent Brussels from making a ruling. During 1997 the beginning of formal proceedings against WestLB was postponed by a European Commission under pressure from the German government.
Competition commissioner Karel van Miert, who supported the private banks’ stance throughout and was reportedly willing to start proceedings far earlier, finally managed to launch the investigation in October 1997.
Again the German government achieved delay by dragging its feet on essential information the European Commission had requested. Nevertheless, van Miert’s report was essentially completed by the summer of 1998. Yet again, the Kohl government used political pressure to get publication postponed until after the German general election in September 1998. In the end, the report did not appear until July 1999, when the show was already over for Jacques Santer’s tainted Commission, unfairly compromising the report’s credibility.
The government’s efforts to suppress an investigation seem excessive, but so is its attachment to the public-sector banks. Local politicians and Landesbanken chiefs are all part of the same political system – and most of them have the same roots.
To say that Friedel Neuber is closely linked to North Rhine-Westphalia’s government is an understatement. The crux of his extraordinary power and influence is the fact that the Land has been ruled by the Social Democratic Party since 1966; over these decades the relatively small number of individuals leading the local party, running the state government and managing its main state-owned companies have become a tightly knit group, some members having dual roles.
Chief executive of WestLB since 1981, the 64-year-old Neuber is reckoned to be the most powerful man in North Rhine-Westphalia, the huge economic power centred on the Ruhr conurbation in north-west Germany. His bank has been absolutely crucial to the state’s economy, rescuing and nurturing various local industries, particularly coal and steel.
It is difficult to quantify exactly how much loss-making business Landesbanken do for their friends in government, but their motivation is obvious. Neuber prefers to describe it as “a different view of risk” but he doesn’t deny that approach; it is not in his interest to do so. The “public mandate” implies that Landesbanken have to take on business on sub-market rates.
Even the private banks agree that a bank with a genuine mandate to serve the public good deserves a state guarantee; that is why Neuber plays it up, arguing that “if the Sparkassen were driven solely by profits, their branch network would be halved in size”. The example is a smokescreen concealing the fact that WestLB and all the other Landesbanken have long since departed from the public mandate.
Occasionally a Landesbank’s energetic support for political objectives becomes evident. Never was this assistance more obvious and politically significant than the public acquisition of Salzgitter, backed by Norddeutsche Landesbank, which helped get Gerhard Schröder re-elected as premier in the state of Lower Saxony in spring 1998. Fending off foreign investor British Steel, Schröder arranged for public money to rescue and restructure the German steel group. That victory was Schröder’s springboard to defeat Oskar Lafontaine for the position of chancellorship candidate; from there it was an easy leap into power for Schröder at the September 1998 national election.
The privatization of Landesbanken and Sparkassen is taboo in German politics. It is so far off the agenda that the government has no blueprint for how it might be done.
So when in July van Miert announced that the Landesbanken would have to pay much higher interest, the German government reacted with rage and alarm. The Landesbanken don’t even have to make their own appeal to the European Court of Justice; generous Mr Schröder will do it for them. Meanwhile, the German government is prepared to take the flak from Brussels by simply ignoring the order to demand the interest repayments from WestLB.
If WestLB refuses to pay, the private-sector banks will go on playing at a disadvantage – perhaps. Even after eight years it’s unclear what effect the new capital really had on competition. Some private bankers claim it was evident right from the start in 1991. Wolfgang Arnold claims LSH used its new capital to win fantastic new business in the swaps market by offering unbelievable rates. In 1992, mighty WestLB did the same.
By offering what looked like loss-making swap rates, the Landesbanken were hitting Deutsche Bank, Commerzbank, Dresdner Bank and the others where it hurt most. “It was the big corporations like Siemens and Volkswagen, who look at the third digit after the decimal point,” Arnold recalls. Other private bankers say that the business effect of the cheap capital was unclear. “We didn’t even notice what happened in Schleswig-Holstein,” admits a board member at one of the big banks. “It was only when the audit office in the state of North Rhine-Westphalia lodged an official objection to the WestLB transaction that we were made aware of it.”
Even now the repayment order has been made, private-sector bankers are at an embarrassing loss to specify any effect on business of the free capital. Any additional capital would most likely be used in the syndicated lending market and to boost relationships with multinationals and public authorities. But because Landesbanken have been quoting sub-market prices for decades, WestLB’s additional few billion made no real difference.
The real killer for the private sector is the refinancing advantage accrued from Gewährträgerhaftung and the ability to undercut competitors without the same advantage.
