VZCZCXYZ0140
OO RUEHWEB

DE RUEHFT #0666/01 0661316
ZNR UUUUU ZZH
O 061316Z MAR 08
FM AMCONSUL FRANKFURT
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5036
INFO RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
RUCNMEM/EU MEMBER STATES  IMMEDIATE
RUCNFRG/FRG COLLECTIVE IMMEDIATE

UNCLAS FRANKFURT 000666 
 
SIPDIS 
 
DEPARTMENT FOR EUR/AGS 
TREASURY FOR LUKAS KOHLER/OFFICE FOR EUROPE AND EURASIA 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON GM
 
SUBJECT: Landesbank Baden-Wuerttemberg: A Lone Buyer in a Buyer's 
Market 
 
 
ENTIRE TEXT IS SENSITIVE BUT UNCLASSIFIED.  NOT FOR INTERNET 
DISTRIBUTION 
 
REF: a. 08 Leipzig 0002; b. 08 Frankfurt 0568 
 
¶1.  SUMMARY: Landesbank Baden-Wuerttemberg (LBBW), Germany's largest 
state bank, has emerged from the recent crisis in the state bank 
sector as a potential buyer for several troubled counterparts. 
After concluding plans to take over SachsenLB, LBBW is now awaiting 
EU approval of the deal, while rumors abound that it may also be 
eyeing BayernLB and WestLB.  While officials in Baden-Wuerttemberg 
say that LBBW needs to digest SachsenLB before making any other 
moves, political pressure mounts to rescue troubled banks and 
consolidate the industry, with LBBW left as one of the few viable 
buyers.  END SUMMARY. 
 
SachsenLB Deal on Track 
----------------------- 
¶2.  On February 27, LBBW CEO Siegfried Jaschinski, 
Baden-Wuerttemberg (B-W), Minister President (M-P) Guenther 
Oettinger and Saxony M-P Georg Milbradt met with EU Commissioner 
Neelie Kroes in Brussels to discuss the takeover of SachsenLB by 
LBBW.  The EU Commission is currently reviewing the terms of the 
deal, specifically whether the 2.75 billion euro ($4.18 billion) 
guarantee from the state of Saxony against further losses by 
SachsenLB, may constitute improper use of state aid.  With both 
states owning a large share of their respective banks, both 
Oettinger and Milbradt (both Christian Democratic Union 
politicians), have significant political capital invested in a 
successful outcome. 
 
¶3.  Representatives of the B-W Finance Ministry emphasized to Econ 
Off and Econ Spec that the deal needed to succeed.  Otherwise, 
SachsenLB would fail and badly damage the credibility of Germany's 
network of state banks.  One Finance Ministry expert expressed 
confidence that Brussels will approve the state guarantee, citing 
its approval of the state bailout of the British bank Northern Rock. 
 LBBW has the option to withdraw if the state guarantee is not 
approved, leaving SachsenLB's fate unclear.  As part of the deal, 
LBBW agreed to guarantee 6.4 billion euros ($9.73 billion) which 
would be used if the state guarantee was exhausted.  CEO Jaschinski 
has reacted publicly to criticism of this provision, saying LBBW has 
done its homework and the deal poses no large risk to his bank. 
 
LBBW's Success Creates Pressure to Buy 
-------------------------------------- 
¶4.  LBBW expects its own subprime write-downs for 2007 to total 800 
million euros ($1.2 billion), stemming from investments made by its 
subsidiary, Landesbank Rheinland-Pfalz (LRP).  The losses make up 1% 
of the LBBW's overall investment portfolio.  The bank still expects 
a profit of around 300 million euros ($456 million) for the year.  A 
prominent Social Democratic Party leader who sits on the LBBW 
Advisory Board says that LBBW's business model has succeeded where 
others have failed because it has its own clients and serves as a 
house bank for small and medium-sized companies throughout the 
state.  An LBBW economist said that the bank's wide range of 
services and diversified clientele had generated strong profits for 
years, easing pressure to earn money from other, riskier sources. 
 
 
¶5.  LBBW's relatively strong position has led to speculation that it 
will step up as a buyer for two other troubled state banks, BayernLB 
and WestLB, both of which are much larger than SachsenLB.  The LBBW 
board member said that the National Savings Bank Organization and 
CDU politicians are pressuring LBBW to rescue other banks, which by 
law can only be bought by another state bank.  The rumor of a merger 
with BayernLB began as early as fall 2007, but has recently been 
rekindled by BayernLB's recent surprise announcement of 1.9 billion 
euros ($2.9 billion) in write-downs.  Now that Helaba's bid for 
WestLB looks unlikely to go forward, LBBW is seen as one of the few 
eligible buyers for the deeply indebted banks; all sides prefer to 
see a market solution to the problem. The LBBW board member 
cautioned, however, that LBBW needs to digest SachsenLB before 
taking on any other troubled institutions. 
 
¶6.  Representatives at the B-W Chamber of Commerce (IHK) noted that 
the global financial turmoil had not had any visible impact on the 
Baden-Wuerttemberg economy.  They reported that commercial borrowers 
in their state were not experiencing a credit crunch.  The only real 
effect, as they saw it, was an already palpable psychological impact 
on investor confidence. 
 
¶7.  COMMENT:  Despite the recognition that German state banks need 
to consolidate, few of them have the will or the finances to take on 
their troubled counterparts and the law prevents private banks from 
entering the process.  On paper, LBBW is the best-suited to lead the 
 
process.  The bank, however, will have to strike a balance between 
pressure from politicians and market forces on the one hand, and its 
own considered judgment as to what is best for the institution.  END 
COMMENT. 
 
¶8.  This cable was coordinated with Embassy Berlin and ConGens 
Duesseldorf and Leipzig. 
POWELL