German Property Scam Puts Banks on Defensive
Officials reexamine cozy relationship between banks and business after abrupt collapse of Schneider company
AN election-year scandal, in which Germany's ``construction king'' disappeared and left about $3 billion in debts, is prompting a reexamination of the nation's banking and corporate system.
Officials at Deutsche Bank AG, the biggest creditor of real estate developer Jurgen Schneider, have haltingly admitted making mistakes. They say there may be a top-level shake-up to punish those who made the loans.
``We will do everything possible to reestablish the reputation of the bank,'' Deutsche Bank chief executive Hilmar Kopper told a news conference April 25. Innocent victims of the Schneider scam ``must not have to pay for the mistakes that we have made.''
Deutsche Bank's admissions have sparked a debate in the nation's financial community over the lending policies of German banks, and the cozy relationship that now exists between banks and business in Germany.
Top German bank officers often sit on supervisory boards of leading German companies. Such close ties have the potential to influence lending decisions.
The bankruptcy of the Schneider property empire is coming on the heels of another near-bankruptcy debacle involving the Metallgesellschaft AG conglomerate last December. The occurrence of two major scandals over such a short time is a sure sign that corporate governance and business relations with banks need to change, the German news media say.
Trust in banks eroded
``Serious consequences can arise from the damage that banks have brought upon themselves through negligence: the damaging of the trust in the responsibility of German banking institutions,'' Wilfred Herz wrote in the Die Zeit weekly.
But other experts say the Schneider affair is an exception.
``The close relations [between banks and business] should not be changed. In general, German banking practices function well,'' said Gunter Lambertz, an economist at the German Industry and Trade Association.
Meanwhile, the governing coalition of Chancellor Helmut Kohl, is taking action to limit potential political fallout from the scandal, particularly the unemployment that is sure to accompany the bankruptcy.
``This is not something to be left to the forces of the market,'' said Claudia Seltmann, a spokeswoman at the German Economics Ministry. ``We want to see if we can strengthen the system.''
Mr. Schneider disappeared April 7, leaving letters saying that medical advisers had urged him to take an immediate vacation. His whereabouts are still unknown. German newspapers have carried reports of sightings in such disparate places as Florida, Switzerland, Iran, and Paraguay.
The Schneider real estate empire involved a tangled web of enterprises organized under a holding company called Dr. Jurgen Schneider AG, headquartered near Frankfurt. Only Schneider and his wife had signatory authority over the company.
The development empire was involved mainly in prime real estate projects in a variety of cities, particularly in and around Frankfurt and Leipzig.
Officials estimate that the collapse of Schneider left the company's approximately 40 creditor banks holding about $2.9 billion in outstanding loans. Small contractors were owed another $150 million, officials say.
Banks hope that Schneider's real estate assets will cover a large chunk of the loans. But the Economics Ministry in Bonn say there is about a $1 billion shortfall between the value of the assets and the amount of the loans. It added that contractors were unlikely to receive payment.
Deutsche Bank hardest hit
Of the Schneider creditors, Deutsche Bank has the largest exposure, with loans totaling about $710 million. It also is one of the leading Metallgesellschaft creditors.
On April 19, police raided nine Schneider properties in search of documents to help authorities solve the Schneider asset maze. In addition, the state prosecutor's office in Frankfurt said its investigation would examine whether banks engaged in fraudulent activity.
Deutsche Bank, which has already come under fire for withholding knowledge about the financial condition of Schneider's empire, said it welcomed the investigation.
The bank has admitted that it received a letter from Schneider on April 7, the same day he disappeared, disclosing details of the real estate group's precarious finances, as well as giving clues that he intended to flee. But the bank took a week to acknowledge receipt of the letter.
The Schneider scandal's political repercussions are most likely to be felt in eastern Germany, whose economy is still suffering from the effects of switching to capitalism. The thousands of construction jobs that are expected to be lost are sure to increase disenchantment with the Bonn government, politicians say.
Economic Minister Gunter Rexrodt has requested banks to find ``unconventional'' ways to assist the companies affected by the Schneider collapse in order to limit layoffs.
Kohl has assailed the banks for their questionable lending practices but has stopped short of calling for a regulatory overhaul.
Last week, Kohl said banks had a double standard for lending, giving away millions to companies with which they were closely connected without doing the proper research. Yet many banks are supercautious when lending 100,000 Deutsche marks to a factory foreman.
``When a bank gives a loan ... one expects it to examine the line of credit with caution,'' he told German television.