Although they are equally disadvantaged exactly in the same way from the cheap capital and state guarantees for the state-owned banks, the long-suffering cooperative banks don’t complain. This insouciance seems bizarre, but the reason is simple. The cooperative banks are hoping that market pressure on the state-owned Sparkassen will drive them into more mergers with local cooperative banks on the ground that a merger is the only chance for either bank to compete profitably with the likes of Deutsche, Commerz and the direct banks in the long term.
The first such merger earlier this year in a small, struggling town called Marktredwitz on the Bavarian-Czech border thrilled many local cooperative bankers who faced a bleak future of growing costs and falling margins in fragmented local markets.
Even before the Brussels decision was officially released, Neuber held a press conference to complain about “a substantial competitive disadvantage which could squeeze all public banks out of the market”. He says a politically motivated Commission is trying “to pull the rug from under our feet”. His associates are saying if they lose, WestLB is dead.
WestLB is crying wolf by arguing that the real implications of the dispute are that all publicly owned enterprises could now be forced to pay 26.7% returns to their shareholders – the rate the European Commission says WestLB should pay on its disputed capital infusion. It’s an impossible task that would effectively force them into privatization. Even van Miert never thought that far.
But by pushing the panic button, Neuber got a lot of politicians to think seriously about more mergers among Landesbanken.
A few days after the Brussels ruling, the politicians who run the states of Hesse, Bavaria, and Baden-Württemberg met to discuss the formation of “Südbank”, a conglomerate of Landesbank Hessen-Thüringen (Helaba), Bayerische Landesbank and Landesbank Baden-Württemberg. But the initiative was soon exposed as an blatant attempt by Roland Koch, the newly elected premier in Hesse, to regain a direct stake in his local AAA rated Landesbank.
Most Landesbanken officials are convinced that the Südbank idea will fail, and that in turn will destroy the raison d’être of “Nordbank”, a mooted link-up between WestLB, NordLB and other Landesbanken in the North.
Takeover ambition
Neuber’s real interest is in taking over Helaba, and he describes how he visited the Frankfurt-based bank on the morning of the Euromoneyinterview, trying once again to talk down the price and to find out more about the bank’s real balance sheet structure.
There’s the rub: thanks to their predatory pricing the Landesbanken often regard each other as their toughest competitors and refuse to reveal their business details until months after a merger is irrevocably agreed.
In January three state-owned banks merged to form Landesbank Baden-Württemberg. These three banks were doing the same business in the same region, yet over six months after the merger and nearly two years after the plan was announced, the new management is still unable to say what synergies will be achieved, and when – if ever.
Although some Landesbanken claim to have contingency plans for the loss of Gewährträgerhaftung, Neuber and other chiefs offer only the vaguest indications. Theoretically, Landesbanken say, they could be more selective in public-sector financing, or in retail banking, where the Sparkassen currently accept all-comers as part of their creed. But that would bring them into conflict with the government, a conflict that would damage them even more than the private banks.
So once again the Landesbanken are staking their future on the public sector. Thanks to his friends in the North Rhine-Westphalia government and the (state-owned) Sparkassen, Neuber has already arranged to raise the money he may, possibly, one day, have to repay to the Land. Even before asking the Sparkassen (the Land’s consent is evidently sufficient), Neuber was telling Euromoneyabout his plans for a core capital increase next spring, the new money contributed by state-owned shareholders in the same proportion to their existing stakes. Arranged apparently with minimal effort, Neuber’s new scheme makes a mockery of the private banks’ campaign and the European Commission’s investigation by rendering them irrelevant.
Thanks to the Gewährträgerhaftung, investors are indifferent to the ruling from Brussels. Landesbanken treasurers are being asked to interpret the decision, but investors have not changed their view of the Landesbanken’s credit standing as a result.
In January this year WestLB scored a first in Germany by selling non-voting hybrid stock in a group subsidiary, thus raising group core capital by Dm1.7 billion. The investors included institutional investors as well as Sparkassen in North Rhine-Westphalia. The yield paid on this hybrid capital is 1.25% over Euribor, rather lower than the 26.7% demanded by the European Commission.
Despite the ease with which it funds itself, WestLB continues to protest against the decision, shouting loudly about van Miert being a member of a discredited European Commission which remained only on sufferance until mid-July. They note that only 11 out of the 15 commissioners present endorsed van Miert’s decision; and that both German commissioners plus Commission president Jacques Santer opposed it.
