VZCZCXRO8954
OO RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHFT #3256/01 3041002
ZNR UUUUU ZZH
O 301002Z OCT 08
FM AMCONSUL FRANKFURT
TO RUEHC/SECSTATE WASHDC IMMEDIATE 8417
INFO RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
RUCNMEM/EU MEMBER STATES  IMMEDIATE
RUCNFRG/FRG COLLECTIVE IMMEDIATE

UNCLAS SECTION 01 OF 02 FRANKFURT 003256 
 
TREASURY FOR OASIA 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN GM
SUBJECT: Large German Banks Expect Government to "Invite" them into 
Stabilization Fund 
 
ENTIRE TEXT IS SENSITIVE BUT UNCLASSIFIED.  NOT FOR INTERNET 
DISTRIBUTION 
 
REF:  A. BERLIN 1452, B. FRANKFURT 3102, C. BERLIN 1414 
 
¶1.  Summary: In what would be an about-face in government policy, 
senior managers at large German banks expect the Finance Ministry to 
"invite", or require, institutions to accept capital injections 
rather than accept funds on a voluntary basis.  Such a change would 
overcome a perceived weakness of the German rescue plan: since 
participation is optional, those that take part are stigmatized, 
while other players avoid accepting funds at all cost.  Despite some 
reluctance to give up independence, private bank executives argue 
that the change would make sense as it mirrors the packages in other 
major economies and would ensure that the playing field remains even 
between German banks and international competition.  The executives 
said they expect the change to take place before the end of the 
year, although it could be both politically and operationally 
difficult to carry out.  End Summary. 
 
Financial Market Stability Fund Creating Stigmas 
--------------------------------------------- --- 
¶2.  On October 29, Office of Management and Budget Deputy Director 
Stephen McMillin hosted a roundtable with senior German financial 
executives to discuss ongoing financial developments in the U.S. and 
Europe.  After Mr. McMillin gave an overview of the situation in the 
U.S., the conversation turned to Germany and Europe.  The executives 
unanimously expressed the opinion that the Finance Ministry must 
change its Financial Market Stabilization Fund (FMSF), whereby banks 
can decide whether or not to accept capital injections (Ref A).  To 
date only troubled banks, such as BayernLB, WestLB, HSH Nordbank and 
Hypo Real Estate, have asked for funds.  Commerzbank Chief Risk 
Officer Wolfgang Hartmann, whose bank has considered tapping into 
the fund, argued that the fund currently "stigmatized" these banks, 
while others refused to take part to preserve their reputations.  He 
felt the Finance Ministry would alter the FMSF to "invite" (meaning 
require) Germany's biggest banks to accept capital injections by the 
end of the year. 
 
¶3.  Deutsche Bank Global Head of Capital Management Rainer Rauleder 
said forced participation in the program "would not be so bad" fro 
his bank, but that otherwise Deutsche Bank had no need for capital 
injections: it was "doing fine" and had secured funding through the 
end of 2009.  With over 2 trillion euros ($2.5 trillion) in assets, 
Deutsche Bank is Germany's largest bank and focuses on global 
markets and investment banking.  Deutsche Bank CEO Josef Ackermann 
recently generated headlines by reportedly telling senior management 
that he would be "ashamed" if his bank needed to tap government 
funds (Ref A).  Comment:  Despite its apparent sure footing, 
Deutsche Bank would probably have to be included in any list of 
required participants due to its size and symbolic importance as 
Germany's leading bank and Rauleder's comments indicated that he 
acknowledged this reality.  End Comment. 
 
Differences in Plans Distort the Market 
--------------------------------------- 
 
¶4.  Several bankers argued that the change in the FMSF was necessary 
to even the playing field in the European financial sector.  Morgan 
Stanley Managing Director Christian Zorn pointed out that while the 
British and German rescue packages included severe penalties for 
participating institutions, the French plan offered capital at "a 
nicer price."  Such differences between national plans would bring 
distortions to the sector and artificially enhance the 
competitiveness of French banks.  He feared that Germany's approach 
was not sufficiently prescriptive and that German competitiveness 
would lag if banks continued to refuse to accept capital. 
 
¶5.  Zorn also pointed out that requiring the largest banks to accept 
capital injections would have less impact in Germany than elsewhere 
due to the dispersed nature of Germany's financial sector. 
Injecting capital into only the largest banks would capture less of 
the market than in other countries where large banks dominate; it 
would therefore be less effective. 
 
Political Way Forward Also Difficult 
------------------------------------ 
 
¶6.  The participants also asserted that it would be politically 
challenging to change the FMSF at this point.  The ruling CDU-SPD 
Grand Coalition has been widely praised for its handling of the 
crisis to date, but inviting the largest banks into the fund would 
not only be another political U-turn, but could generate debate on 
the fund's "fairness" if it excluded smaller banks.  Finance 
Minister Peer Steinbrueck would have to avoid creating the 
impression that he was favoring large banks, which in many cases are 
not in dire straits and are still profitable. 
 
 
FRANKFURT 00003256  002 OF 002 
 
 
¶7.  JPMorgan Chase Managing Director Martin Wiesmann felt punitive 
aspects of the plan, such as the 2% premium in return on capital, 
would have to be relaxed if large banks were invited in, as 
profitable banks should not be forced to pay such fees.  Such a 
change could also generate outcry in the public as it would create 
the impression that banks were being let off the hook for profligate 
behavior.  The bankers argued that the markets were punishing the 
financial sector enough already, but acknowledged that the public 
did not sympathize with this argument. 
 
¶8.  Comment: The conversation was notable in that all participants 
agreed that the German government would soon "invite" (i.e., compel) 
large banks to accept capital injections and that such a move was 
necessary although it would limit the independence of large banks. 
Sources at the Association of Private Banks in Berlin had hinted 
earlier in the week that this might be a possibility.  Even 
perennial lone-wolf Deutsche Bank saw this option as better than the 
alternative: a loss of relative German competitiveness in the 
European market and a slower recovery.  End Comment. 
 
¶9.  This cable was coordinated with Embassy Berlin and cleared with 
OMB. 
MIRE