Note that West­LB, one of the Ger­man state-owned Lan­des­banks, is in the midst of a major restruc­tur­ing, in keep­ing with the wave of merg­ers in the Lan­des­bank land­scape since 2007:

Does­n’t look like West­LB is under pres­sure to offload assets
Inter­na­tion­al financ­ing review
16 Feb­ru­ary 2012 | By Kei­th Mullin, Cap­i­tal City

Is WestLB’s restruc­tur­ing in good shape? I pose the ques­tion because even though the bank has opt­ed to break up its busi­ness­es into bite-sized units to max­imise sales poten­tial, it doesn’t seem to be that keen to deal.

...

What’s inter­est­ing about the West­LB restruc­tur­ing in a broad­er indus­try con­text is the spec­u­la­tion it kicked off about whether it would lead to fur­ther Lan­des­bank con­sol­i­da­tion. On that, I’m not so sure. In an extreme­ly con­vo­lut­ed takeover struc­ture, West­LB rival Hela­ba (Lan­des­bank Hes­sen-Thurin­gen) is acquir­ing between €40bn and €45bn of West­LB assets as a pre-arranged com­po­nent of the restruc­tur­ing plan, along with around 400 staff. This so-called Ver­bund­bank trans­fer takes effect on July 1. I think it’s clear that Hela­ba will prob­a­bly also end up acquir­ing SPM-Bank from the State of North Rhine-West­phalia, with most of the 1,000 lega­cy employ­ees.

That leaves a rel­a­tive­ly neat group of just six Lan­des­bank groups. Fol­low­ing a series of merg­ers in past years, the remain­ing LBs are Bay­erische Lan­des­bank (Bay­ernLB, which owns 49.9% of Lan­des­bank Saar); HSH Nord­bank (cre­at­ed out of merg­ers with Ham­bur­gis­che Lan­des­bank and Lan­des­bank Schleswig-Hol­stein); Lan­des­bank Baden-Wuert­tem­berg (LBBW, incor­po­rat­ing Baden-Wuert­tem­ber­gis­che Bank, Sach­sen Bank and Rhein­land-Pfalz Bank); NordLB (which owns 92.5% of Bre­mer Lan­des­bank); Lan­des­bank Berlin; and Lan­des­bank Hes­sen-Thurin­gen (Hela­ba, incor­po­rat­ing some/all of lega­cy West­LB). That’s a hell of a lot neater than in pre­vi­ous years. Now I’m no Lan­des­bank spe­cial­ist, but how much room in prac­tice does that leave for more con­sol­i­da­tion? I’m in the process of try­ing to find out. Watch this space.

...

Keep in mind that this lat­est wave of Lan­des­bank con­sol­i­da­tion was pre­ced­ed by decades of some­times aggres­sive over­seas invest­ments by the state-backed Lan­des­banks and Ger­man insur­ers, but that state back­ing was phased out start­ing in 2005(the state sup­port, it was argued, gave the Lan­des­banks an unfair com­pet­i­tive advan­tage). Iron­i­cal­ly, the loss of state back­ing for debts issued sud­den­ly made the banks even more prof­it hun­gry in antic­i­pa­tion of the loss of state-back­ing:

Lan­des­banks and life insur­ers counter cred­it cri­tiques

Orig­i­nal head­line: Cred­it risk

Risk mag­a­zine | 01 Jul 2003

Con­cerns about Lan­des­banks’ and Ger­man life insur­ers’ cred­it risk man­age­ment have grown in recent months, fol­low­ing reports from rat­ing agency Fitch Rat­ings ques­tion­ing their expo­sures. But the insti­tu­tions say the crit­ics are wrong.

On the debt syn­di­cate desks of the world’s lead­ing invest­ment banks, the phrase ‘Ger­man insti­tu­tions’ can get puls­es rac­ing. Anec­do­tal evi­dence indi­cates that Lan­des­banks and life insur­ers snap up almost every­thing on offer, whether straight cor­po­rate bonds or the most sophis­ti­cat­ed struc­tured prod­uct.

Ear­li­er this year, Fitch Rat­ings inves­ti­gat­ed the cred­it-wor­thi­ness of these insti­tu­tions. In reports on the Lan­des­banks and the insur­ance indus­try it focused atten­tion on their cred­it port­fo­lios and use of cred­it deriv­a­tives. The reports were poor­ly received by the insti­tu­tions involved, and many bankers have crit­i­cised the domes­tic media for regur­gi­tat­ing “ground­less non­sense” about Germany’s finan­cial insti­tu­tions.

...

