Stress tests dredge up past at WestLB, landesbanks

* WestLB one of several landesbanks subject to stress test

* Adventurous pasts make landesbanks a focus of concern

* Landesbanks may be helped by previous state bailouts

By Edward Taylor

FRANKFURT, July 20 (BestGrowthStock) – Dietrich Voigtlaender,
installed last year to turn around Germany’s troubled WestLB
[WDLG.UL], is 51, a no-frills retail banker, and the antithesis
of the adventure-loving executive who led landesbanks astray.

Hit hard by the credit crisis, Germany’s eight landesbanks
are a focus of concern in the run-up to European stress tests of
lenders’ financial strength, although huge state bailouts many
already got will likely help them pass. [ID:nLDE66C1K5]

Nestled in the heart of the Rhineland far from London or New
York, WestLB came to symbolise the bold strategy that converted
many of the state-controlled regional lenders into sprawling
groups with ambitions to be global players.

Owned by states, municipalities and local savings banks,
landesbanks are now struggling to find a viable business model
as they seek to reshape themselves for a more modest future.

“The landesbank sector remains under intense pressure to
adapt,” Voigtlaender, an industrial engineer, had said in May.

“We have done our homework and will contribute to making the
landesbank sector fit for the future,” he added. [ID:nLDE62M152]

Voigtlaender, who climbed the ladder at the DZ Bank
cooperative, has spent months cutting down WestLB’s risk
positions and transferring 77 billion euros ($99.5 billion) in
toxic assets to an off-balance-sheet “bad bank”.

The goal is to make the Duesseldorf-based lender stable,
predictable and far less flashy than it has been in the past.

The bank’s slow demise followed years of mismanagement and
shoddy risk oversight as Voigtlaeder’s predecessors amassed
billions in losses through risky deals which led to the
departure of a raft of chief executives. [ID:nLDE66J1OI]

Landesbanks for years were able to take high-risk bets on
international markets, relying on state guarantees to borrow
cheaply and backstop potential losses.

But in 2005 the landesbank groups — which at the time
supplied nearly a quarter of business loans in Germany — lost
this valuable backstop as the European Union intervened.

The result — higher lending costs, lower margins and more
competition — forced them to alter their business model.

In WestLB’s case that meant taking even more risks, but this
time without a safety net.

The provincial bank pushed into investment banking after the
breakdown of the “Deutschland AG” system of corporate governance
that had let landesbanks become fiefdoms for a cabal of local
politicians and executives in postwar Germany.

Friedel Neuber, who headed WestLB in 1981 and stayed at the
helm for 20 years, was known in his home state of North
Rhine-Westphalia as “the puppetmaster” for his ability to pull
strings in business and political circles.

The influential banker also served as supervisory board
chairman at utility RWE (RWEG.DE: ), tourism and logistics group
TUI AG (TUIGn.DE: ) and engineering outfit Babcock Boersig.

He backed the merger that created ThyssenKrupp (TKAG.DE: ),
and helped turn RWE into an international player.

Under Neuber WestLB transformed itself as well from a lender
providing cheap financing to the local economy into a global
player active in investment banking and private equity.

INVESTMENT BANKING PUSH

WestLB bought the old-school U.K. brokerage house Panmure in
1996 as part of an expansion into investment banking. It marked
the start of a tradition of hiring star bankers and taking
outsized bets, but also of falling down on risk management.

WestLB bankers such as Robin Saunders became celebrities in
their own right, and began making waves internationally.

The glamorous female banker and trained dancer made waves by
spending 400,000 pounds ($611,500) on her 40th birthday party in
a Florentine palace.

Lauded as a “hot-shot blonde financier” by an adoring
British press, she pursued a string of exotic international
deals, including a high-risk loan to U.K. television rental
company Boxclever.

The loan turned sour, costing WestLB 400 million euros in
2003 and proved a key factor leading to the dismissal of Juergen
Sengera, who had by that time become WestLB’s chief.

In 2007, WestLB traders lost 600 million euros on a
proprietary trading bet speculating on the price spread
between Volkswagen (VOWG_p.DE: ) preferred and ordinary shares.

And at the height of the credit crisis in 2008, WestLB’s
owners — local savings banks and the state of North
Rhine-Westphalia — were forced to shoulder a 3 billion euro
rescue after subprime-related assets began to crater in value.

Voigtlaender, who is from the sleepy medieval market town of
Hildesheim, believes he is on the right track toward taming
WestLB’s dependence on high-level risk taking.

“WestLB now is a profitable bank with a stable earnings
basis from the business with its clients,” he said.

UNDER STRESS

The landesbanks were originally set up with a public-sector
mandate to promote regional development.

But WestLB, SachsenLB, LBBW [LBBW.UL], BayernLB [BAYLB.UL]
and HSH [HSH.UL] stumbled between 2007 and 2009, each requiring
billions of euros in bailout funds after getting into trouble
investing in risky products tied to subprime mortgages.

The European Commission has ordered the rescued landesbanks
to overhaul themselves by abandoning high-risk businesses and
shrinking their balance sheets. In WestLB’s case, the EU even
ordered a change of ownership by 2011.

The landesbank sector still has some heavy lifting to do.

Barclays Capital credit analysts said Spanish cajas, German
landesbanks and Greek banks are most likely to fail the stress
test, or to be forced to raise new capital. [ID:nLDE6651BK]

Analysts at Credit Suisse estimate the landesbanks will
require 31 billion euros of fresh funding.

In addition to setting up its bad bank, WestLB is seeking to
sell further assets including property lender Westimmo.

But WestLB may have to be quietly wound down unless a buyer
is found, bankers close to the matter have said.

Stock Market

(Editing by Michael Shields)

Stress tests dredge up past at WestLB, landesbanks