Ignoring the EU Commission
Initially there was hope that Mario Monti, the new commissioner in charge of the competition commission, would succumb to pressure from the German government and water down van Miert’s demand to 18%, 15% or perhaps only 12% before tax. This quickly began to look like a forlorn hope after reports that Monti agrees with van Miert on practically everything. Neuber is now saying he won’t be talking to the European Commission any more.
The Landesbanken hope that the German government will be allowed to ignore the decision in return for some other favour to Brussels. “There are plenty of Commission decisions which have never been enforced,” says one Landesbank official. “It wouldn’t be the first time.”
Meanwhile, the private banks will discover whether they have the nerve to address the real issue of Gewährträgerhaftung. “Some board members are happy to fight, others are more conciliatory,” says a bank treasurer. At treasurer level, there’s no doubt that the complaint should be made now, and the BdB would certainly run the campaign with continued energy, but board members are holding back.
The private banks are convinced that the government would punish whoever took the initiative. Those who have spoken out in public confirm that. “I can’t prove anything, but I’ve had very strong suspicions about why we didn’t win a certain piece of business on occasions in the past,” says a board member who learnt the hard way. Any complaint against Gewährträgerhaftung now would blot their copybook even more.
Manfred Weber, chief executive of the BdB, is one of the most cautious. “We’d have to be mad to start a war against the government,” says a Weber aide.
For years Hilmar Kopper and his predecessors in the chief’s seat at Deutsche Bank always felt they had a special relationship with Bonn, despite the power of the Landesbanken. That is why Kopper opposed any direct challenge to Gewährträgerhaftung.
Under Rolf Breuer, Deutsche’s attitude may be changing. On July 28 Breuer appeared to seize the initiative by railing at the public banks as “a cancer” in the German economy. It was an ill-judged remark he will be punished for, not just by the government – and it appears to have triggered a new confrontation.
When speaking to Euromoneythe following day, Neuber chose, apparently on impulse, to broadcast a threat against the private banks.
“We haven’t moved [against the private-sector banks] yet, but we could. If things escalate any further we will act.”
So how does one German bank punish others? “Now and again”, as Neuber puts it, WestLB hurts other banks by excluding them from deals and choosing non-German investment banks instead.
He then delivers two examples that suggest this is no more than ordinary tit-for-tat. When Deutsche Bank increased its capital earlier this year, Neuber rang Breuer to ask why none of the Landesbanken had been invited onto the syndicate. “Officially, he told me that it was too difficult, that there were too many of us.” So at the next opportunity, Preussag’s convertible issue in July, Neuber was amused to find himself receiving a call from Breuer for exactly the same reason. “Very friendly, he was. So we chose Warburg Dillon Read [as co-lead manager] instead.”
The private banks need not be too worried. Any lack of cooperation on syndicates alone would hurt WestLB just as much as Deutsche, Dresdner or Commerzbank.
The potential rewards from a tax reform, reducing banks’ income tax bill or allowing them to sell participations without massive capital-gains tax charges, are far greater than the damage done by WestLB’s capital increase, or even the Gewährträgerhaftung.
The private banks fear the Landesbanken will no longer support their lobbying efforts on tax reform, or refuse to contribute to industry-wide campaigns. Under Horst Köhler – now head of the European Bank for Reconstruction & Development – the Sparkassen and Landesbanken announced they no longer recognized any mutual interests on strategic banking issues; a one-size-fits-all definition that gave Köhler the excuse to withdraw from the preparations for the euro. When Dietrich Hoppenstedt took over as the new Sparkassen president last year he put relations back on an even keel, but is now hinting heavily at non-cooperation again.
That is why, in late July, Kohlhaussen was denying the champagne party and dismissing the idea of a complaint. “There’s no decision [from the BdB’s committee],” he said. The committee meets next on November 4; so far there is no sign that they will have changed their minds by then.
Kohlhaussen’s tactic is to persuade others to act on his behalf. “We’ve got a lot to say about this yet,” he promises. The ideal outcome for him would be an investigation into Gewährträgerhaftung by Mario Monti, the new competition commissioner in Brussels.
But even van Miert, famous for initiating the privatization of Belgian state banks, told BdB members years ago that he couldn’t launch an investigation until he received a complaint. And because they are unwilling, the Gewährträgerhaftung still stands.
The German Landesbanken may be privatized in the end, but not before WestLB and the other expansionary Landesbanken have robbed even more business from the private banks on the back of the state guarantee. For that delay, the private banks have themselves to blame.
