The sale of German bank SachsenLB was agreed at an emergency weekend meeting to beat a midnight deadline yesterday morning that would have triggered its insolvency.
It emerged on Sunday that SachsenLB was being sold to LBW, the state bank of Baden-Wüttemberg. The deal came a week after SachsenLB's Dublin subsidiary required a €17.3 billion rescue package from a group of fellow German banks.
Last Thursday, it became clear that SachsenLB could not meet another €250 million in repayments. Subsequently another €350 million in due repayments was uncovered, bringing the bank's total uncovered debts to €600 million.
SachsenLB ran into trouble when Ormond Quay, an off-balance sheet funding vehicle, was no longer able to issue short-term financing in the commercial paper market.
To prevent the bank's collapse, Germany's financial regulator BaFin demanded that the bank be sold by midnight on Sunday night/yesterday morning. BaFin head Jochen Sanio spent the weekend in Dresden to make sure the deal was done.
Saxony's state constitution requires a parliamentary vote to approve the sale of state holdings, but the urgency of the situation prompted state premier Georg Milbradt to invoke emergency legislation that allowed his cabinet to approve the sale.
Once the sale was agreed, new owner LBBW gave its new subsidiary a loan of €250 million to cover its immediate obligations. More cash will follow when the sale is completed in the coming months, at which point the final sale price will be agreed.
Leading banking analysts welcomed the sale of SachsenLB yesterday as "overdue".
"However, it would have been much nicer if it had arisen as a strategy and not as an emergency solution," said banking expert Wolfgang Gerke on state radio.
UK bank Barclays has meanwhile been left with an exposure worth several hundred million dollars to failed debt vehicles created by its investment banking arm amid growing scrutiny over its links to SachsenLB.
Barclays provided back-up financing to one of four structured investment vehicles set up by Barclays Capital, people familiar with the matter said, leaving it with an exposure in the "low hundreds of millions of dollars".
News of Barclays' exposure will ease concerns among investors about its potential losses arising from the vehicles, known as SIV-lites. However, the bank's relationship with SachsenLB is likely to face scrutiny after it emerged that Barclays had set up a SIV-lite on the German bank's behalf less than three months before it collapsed.
Edward Cahill, the Irish Barclays banker who was responsible for setting up the SIV-lite structure, and a junior colleague resigned last week, prompting widespread speculation about potential losses at the bank.
However, people close to the situation stressed that compliance officers had carried out a standard review of Mr Cahill's operations and had not found anything untoward. Mr Cahill, who could not be reached for comment, has not been seen since his departure.
