Come on in, the water's fine

What are they waiting for?

Despite the near collapse of some German banks and the grim state of global credit markets, just two German lenders have tapped a state rescue fund. The government has offered €560 billion ($701 billion) in cash and guarantees, but only public sector bank Bayerische Landesbank and a private lender, Hypo Real Estate Holding AG, have signed on.

Deutsche Bank AG chief executive Josef Ackermann, insisting his bank won't need Berlin's help, said he would be embarrassed to take it. Others have been less brash but equally resistant, even as they silently fume at the pay cap that is a high-profile feature of the package. Banks taking state aid can pay their executives no more than €500,000 a year.

But analysts say it is merely a matter of time before the money starts to move. Early out of the gate, they predict: government-run HSH Nordbank AG and Düsseldorf-based WestLB AG.

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Though Commerzbank AG has said it has enough cash to last through March, observers are skeptical. "Commerzbank wants to lower the importance of capital markets as a source of funding by increasing the importance of client deposits by 2011. But that intention won't help today," says Konrad Becker, an analyst with private Munich bank Merck Finck & Co. Becker estimates Commerzbank will need €4.2 billion to maintain an 8% Tier 1 ratio. Since it has already committed to selling new shares to fund a €9.8 billion acquisition of rival Dresdner Bank AG, the analyst wonders just where that cash injection will come from.

"It might be more attractive to accept the federal government as a new investor," Becker says.

Germany's rescue package includes €400 billion in guarantees, up to €80 billion in cash for investing in lenders and an additional €80 billion to buy up toxic assets. Under the oversight of a new watchdog agency, banks can tap no more than €10 billion in cash per institution. The government will buy a maximum of only €5 billion in risky assets per bank and can refuse to take on investments it deems too risky. Institutions must also eliminate dividends as long as Berlin remains an investor.

The package quickly sparked a very public spat between Germany's coalition government and Deutsche Bank's Ackermann. After Ackermann dismissed the notion of taking public money, politicians immediately shot back that not relying on government funds in an emergency would be irresponsible. The politicians were particularly offended because Ackermann had helped craft the package. The more modestly paid politicians hinted that Ackermann may have been looking to protect his own compensation -- he pulled in €14 million in 2007. In a follow-up interview with Bild, Germany's best-known banker agreed that bankers in need should rely on Berlin.

But that didn't mean he was done throwing jabs. Ackermann explicitly took exception to the €500,000 regulation, something politicians facing September 2009 elections may have felt pressured to include. "The stricter the conditions, the lower the willingness to accept help. Or the best workers, the ones who are most needed in difficult times, will go look for a job somewhere else."

Analysts almost universally believe Deutsche will need some form of capital help in the near future. Merrill Lynch & Co. recently estimated that Deutsche will need €8.9 billion in cash. Ackermann has been coy about his bank's third-quarter performance but has so far promised a 10% Tier 1 capital ratio.

The bank's shares have lost about two-thirds of their value since the start of September.

As Deutsche weighs its options, BayernLB prepares to take its share of the government's rescue fund. The Munich lender has requested €5.4 billion as well as an additional €1 billion from two state-backed shareholders. The money would replace an already announced €2.4 billion injection from those government shareholders (the state of Bavaria and an association of local government savings banks). But Berlin now reportedly wants those investors to make good on the commitment and slash its involvement to €3 billion.

Hypo Real Estate, a Munich private real estate lender, said it had applied for the federal government to guarantee €15 billion in short-term loans. It will also ask for an unspecified amount of cash. The request comes even after the government orchestrated a €50 billion bailout for the bank.

It's surprising that only BayernLB and Hypo have asked for help, given that German banks were among the very first lenders to reveal their subprime exposure. First, Sachsen Landesbank ran aground, and then IKB Deutsche Industriebank AG revealed its own subprime woes. Eventually, distressed debt investor Lone Star Funds acquired it.

German Finance Minister Peer Steinbrück warned that many banks remain vulnerable. "The rescue package will run through the end of next year. And I'm certain we'll need it for at least that long."

That German banks may not yet know the depths of their trouble became clear as Iceland's credit crisis erupted in October. Germany's financial institutions, it turned out, had extended €21.3 billion in loans to banks in the near-bankrupt island nation.

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