Hela­ba is one of the more con­ser­v­a­tive Lan­des­banks. “We are a risk-shy whole­sale bank,” says Andreas Petrie, head of cred­it prod­ucts at Hela­ba in Frank­furt. “On a scale of one to 10 we are a two in Ger­many and a three inter­na­tion­al­ly.” Most of its cred­it risk comes from the pub­lic sec­tor or the mort­gage mar­kets. It has around 40% of its mort­gage port­fo­lio out­side Ger­many – in the US, the UK, the Nether­lands and the rest of west­ern Europe – and it is a major lender to Germany’s 100 largest cap­i­tal mar­ket clients.

While Hela­ba is con­ser­v­a­tive, it is by no means atyp­i­cal. Until recent­ly, Lan­des­banks oper­at­ed large­ly in the low-mar­gin and low-risk envi­ron­ment of mort­gage assets, pub­lic-sec­tor finance and ser­vic­ing the sav­ings bank mar­ket. The cat­a­lyst for a change in Lan­des­banks’ atti­tudes to risk was an agree­ment in July 2001 between the Ger­man author­i­ties and the Euro­pean Com­mis­sion, which removed the state guar­an­tee of Lan­des­banks by July 2005 – and effec­tive­ly down­grad­ed the banks from their cur­rent triple‑A lev­el. That action pushed up fund­ing costs, and the banks have been forced to seek ways to increase rev­enues.

One method – adopt­ed by all the Lan­des­banks – has been to seek out instru­ments with poten­tial­ly high­er returns. Chris­t­ian Spiel­er, head of finan­cial insti­tu­tions deriv­a­tives mar­ket­ing at JP Mor­gan Chase, says there has been a steady – and sen­si­ble – growth in risk appetite among Lan­des­banks. “Most banks were focused on the low-risk end of the mar­ket in the mid-1990s, and start­ed with bonds and then some asset-backed secu­ri­ties (ABS) and oth­er lever­aged cred­it prod­ucts. Com­ple­ment­ing tra­di­tion­al oper­a­tions to a cer­tain degree by engag­ing in the inter­na­tion­al cred­it mar­kets is a very mean­ing­ful and risk-mit­i­gat­ing strat­e­gy for Lan­des­banks.” Lan­des­bank Baden-Würt­tem­berg, West LB and Lan­des­bank Sach­sen are known to have built up large ABS port­fo­lios.

...

Not sur­pris­ing­ly, the Lan­des­banks like west­LB that were instru­men­tal in fuel­ing euro­zone and US pri­vate-sec­tor bor­row­ing binges bub­bles even­tu­al­ly found them­selves heav­i­ly invest­ed in in soon-to-implode coun­tries:

The Local
Ice­land cre­ates bank­ing pain in told-you-so Ger­many

Pub­lished: 26 Oct 08 09:05 CET

Ger­man politi­cians were fast to blame “Anglo-Sax­on” excess­es for the finan­cial cri­sis but the coun­try’s own banks, par­tic­u­lar­ly state-owned lenders, have been any­thing but risk-averse.

Fig­ures this week from the Bank of Inter­na­tion­al Set­tle­ments showed that Ger­man banks were by far the most enthu­si­as­tic when it came to lend­ing mon­ey to Ice­land, the Nordic island state tee­ter­ing on the brink of finan­cial col­lapse.

Ice­land owed banks in Europe’s biggest econ­o­my over $21 bil­lion (€16.5 bil­lion), almost a third of the island’s total lia­bil­i­ties and far more than any oth­er coun­try, data from the cen­tral bank­ing body showed.

“This was a very sur­pris­ing­ly high num­ber ... Ice­land only has around 300,000 inhab­i­tants, the same as a town like Wup­per­tal,” said Kon­rad Beck­er, bank­ing ana­lyst at the pri­vate Mer­ck Finck bank. “And no one is going to lend Wup­per­tal $21 bil­lion.

“Ger­man banks, even state-owned ones, were not exam­ples of a pru­dent, con­ser­v­a­tive way of bank­ing,” Beck­er told AFP.

The North Atlantic island has been hit hard by the finan­cial cri­sis, with its gov­ern­ment forced to nation­alise its three largest banks and seek emer­gency bailouts from oth­er coun­tries and from the Inter­na­tion­al Mon­e­tary Fund.

Ger­many’s loans to Ice­land were five times high­er than those of banks in Britain, with region­al Ger­man bank Bay­ernL­B’s lia­bil­i­ties alone exceed­ing those of all Italy’s main banks com­bined, accord­ing to the Han­dels­blatt dai­ly.

...

And it is not just Ice­land. The data also showed that Ger­man banks have also been at the fore­front of invest­ing in oth­er Euro­pean coun­tries offer­ing high returns — and high risks — most notably in Ire­land and Spain.

Ire­land last month became the first euro­zone mem­ber to be in reces­sion after years of break­neck growth, while the col­lapse of Spain’s once-boom­ing prop­er­ty mar­ket has left many investors with their fin­gers bad­ly burnt.

