About-face

The move came not a moment too soon.

Fearful that a €560 billion ($723 billion) bank bailout was having no effect, the German government in mid-January bowed to pressure from both within and outside Europe's biggest economy and announced the partial nationalization of one of the country's biggest lenders. Now it's in talks to take as much as a majority stake in another wobbly institution. Bank executives, investors and analysts endorsed the policy shift as the smart course of action -- and fervently hope it will work.

Berlin, through its Soffin bank bailout fund, recently said it would give Frankfurt's Commerzbank AG a cash injection of €10 billion in exchange for a 25% stake in the country's second-largest listed bank in new shares. It was the second injection for Commerzbank, which had stumbled as it worked to complete its acquisition of Dresdner Bank from insurer Allianz SE by the end of January.

German politicians made no effort to present the move as a one-off, an indication that it likely won't be the last. About a week later, deeply scarred government and mortgage lender Hypo Real Estate Holding AG said it was still in talks about a capital injection after it went to Soffin, securing €12 billion in guarantees. The government last year orchestrated a €50 billion rescue of Hypo before the fund had been created. Politicians have confessed that they're looking at modifying the law that created Soffin to allow it to take more than a 33% stake.

Hypo's problems stem from the €200 billion in loans on the books of its Depfa Bank plc unit, an Irish bank it bought two years ago for €5 billion. The parent reportedly would prefer to unload Depfa on Soffin, but politicians argue that would be unfair to taxpayers. Because Hypo's problems are so profound, analysts believe the best solution is a majority holding for the government that would require Hypo
shareholder approval.

The about-face on direct stakes is part of a broader economic rescue plan launched at the eleventh hour by Chancellor Angela Merkel's coalition government after it was criticized for not doing enough for the average worker -- and voter. The new package includes €100 in cash per child for families, a higher personal income tax deduction and €2,500 to anyone willing to trade in an aging auto for a newer, more energy-efficient model. Many had hoped Merkel would follow Great Britain's lead and temporarily rescind a 3-percentage-point increase in value-added tax, which her government instituted two years ago. But that would be nearly impossible after her finance minister, Peer Steinbrück, in December decried the move in the U.K. as "crass Keynesianism."

To anyone who knows Germany's banking structure, Berlin's reluctance to begin nationalizing lenders on the scale of the U.S. or U.K. was understandable, since most German banks already belong to a municipal or regional government, if not the federal government itself. Indeed, the first high-profile government bank bailout in the subprime crisis was the €7.2 billion rescue of corporate bank IKB Deutsche Industriebank AG in 2007.

If Hypo's troubles are making the cash injection talks more difficult, taking a piece of Commerzbank was an easy sell. With the rescue, Merkel's government effectively got to help three German companies at once and ensure taxpayers participate in the lender's recovery. With the cash, Commerzbank can complete the absorption of Dresdner, securing some jobs. And insurance behemoth Allianz gets the troubled bank off its books after a dream of cross-selling banking and insurance products became an
earnings nightmare.

"With the takeover complete, Commerzbank's management is now facing its biggest challenge -- delivering profit. The deal proved to be more difficult than originally planned," says Alexander Hendricks, a Deutsche Bank AG analyst.

Although it hasn't had to look to Soffin for money, Deutsche Bank, the country's biggest bank, has taken on the German government as an indirect minority shareholder. The lender in January renegotiated its €4.9 billion acquisition of retail rival Deutsche Postbank AG. The new terms include an 8% Deutsche stake for Postbank parent Deutsche Post AG. The government owns 30% of the former monopoly post office but said it has no interest in influencing Deutsche. Post said it doesn't want the investment, anyway -- it plans on selling it this year whenever market conditions permit.

Still, Deutsche CEO Josef Ackermann is no fan of the nationalizations. "The big danger I see is reinforcing economic nationalism," he told the Financial Times during the bank's annual New Year's reception in Berlin. Ackermann has injected himself into the debate about the bank rescues after famously helping mastermind Soffin and then saying he would be embarrassed if Deutsche needed an injection or government guarantees.

Although wounded bank share prices are failing to heal, German investors are now glad the government is taking a more active role. That's not surprising, suggests a recent report on the European banking sector by Merrill Lynch's Britta Schmidt. "History," she writes, "shows that recessions preceded by a banking crisis last, on average, two times as long and are nearly four times as bad as 'traditional' recessions. There are plenty of reasons to remain cautious."