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Germany

German Government to Buy Stake in Ailing Lender HRE

The German federal government is to buy shares of ailing mortgage lender Hypo Real Estate (HRE), the bank announced Saturday, in a move which would keep the ailing lender afloat for at least two more years.

The HRE logo

HRE is being saved from potentially catastrophic bankruptcy

The state is to initially recapitalize the Munich-based financier by purchasing an 8.7-per-cent stake in the business, HRE said in a statement.

In the long term however, the German government bank bailout agency SoFFin is to take complete control of the bank, HRE said.

SoFFin is to purchase 20 million shares at a price of three euros each, granting a 60-million-euro ($80.1-million) capital injection to HRE. The current shareholders will initially remain on board.

"(SoFFin) intends to take action to stabilize Hypo Real Estate Group, in the interest of stabilizing the financial markets," SoFFin said.

"SoFFin will implement measures to achieve a sufficient recapitalization" of HRE, the statement added.

However, the prerequisite for SoFFin to stabilize the ailing bank is said to be a complete state takeover, either through the bailout fund or by direct government intervention.

"To this end it is intended to make use of the options that will be provided by the German Financial Markets Stabilization Amendment Act, which is currently being discussed in the legislative process," a statement on the bank's website said.

The act, which specifies the conditions for a state expropriation of HRE, has been approved by Germany's lower house of parliament. State ministers are expected to grant their approval in an upper house consultation due Friday.

Berlin moves to avert catastrophic bankruptcy

People stroll by a company sign of Lehman Brothers

The doomed Lehman Brothers could have brought down HRE

Berlin is concerned that the failure of HRE could have catastrophic consequences similar to those sparked by the bankruptcy of US investment bank Lehman Brothers in September, which hit financial markets around the world.

The head of HRE said Sunday the state's purchase of the 8.7 percent stake in the bank would allow it to survive despite expected losses for the next two years.

Chief executive Axel Wieandt hailed the government's purchase of 20 million shares as "good news."

"With the proposed long-term liquidity and capital support, the Federal Republic ... has put in place the necessary requirements for HRE to continue," Wieandt said in a statement.

"We welcome this step. It is in the interests of the company and clearly good news," he added.

The purchase of HRE shares -- at the minimum legal price of three euros per share -- is an "important signal, an important first step," he said.

"The stabilization and rescue of HRE must succeed. It is in everyone's interests," the chief executive stressed.

However, he acknowledged that the bank expected to be "in a loss situation for at least the next two years."

"Nevertheless, we see our medium-term strategic prospects as positive," he said.

HRE announces hefty losses

Axel Wieandt

HRE's Wieandt was understandably pleased

HRE also released its unaudited earnings statement for 2008, reporting a hefty net loss of 5.46 billion euros ($7.25 billion) due largely to write-downs on intangible assets.

"This result very much reflects the difficult situation on the capital and financing markets," the bank said in the earnings statement.

The pre-tax loss was 5.375 billion, it said, compared to pre-tax profits of 862 million euros in 2007. It said HRE expected to make losses until at least 2011.

"The financial year 2008 reflects the impact of the general crisis on the international financial markets and the specific extremely difficult situation for the Hypo Real Estate Group," Wieandt, said in a statement.

HRE said in its earnings statement that complex "derivative" investments with Lehman Brothers had been the main cause of a 150-million-euro expense on its own balance sheet.

It said it was also hit by losses linked to Icelandic banks, which were largely wiped out by the financial crisis last year.

HRE has already benefited from more than 100 billion euros in private and public aid to keep it afloat.

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