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Germany's KfW, Hypo Real Estate Post Heavy Losses

Two German banks, whose subsidiaries were heavily exposed to the toxic debt that had felled Lehman Brothers, reported huge losses for 2008 and have undergone restructuring to whip them back in shape.

Logo of kfW bank group

KfW bank group sold its money-losing subsidiary to a private US equity group

Germany's state-owned KfW reported a nine-month loss of 1.8 billion euros ($2.3 billion), according to a statement released Monday, Nov. 17. The development bank was brought down by the majority stake it owned in IKB, which was bailed out for 1.1 billion euros and subsequently sold to the US private equity group Lone Star for barely 150 million euros in August.

Icelandic government bonds that KfW owns also contributed to the losses, according to the German financial daily Handelsblatt as did the widely publicized blunder in which the IKB made an electronic transfer of 319 million euros the day that Lehman Brothers declared bankruptcy.

The three bank directors involved with the error have been dubbed "Germany's most stupid bankers" and were summarily fired.

The other troubled bank is Germany's Hypo Real Estate (HRE), which after flirting with bankruptcy earlier this year expects heavy losses for 2008, the property lender said in a statement Monday.

HRE, which incurred a net loss of 3 billion euros in the last quarter, expected "an extremely negative consolidated result for all of 2008," according to Markus Fell, the institute's financial director. He added that the restructuring of HRE would continue to pose a major strain on consolidated results in 2009.

Lehman exposure brought down HRE

Logo of Hypo Real Estate

The mortgage bank is being restructured with government aid

Like KfW, HRE had suffered most of its losses through a subsidiary, Depfa, which also had extensive business dealings with the insolvent Lehman Brothers. HRE was forced to devalue its Depfa assets by 2.48 billion euros in its third quarter results.

"The tremendous force which hit the HRE Group due to the unparalleled financial crisis, can clearly be seen in the figures for the period ending 30 September," said Fell.

The mortgage lender has already obtained a 15 billion euro state-backed loan guaranteed under a government rescue package and its directors are working on restructuring the group under the supervision of the Bundesbank, Germany's central bank.

"For the time being, HRE will not be able to adequately refinance the company via the money and capital markets alone, even if this is of course our objective in the medium term," HRE chief Axel Wieandt said.

Eight of the bank's supervisory board directors have already resigned, including Hans Tiemeyer, former head of the Bundesbank. Three directors who present JC Flowers, the US investment fund that owns a 24 percent stake in HRE, however are staying on.

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