German politics and the German media have largely blamed the U.S. for the current financial crisis. Germany's cherished "social market" policies, so the unified chorus, would have never produced the reckless behavior of banks witnessed in the country of profit maximization, the U.S. In particular, German regulatory bodies and rules - according to the saga - would not have allowed German banks to invest in toxic assets. So, why oh why didn't the U.S. follow Germany's admirable policies?
This WSJ article tells a slightly different story. German politics blew it big time.
BERLIN -- Germany's financial regulator warned of serious problems Hypo Real Estate Holding AG six months before the lender was rescued in a massive bailout, but the regulator lacked powers to act and the government ignored its warnings, according to documents viewed by The Wall Street Journal. (...)
For months, Germany has lectured the U.S. and others on the need for stricter regulation of financial markets, holding itself up as a model. The German parliament probe into the €102 billion ($142.6 billion) rescue of Munich-based Hypo, however, suggests Germany struggled as much as the U.S. or Britain to control the risks the country's banks were taking.
Hypo's funding problems and huge losses on complex securities make it the worst of Germany's problem banks, though it is one of many. German banks could face total losses in the current financial crisis of €200 billion to €300 billion, according to several estimates, of which only around €100 billion has been written down. (...)
Overall, banks in Western Europe could lose about $1.4 trillion in
this crisis, more than expected losses in the U.S. banking system,
according to the International Monetary Fund. (emphasis added)
Finance Minister Peer Steinbrück, who has repeatedly said the "center of gravity" of the global financial crisis lies in the U.S., earlier this month rejected publishing stress tests on German banks, saying it could undermine confidence in the banking system.
A Finance Ministry spokesman said Wednesday that top officials including Mr. Steinbrück were aware of problems in capital and banking markets in 2008, but had no specific indications that Hypo was in difficulty at that time. The failure of Lehman Brothers Holdings Inc. in the U.S. last September was the event that pushed Hypo toward insolvency, the spokesman said.
However, documents produced by the German parliament investigation show that on March 20, 2008 -- months before Lehman's collapse -- financial-markets regulator Bafin passed on to the German Finance Ministry a report Bafin had requested from the Bundesbank on Hypo's funding.
The Bundesbank's report, which included a special audit of Hypo's Dublin-based Depfa Bank PLC unit, raised an alarm about Hypo's massive short-term borrowing needs, as well as its risk management. The report also said that Hypo's compliance with key banking regulations on managing liquidity and other market risks "must be seen as nonexistent."
The Finance Ministry in November told parliament in a letter that an unnamed senior Finance Ministry official to whom the March report on Hypo was addressed never saw it, because he was on vacation. It was reviewed by lower-ranking officials, and when he returned to work, the report had been filed away, the letter said. The Finance Ministry declined to comment.
Avoiding transparency and public scrutiny at all costs is a major concern of German politicians, since the results might "undermine confidence" in the system.
Anyway, the U.S. is the culprit, so why ask silly questions about German faults... Also, an American investor is going to lose his investment, which adds a bright spot to the story:
In April, a month after the Finance Ministry had received the preliminary audit report with its damning verdict on Hypo's risk management, a group of investors led by U.S. financier J.C. Flowers announced their intention of buying a 24.9% stake in Hypo, which they followed through on.
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