German banker who misled market gets suspended jail term
By DPA, IANSWednesday, July 14, 2010
DUSSELDORF - A German banker who misled the market about the looming sub-prime mortgage crisis in 2007 was handed a 10-month suspended jail sentence and 100,000 euros ($125,000) in fines Wednesday.
Stefan Ortseifen issued an optimistic press release, although his German bank, IKB, was about to fail. IKB had invested in worthless paper linked to the collapsing US housing market.
Former chief executive Ortseifen is the first senior German to be convicted for a role in the 2007-2010 world financial crisis, which began in 2007 with mass defaults on poorly-secured US housing loans.
He was convicted by a state court in Dusseldorf of deliberately manipulating a market. The German government had to step in with 10 billion euros in loans to rescue IKB, a bank which had been set up by and made loans to mid-sized German industrial companies.
Judges said a press release issued by Ortseifen in July 2007 misled markets into thinking IKB’s financial position was much better than it really was.
Ortseifen and his lawyers had denied the charge, blaming Germany’s main investment bank, Deutsche Bank, for IKB’s collapse. Deutsche cut off its credit-trading financing to IKB July 27, 2007.
The IKB collapse sucked Germany into the vortex of the financial crisis. Many German banks have still not fully recovered.
Some German banks had invested in housing loans to poor Americans because of the high yields offered and had not realized the risk.
IKB set up separate companies to invest 17 billion euros in “structured finance products” linked to the mortgages.
IKB’s exposure was not initially obvious in 2007 from studying the parent-company accounts, but it was about to come into the open as ratings agencies began a massive markdown in the value of structured-finance investments.
However Ortseifen announced that IKB’s profit prospects were steady, and that IKB’s write-downs because of subprime mortgages would not exceed a single-digit number of millions of euros. The court said he knew at the time this was untrue.
