Fun with banks: $23.2 billion here, $23.2 billion there… pretty soon you’re talking real money


Sachsen LB, the German publicly-owned bank, on Friday night became the latest victim of the current credit crisis when the [bank] had to be bailed out because of its exposure to the US asset-backed securities market. [Guess who’s holding our mortgages!]

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 €17.3bn credit facility to a special investment fund, or conduit, that Sachsen LB had funded and managed. [Remember Enron’s off-balance-sheet entities? They’re ba-aaaack…]

The conduit, called Ormond Quay [almost, but not quite, as sexy as “Raptor”], borrowed in the short-term commercial paper market and invested in longer-term structured credit instruments [i.e. a carry trade that can’t possibly go wrong]. It was supported by a credit line from Sachsen LB.

The rescue was triggered when commercial paper investors refused to refinance Ormond Quay [nobody would loan it more money] and Sachsen LB was unable to provide the credit facility it had pledged.

The bail-out came just one week after the bank had reassured the market it had “sufficient liquidity” and followed the bail-out 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 papers resulted in there being doubt [very doubtful doubt] on securing funding for the Ormond Quay conduit supported by Sachsen LB with a volume of €17.3bn ($23.2bn). As a result, the credit standing of Sachsen LB has been called into question [i.e., we’re bankrupt],” the bank said in a statement friday night.

The Sparkassen-Finanzgruppe, the savings banks association, provided the credit facility of €17.3bn to secure the liquidity at the Ormond Quay conduit. The bank said the facility made it able to fulfill its financing obligations resulting from the other conduits it supports, such as Georges Quay and Sachsen Funding “at all times”. [Anyone want to place bets on that?]

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 [asset-backed secruities] structures managed by its subsidiary.

From the Financial Times.