The Bundestag, Germany's lower house of parliament, has passed controversial legislation enabling the state to seize control of ailing commercial lender Hypo Real Estate.
Nationalizing Hypo Real Estate would be a last resort
Widely seen as a last-ditch attempt to stabilize the German financial market, the measure was passed on Friday, March 20, by a vote of 379-107.
It marks the first time in modern-day Germany that bank shareholders face possible expropriation -- which would happen if they were to block the state's planned bailout steps -- and could mark the start of Germany's first bank nationalization since the 1930s.
Exhausting the alternatives
Berlin has provided the bank with 102 billion euros ($137 billion) in state guarantees since it ran into difficulties in October 2008, with Social Democrat Finance Minister Peer Steinbrueck insisting the bank must be saved because of its importance to the German system.
He says the bill is solely targeted at Hypo Real Estate to give the government an option if it fails to secure a controlling majority in the bank, which it believes is necessary to restructure the lender. It wants to get a controlling stake of over 90 percent in the bank.
"Bank rescue keeps us from chaos," CDU budget spokesman Steffen Kampeter told lawmakers Friday. "This step is the necessary answer from the government to the financial crisis."
However, the government stressed that Munich-based Hypo Real Estate would only be nationalized for a limited period of time if all other attempts by the state to take control have been exhausted.
The legislation stipulates that the government, which plans a capital increase in the bank, must first try alternatives to expropriation such as seeking agreement from shareholders to part with stock or their participation in a capital injection.
Flowers reluctant to sell
Can Christopher Flowers be persuaded to sell his stake?
Hypo's biggest investor is Christopher Flowers, who holds a stake of roughly 24 percent.
Berlin has so far failed to persuade Flowers, head of New York-based investment firm J.C. Flowers & Co., to sell his shares at market rates before it goes ahead with a capital increase.
He insists that he sees long-term prospects of recovery for the stock and has said he wants to keep his investment in the bank and would prefer the German government to take a 75 percent plus-one-share stake.
The stock has fallen 95 percent since September and treaded at 83 eurocents at 9:15 a.m. in Frankfurt, reported Bloomberg Friday.
Analysts have said that the bank may need as much as 10 billion euros in fresh capital to help it meet minimum capital reserve requirements.
The legislation now has to be approved by the Bundesrat, the upper house, before it can become law. The vote is scheduled for April. 3.