State of Hypo-action

The headlines have focused largely on US and UK banks recently, but a slow-motion car crash is taking place in the banking sector across Germany, Austria and Eastern Europe. A graphic example of this decline is the state of Hypo Real Estate, which is going through the motions of handing the keys to the German Federal government.

To add a bit of context, Hypo used to have a relatively (if dull) business of public sector and infrastructure financing. Over time, their commercial lending practice started to balloon, offering everything from mezzanine financing to RMBS/CMBS. Their favoured hunting grounds included eastern Europe, where they funded many an over-leveraged deal where the equity now been wiped out (and some of the junior debt holders too).

I actually went to see them at the high of their (shaky) business in London. A shiny new office in the Swiss Re building in the City (pretty expensive for a mid-sized wannabe investment bank), and a frighteningly gung-ho attitude. I was taken aback, as the only prudence there was in a dictionary.

A 93% fall in market value speaks for itself - this business is a dead bank walking. What interests me is that we haven't yet seen too much newsflow of this type from Austria, whose banking system has equally worse exposure to this mess. Stay tuned!