Friday, August 03, 2007

The Sub-Prime Problem is not just an American Problem

I read an article the other day that quoted Hank Paulson as saying that the sub-prime problem was largely contained. And while I agree with him that the repricing of risk and sub-prime credit is only a small part of the overall world economy, I wouldn't necessarily describe the problem as "contained", certainly not just to America.

Unlike most people I actually live overseas and I speak a couple of other languages. I go to the gym everyday and I get a complimentary copy of the Frankfurter Allgemeine Zeitung (Frankfurt General Newspaper, or FAZ) from them.

All week the FAZ has been running a series of articles on the IKB, a middle sized bank for industrial customers here in Germany. I'm not going to translate those articles, but suffice it to say that they are hyper-critical of management, calling for at least the removal of the Board of Advisors.

Current estimates of the losses at the IKB are running to upwards of 3.5 Billion Euros. So after a massive bail-out and other credit guarantees by the state run KfW, the criticisms are warranted. Most of these Board of Advisors positions are nothing but cushy political appointments for party apparatchiks, and the ivory tower types who hand out the doctoral degrees in this country.

And no, I'm not going to expand on IKB, or KfW. They are both something like 17 syllable words that nobody would fully understand. A lot of German words are like that. It's something you get used, eventually. As for the term "contained", I would suggest a look at the chart of IKB.DE, or its American Depository Receipt stock IKBDF.PK.

This article has been cross-posted to the authors personal blog


indigo-alien said...

Finally, and English language link on the situation.

pythagoruz said...

Good find.

"It prompted the Bundesbank president to repeatedly call for calm over the affair, which watchdog Bafin said threatened to snowball into the biggest banking crisis in Germany in more than 75 years."

Worst in 75 years, so in other words since fall of the Weimar Republic (in 1933). Weren't you just drawing parallels between those economic problems and the ones of today... Whats bad for banks is bad for investment in general, any chance this will slow Europe down?

It sounds like in Europe there will be effort to spread the losses around and keep everyone afloat. Thats a little different than how Wall Street seems to tackle the situation: short the hell out of the company and buy their assets after they crumble. Ala NEW, AHM, BSC, etc, etc. Like vultures are circling above.

indigo-alien said...

Well, there isn't really any way to "spread the losses around". I found out today that the KfW owns 37% of the IKB, so they pretty much had to bail the buggers out.

And on the political front it turns out that the current federal minister of finance (Peer Steinbruck) is the chairman of the Board of Advisors for KfW. Opposition politicians are already calling for a parliamentary inquiry as to who approved of this poor investment.

The IKB's purpose is to support small to middle-sized Germany industry.

If other banks have been investing in US Sub-Prime, I suppose it credit could become harder to come by but as things stand now, I believe this is the only problem account.

indigo-alien said...

A much better argued and reasonable English language link;,1518,499160,00.html