Time To Bust Up The Club

On the face of it, he's a most unlikely free-marketeer. A card-carrying socialist, Thilo Sarrazin is Finance minister for the city of Berlin, whose government includes the successor party of the former East German communists. But bankrupt Berlin needs cash, and Sarrazin is determined to get it. So determined, in fact, that he's preparing to break one of Germany's longest-standing political and economic taboos--by selling off Landesbank Berlin, the city's public-owned bank, for some €8 billion.

Ho-hum? Not in Germany. The move has sent a tremor through one of the coziest clubs in the land--the state-owned banks that control almost half the country's banking assets. Germany may be Europe's largest economy, home to some of the world's most successful companies, yet the basic structure of its banking system is unchanged since the 1800s--fragmented, inefficient, cosseted from competition. In Berlin's Landesbank sale, some see the coming of a whole new era, freeing up hidden wealth and powering new growth across the economy. "This is the biggest event in European markets this year," says Dirk Becker, a bank analyst for Kepler Equities in Frankfurt. "In 10 years we'll have a completely different German financial landscape and look back on this as the catalyst that set it off."

To see why, just look at once mighty Deutsche Bank. Twenty years ago, it was Europe's biggest bank. Today, ranked by market value, it no longer makes it into the top 10, far behind British and French giants and even new Spanish and Italian competitors. All over Europe, deregulation and consolidation has created profitable banking conglomerates and unleashed new economic dynamism. But German banks just lumbered along, frozen out of two thirds of their own home market by 460 inviolable public banks and an additional 1,300 cooperative S&Ls. That's one reason why London has marginalized Frankfurt as Europe's undisputed financial capital--even though Britain didn't even adopt the euro.

If Becker and others are right, and Landesbank undoes this hidebound status quo, the benefits could indeed be enormous. According to the International Monetary Fund, bringing inefficient public banks up to the average profitability of European banks would generate increased profits worth almost half a point of GDP annually. The market value for their owners--German taxpayers--would rise by a whopping 17 percent of GDP, roughly a quarter of the national debt.

In the past, a chummy coalition of politicians and lobbyists has managed to fend off deregulation. Lots of pigs feed off the public banking trough: bank managers who don't have to worry about profits or competition; politicians routinely rewarded with nicely paying jobs on their boards; local governments that use the banks to bail out companies or finance pet projects. Landesbank is exhibit A. In the 1990s, a clique of politicians and inept managers wiped out the bank's assets in a series of fly-by-night real-estate deals, which Berlin then covered with a €23 billion taxpayer bailout. As the IMF numbers make clear, that's only a small fraction of the cost of the system.

Defenders say Germany needs its public banks, which they argue guarantee fair access to financial services. Yet other nations have dismantled virtually identical systems, among them Italy and Spain, without bad effects. In any case, it's hard to see how the alleged benefits of public banking would be worth 17 percent of GDP.

As Sarrazin prepares to confront the German establishment, he has a powerful ally. The European Commission is closely monitoring the Landesbank case, last month reminding the German Finance Ministry to keep the sale transparent and fair. (In fact, it was the EU that mandated the sell-off as a condition for the €23 billion Landesbank bailout.) Among the 19 bidders who registered last week are five other public banks whose key interest is to outbid any private buyer and keep the sale from setting a trend. "The public banks will try to prevent at any price a private German or foreign bank from breaking into their sector," analyst Becker predicts. Landesbank's CEO, Hans-Jörg Vetter, has reportedly told investors that he'd prefer to sell blocks of shares instead of the winner-takes-all auction. That would make it easier for other public banks to jointly acquire a controlling stake--and keep their cozy world intact.

Since a good slice of power and patronage is at stake, leading politicians have begun ranting against the sale. Jürgen Rüttgers, the powerful governor of North Rhine-Westphalia, last month told a baffled audience at the German Council on Foreign Affairs that selling the savings banks would be a sellout of the ''European model" and lead the country down the slippery slope of--gasp!--''Anglo-Saxon" capitalism. We shall see. Meanwhile, foreign banks eager to push into the German market are eyeing Landesbank hungrily, among them giant UniCredito--a product of banking privatization in Italy.

Even if the public bidders end up with the prize this time (most likely by desperately overpaying; on Friday the small Landesbank free float was trading at 37 percent above fair value), industry observers predict that more sell-offs are inevitable. If Berlin's bank sale helps create a stronger, more efficient financial sector in Germany, ultimately hiking the country's economic growth, it will be a godsend.