Sonntag, 8. März 2009

Bank nationalization, German style

The Hypo Real Estate saga continues: Apparently, Chris Flowers has now complained to the German Economics Minister about the behavior of the German Finance Minister.

So what's the status? Let's summarize:

- Flowers invested roughly 1 bn € to buy a 25 % stake in HRE.

- The only reason why HRE has not been liquidated already is government guarantees of 102 bn €. In other words: If it weren't for those 102 bn € in government guarantees, HRE's market value would be zero (nobody can seriously argue that HRE would achieve a positive liquidation value for the shareholders).

- The government wants to increase its shareholding stake to at least 90 %. It is apparently willing to pay the current market price for Flowers' stake. Wouldn't be much, but it would mean paying money for shares that only have a positive market value because the government provided 102 bn € in guarantees.

- Flowers wants the government to conduct a capital increase instead. He doesn't mind being diluted to 7 %. But he wants much more than the market price: He wants the market price of several months ago, which is apparently three times more than what the government has offered. Why does he want more? He argues that the nationalization debate has destroyed the value of the bank. Yeah, right.

- In reaction to Flowers' demands, the government is trying to legislate a nationalization law allowing it to take over the shares at market price.

- And apparently, FDP and parts of the CDU are now taking Flowers' side: According to them, nationalization is anti-constitutional, because private ownership is sacred. Private ownership of a bank that would no longer exist if it wasn't for 102 bn € in guarantees provided by the government!

I just don't get it. If Flowers wants to stay a shareholder, he should put up the money needed for recapitalisation. If he doesn't want to, the government should dilute him via low-priced capital increase. Capital increases are always done at a discount to market value. Put in the capital at a nice discount, and Flowers gets diluted to 1 % or so. No unconstitutional expropriation. Simple dilution of equity interest in the context of a capital increase.


  1. If you're referring to me, I'm not American.

    If you're referring to Chris Flowers: I understand that a few weeks ago, he fired his German representative and closed his German office. So in that sense, he has already gone home.