Another German bank bailed out amid credit crunch


Sachsen LB is Bailed Out As
Credit Crunch Fallout Widens

By Ivar Simensenin
Financial Times, London
Sunday, August 18, 2007

FRANKFURT, Germany -- Sachsen LB, the German publicly-owned bank, last night became the latest victim of the current credit crisis when the Landesbank had to be bailed out because of its exposure to the US asset-backed securities market.

The bank, which is based in and owned by the German state of Saxony, said the German savings banks association had stepped in and taken over a E17.3 billion credit facility to a special investment fund, or conduit, that Sachsen LB had funded and managed.

The conduit, called Ormond Quay, borrowed in the short-term commercial paper market and invested in longer-term structured credit instruments. It was supported by a credit line from Sachsen LB.

The rescue was triggered when commercial paper investors refused to refinance Ormond Quay and Sachsen LB was unable to provide the credit facility it had pledged.

The bailout came just one week after the bank had reassured the market it had "sufficient liquidity" and followed the bailout of IKB, the German lender to small companies, whose rescue three weeks ago sparked the crisis in credit markets.

"The ongoing market disruption in selling asset-backed commercial paper resulted in there being doubt on securing funding for the Ormond Quay conduit supported by Sachsen LB with a volume of E17.3 billion ($23.2 billion). As a result, the credit standing of Sachsen LB has been called into question," the bank said in a statement last night.

The Sparkassen-Finanzgruppe, the savings banks association, provided the credit facility of E17.3 billion to secure the liquidity at the Ormond Quay conduit. The bank said the facility made it able to fulfil its financing obligations resulting from the other conduits it supports, such as Georges Quay and Sachsen Funding, "at all times."

The rescue was an embarrassing step-down for the bank, which only one week ago publicly reassured investors of its position in the market, following speculation about Ormond Quay. On August 10 Sachsen LB said it saw "no indications" for increased probability of default for the ABS structures managed by its subsidiary.

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