Sparing the rod

12 October 2007 By John Foley Follow @johnsfoley

The troubled bank s biggest investor, stateowned KFW, may sell out but it will probably stay on the hook for IKB s misadventures. Any consolidation of Germany s banking sector is welcome. It s a shame it has to happen at the cost of leaving foolishness unpunished.

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KfW, the stateowned German bank, has appointed Merrill Lynch and Clifford Chance to advise it on a potential sale of its 38% of troubled lender IKB. Commerzbank, DZ Bank and WGZ Bank have all so far expressed an interest in the stake, according to Reuters.

IKB received a rescue package from KfW and a group of other German banks after it was unable to refinance an offbalance sheet vehicle, Rhineland Funding, which had invested in the US subprime mortgage loans market. Since then its chief executive, finance director and other board members have resigned.

Under the bailout plan, KfW assumed a liquidity line of E8.1bn for Rhineland, of which it said last month that E4.5bn had been drawn. The bank also provided around E2bn towards covering losses in IKB's overall portfolio of assetbacked investments.

IKB said on Tuesday that it expected significant earnings volatility, and forecast a net loss of E700m for the year. Its auditors, PricewaterhouseCoopers, have found that the board of directors didn't sufficiently inform the supervisory board of the bank's subprime risks.

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