Ger­man banks have not yet giv­en much detail but if the region­al lender Bay­ernLB is any guide — it has writ­ten off as worth­less €800 mil­lion in loans to Ice­land — this is going to add con­sid­er­ably to the pain already being felt in oth­er areas.

Bay­ernLB, one of Ger­many’s Lan­des­banks, this week became the first lender to seek help from the gov­ern­men­t’s €480-bil­lion finan­cial res­cue pack­age. Ham­burg-based HSH Nord­bank has since fol­lowed suit, and West LB is expect­ed to take up the offer next week.

...

One of the prime sources of the trou­bles, it turns out, was cause by that some of the Lan­des­bank’s US sub­sidiaries engag­ing in the high-risk prac­tice of short-term bor­row­ing from US munic­i­pal­i­ties and invest­ing the bor­rowed mon­ey in sub­prime mort­gage backed secu­ri­ties:

WSJ
April 21, 2010, 7:44 p.m. ET

Ger­man Bank: Vic­tim Or a Con­trib­u­tor?
IKB’s Invest­ments at the Heart of SEC’s Gold­man Probe

BY CARRICK MOLLENKAMP AND LAURA STEVENS

In 2006 and 2007, word spread around Wall Street about an unlike­ly investor: A lit­tle-known Ger­man bank that was will­ing to spend bil­lions of dollars—itself raised from U.S. municipalities—on new and risky cred­it instru­ments.

Now, those invest­ments made by IKB Deutsche Indus­triebank AG are cen­tral to the U.S. Secu­ri­ties and Exchange Com­mis­sion’s case against Gold­man Sachs Group Inc.

In its com­plaint filed last week, the SEC alleged that Gold­man defraud­ed IKB by neglect­ing to dis­close that hedge-fund oper­a­tor Paul­son & Co. was help­ing to put togeth­er a mort­gage invest­ment vehi­cle known as Aba­cus. The SEC alleges that investors, includ­ing IKB,

...

“For a very, very long time the IKB was extreme­ly sta­ble, but also very bor­ing,” said Kon­rad Beck­er, an ana­lyst with Munich-based pri­vate bank­ing firm Mer­ck Finck & Co.

But by the end of the 1990s, the Dues­sel­dorf-based bank was fac­ing lots of com­pe­ti­tion from oth­er banks chas­ing the Mit­tel­stand sec­tor. It also was fac­ing pres­sure to increase profit—not an easy task when most of its busi­ness had extreme­ly tight mar­gins, accord­ing to ana­lysts.

In an effort to expand beyond Ger­man loans, IKB in 2001 brought in a for­mer State Street Corp. bond exec­u­tive named Dirk Roethig, who worked with an IKB team to dras­ti­cal­ly increase the banks’s cred­it busi­ness, accord­ing to com­pa­ny finan­cial doc­u­ments of the time.

Between 2002 and ear­ly 2007, an IKB unit called IKB Cred­it Asset Man­age­ment GmbH increased its assets under man­age­ment by near­ly eight-fold to $23 bil­lion, accord­ing to finan­cial fil­ings. It did this by first sell­ing its own debt to invest­ment pools favored by U.S. munic­i­pal­i­ties. Those who invest­ed with IKB includ­ed the state of Mon­tana, King Coun­ty, Wash., and the city of Oak­land, Calif.

IKB then took that pot of short-term mon­ey and invest­ed in bil­lions of dol­lars of secu­ri­ties backed by sub­prime loans as well as col­lat­er­al­ized-debt oblig­a­tions con­tain­ing mort­gage secu­ri­ties. Accord­ing to an IKB annu­al report, 100% of the assets ini­tial­ly were invest­ment grade.

Most of these deals were placed in IKB’s two big invest­ment vehi­cles: Rhineland Fund­ing Cap­i­tal Corp., found­ed in 2002, and Rhine­bridge PLC, found­ed in 2007, accord­ing to finan­cial fil­ings.

IKB proved an avid buy­er of much that Wall Street had to offer, includ­ing the Gold­man Aba­cus deal now under gov­ern­ment scruti­ny. In 2007, its mar­ket­ing book for Rhineland tout­ed the bank’s “strong record as a lead­ing investor in CDOs.”

Even though it received top rat­ings from the three main cred­it-rat­ings firms, Rhine­bridge launched on June 27, 2007, and was in receiver­ship by Octo­ber 2007. King Coun­ty, Wash., which invest­ed in Rhine­bridge debt as a cash man­ag­er for 100 oth­er gov­ern­men­tal agen­cies, calls it, “per­haps the short­est-lived ‘Triple‑A’ com­pa­ny in the his­to­ry of cor­po­rate finance,” accord­ing to legal pro­ceed­ings the coun­ty has brought against IKB.

...

