WestLB to Cut 25% of Staff, Get EU5 Billion Bailout

WestLB to Cut 25% of Staff, Get EU5 Billion Bailout

Feb. 8 (Bloomberg) -- WestLB AG will cut about 25 percent of its workforce as its owners agreed to provide 5 billion euros ($7.2 billion) to bail out the German bank reeling from trading and subprime-related losses.

The owners, including the state of North Rhine-Westphalia and two regional savings-bank associations, agreed to cover WestLB's potential losses of as much as 5 billion euros related to risky assets, the lender said in a statement today. The bank will shift securities into a new off-balance-sheet unit and cut as many as 1,500 of its 5,900 staff to save about 300 million euros by 2010.

WestLB is getting financial aid from its owners for the third time in four years and looking for a merger partner after posting a 1 billion-euro loss in 2007. The Dusseldorf-based bank lost 604 million euros on trades in the first half, costing Chief Executive Officer Thomas Fischer his job, and set aside 1 billion euros for writedowns after the collapse of the U.S. subprime mortgage market.

``WestLB was the most powerful state-owned bank in Germany about 10 years ago,'' said Dieter Hein, an analyst at Fairesearch GmbH & Co. in Frankfurt. ``Now it's been hit by trading problems and subprime and is seeking a merger from a weakened position.''

The owners are trying to reorganize the business, lower costs and make sure WestLB's liabilities are covered as they pursue a merger with smaller rival Landesbank Hessen-Thueringen. They will guarantee about 23 billion euros of debt securities to be transferred to the new off-balance-sheet unit.

Strategy Backfired

Once a domestic lender that funded apartments, houses and companies in Germany's industrial Ruhr Valley, WestLB took advantage of low financing costs in the 1990s to win business abroad. The expansion strategy backfired five years ago when writedowns swelled at the bank's U.K. financing business, run by U.S.-born banker Robin Saunders.

WestLB's finances last year were eroded by the declining value of debt securities including 1.25 billion euros in subprime investments as well as credit lines extended to off-balance-sheet investment affiliates that couldn't raise funding as short-term debt markets dried up amid the credit crunch.

The debt market turbulence followed first-half losses from traders who made wrong-way bets with the bank's own money. Fischer and his chief risk officer were ousted in July after a probe alleged they didn't sufficiently fulfill reporting requirements on the risks.

German Bailouts

Landesbank Sachsen AG and IKB Deutsche Industriebank AG, two other German state-owned banks, received multi-billion-euro bailouts last year after investing in subprime mortgages. The worst U.S. housing market in a quarter century has led to more than $145 billion in losses and writedowns at the world's biggest financial institutions.

British bank Northern Rock Plc applied for emergency aid from the Bank of England in September after it struggled to fund its business because of a jump in money-market credit costs.

WestLB wants to boost revenue by about 100 million euros by increasing business with small and medium-sized companies and to offer more retail products through closer cooperation with regional savings banks. The lender plans to expand its real estate business and focus on investment banking activities, it said.

Under the bailout agreement, the owners will split the 2 billion euros based on their stakes in WestLB. The state controls about 38 percent and the Westphalia-Lippe and Rhineland savings- bank associations together own just over 25 percent each. Local regional authorities hold the rest.

By providing guarantees and capital, the owners are trying to avoid possible credit-rating downgrades, which would raise borrowing costs and hurt earnings. Fitch Ratings downgraded the lender's individual rating last month, saying it would have defaulted without rescue measures.

Job Cuts

The state isn't aiming to acquire a majority stake in WestLB, Finance Minister Helmut Linssen said at a press conference in Dusseldorf today. The government may also make legal changes to allow WestLB to buy savings banks, he added.

``Job cuts are always a bitter measure, but there is no alternative,'' CEO Alexander Stuhlmann said in the statement. ``We have to immediately begin to shape the future of WestLB and to make the remaining jobs as safe as possible.''

BLOOMBERG