Tavakoli Structured Finance LLC

The Financial Report

By Janet Tavakoli

Landesbanken: Even Lower Ratings May Be In Order

Update: March 4, 2014: European bank regulators breathed a sigh of relief as business news shifted its focus to Russia. Country-by-country there’s a story of hidden risk, bad loans, and accounting fluff.

Germany is the “strong” country in the Eurozone, if you compare it to Greece, not if you compare it to a country with a reasonable standard for a well-run banking system. From Deutsche bank to the Landesbanken, Germany is struggling to come to grips with the handiwork of bank managers that make Hogan’s Heroes’ Hauptfeldwebel Schultz look like a Rhodes Scholar.

WestLB AG, my former employer, closed it’s doors on June 29, 2012. Here’s a reprise of my letter to the Financial Times in 2003:

By Janet Tavakoli
Financial Times – Published: December 1, 2003

Sir, What is most surprising about the unguaranteed ratings for German Landesbanken is that they are not even lower than BBB. A few years ago, it was generally known in German Landesbanken such as WestLB that, without the state guarantee, the rating of the capital markets business would be at best BBB. The surfacing of subsequent problems might suggest an even lower unguaranteed rating is in order.

The capital markets groups of German Landesbanken book transactions for which guarantees will be grandfathered. This applies to transactions – for instance, derivatives transactions – that commence before the guarantees are removed in 2005 and mature before December 31 2015. It is interesting to note that when it became generally known that guarantees would not be in effect for transactions that matured after December 31 2015, Landesbanken swap business for longer maturities dried up.

Because of the guarantees, many Landesbanken engaged in otherwise unsound business practices. Many Landesbanken do not have effective global credit exposure tracking systems, collateral tracking systems, or enterprise wide integrated risk management systems.

The effect of the guarantee is a big hangover for the states providing the guarantee and the huge investment in human and monetary capital that will be required to make the Landesbanken capital markets groups fit for competitive business.

Janet Tavakoli, President, Tavakoli Structured Finance, Chicago, IL 60601, US (Former Head of Financial Engineering, WestLB London)

Note: There is no longer a link available at ft.com for this letter.

See also: “Tavakoli Structured Finance Revokes the Rating Agencies’ NRSRO Designation

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