The trial of Georg Funke, former CEO of German mortgage bank Hypo Real Estate (HRE), began in Munich on Monday, eight-and-a-half years after the lender was bailed out by the German government.
The €100 bn-plus bailout in 2008 was the most expensive ever in Germany, and led to HRE's near collapse being dubbed 'Germany's Lehman Brothers'.
Funke faces charges of misrepresenting the real estate bank's financial position in its financial statements in 2007 and the first half of 2008, although some of the original charges against him have been dropped. Markus Fell, HRE's former finance director is also in the dock.
After its rescue and nationalisation by the German government, HRE was split into a bad bank, FMS Wertmanagement, and pbb Deutsche Pfandbriefbank. Pbb continued to lend and in 2015 successfully recapitalised and privatised, floating on the Frankfurt stock exchange.
HRE had itself been spun-off as a standalone real estate bank by the German HVB bank group in 2003. HRE grew rapidly, acquiring Dublin-based Depfa bank in 2007 which extended its business into public sector finance and more than doubled its balance sheet to €420 bn by the end of 2008.
With hindsight, HRE's problems have been seen, at least in part, as due to a discredited model of borrowing short - via interbank funding - to lend long. In 2008 when Lehman Brothers collapsed, the global interbank funding market had all but shut down.
Pbb Deutsche Pfandbriefbank by contrast is funded in substantial part through pfandbrief, the German covered bond market which withstood the financial crisis and which only allows for a bond cover pool of good quality.
The trial of Funke and Fell is expected to last up to six months.