And yes, the invest­ment vehi­cle described above between IKB and Gold­man Sachs is, indeed, the very same noto­ri­ous “Aba­cus” prod­uct that came to epit­o­mize the fleece-the-sheep cul­ture that’s come to dom­i­nate the finan­cial indus­try.

So after all these ques­tion­able invest deci­sions led the Lan­des­banks to be amongst the first finan­cial insti­tu­tions to implode in the col­laps­ing hous­ing mar­ket, it’s inter­est­ing to recall that the favorite local to set up a “bad bank” (of junk assets) after the hous­ing col­lapse hap­pened to be Ire­land, a coun­try that was sent into the new euro­zone penal­ty-box pri­mar­i­ly because of its under-reg­u­lat­ed, over­sized bank­ing sec­tor. While this fun-fact led to some soul search­ing in Dublin, keep in mind that these for­eign banks with dis­tressed assets in Irish sub­sidiaries weren’t get­ting direct­ly bailed out by the Irish pub­lic dur­ing the bailout of the Irish bank­ing sec­tor. Indi­rect­ly bailed out on the oth­er hand...:

Ire­land wants bank cred­i­tors to bear pain, ECB says no
By SHAWN POGATCHNIK, Asso­ci­at­ed Press
pdat­ed 04/01/2011 02:17:28 PM

DUBLIN — Ire­land still wants to force for­eign bond­hold­ers to bear loss­es in debt-crip­pled banks but is being blocked by the Euro­pean Cen­tral Bank, which has the lenders on life sup­port, Finance Min­is­ter Michael Noo­nan said Fri­day.

Ireland’s bank-bailout bill offi­cial­ly surged Thurs­day by 24 bil­lion euros to 70.5 bil­lion euros ($100 bil­lion) as part of a new round of ECB-ordered stress tests. Ire­land then unveiled plans to slash its large­ly nation­al­ized bank­ing sec­tor down to just two: Bank of Ire­land and Allied Irish Banks.

Rat­ings agency Stan­dard & Poor’s the next day said the tests’ assump­tions were robust, that the worst was over, and the econ­o­my is now set to recov­er grad­u­al­ly.

Although it down­grad­ed Ireland’s cred­it rat­ing by one notch, cit­ing increased risks for bond­hold­ers under new EU rules to come into effect in 2013, it expects the coun­try to recov­er faster than Greece or Por­tu­gal — Europe’s oth­er two worst debt offend­ers.

It added it didn’t expect any more down­grades soon, though S&P rival Fitch warned soon after that it may cut its own BBB+ rat­ing on Ire­land soon as it assess­es the stress tests and oth­er devel­op­ments since its last down­grade in Decem­ber.

But as experts digest­ed the test results, the issue of how far to push loss­es on the banks’ bond­hold­ers remained the focus.

Noo­nan said Ire­land intends to force at least 5 bil­lion euros ($7 bil­lion) in loss­es on the most junior class of bank bond­hold­ers as part of the bailout bill. That rep­re­sents a small con­ces­sion by the ECB, which had until this week opposed such a move.

But Noo­nan said hopes of forc­ing bil­lions more in loss­es on senior bond­hold­ers — chiefly British, Ger­man and Amer­i­can banks — were again vetoed by a major­i­ty of ECB gov­er­nors dur­ing nego­ti­a­tions that ran right up to Thursday’s announce­ments.

Noo­nan said Ire­land would not act uni­lat­er­al­ly against the orders of the ECB, which along with the Euro­pean Com­mis­sion has been against forc­ing loss­es on bond­hold­ers since Ireland’s bank­ing cri­sis erupt­ed in 2008. Euro­pean finan­cial chiefs made pro­tec­tion of senior bond­hold­ers a con­di­tion of its Novem­ber bailout agree­ment with Ireland’s pre­vi­ous gov­ern­ment, which was oust­ed from office three weeks ago amid vot­er fury over the terms of the deal.
...

Note that the Irish banks’ creditors/“junior bond­hold­ers” (most­ly US, UK and Ger­man banks) were even­tu­al­ly forced to take a big hair­cut on their bad loans to Irish banks....oh wait nev­er mind....

NYTimes
Bank Bond­hold­ers to Be Paid While Irish Pub­lic Howls
By DOREEN CARVAJAL
Pub­lished: Jan­u­ary 23, 2012

PARIS — Anglo Irish Bank is poised to pay more than a bil­lion euros on Wednes­day to unse­cured cred­i­tors, draw­ing crit­i­cism from Irish tax­pay­ers who are pay­ing the enor­mous bill for the country’s bank bailout.

The pay­ment is part of Ireland’s effort to shore up Anglo Irish, a state-owned bank now known as the Irish Res­o­lu­tion Bank Cor­po­ra­tion, in a res­cue that ulti­mate­ly could top 47 bil­lion euros, or $61 bil­lion.

The Euro­pean Cen­tral Bank put Ire­land on notice last week that default­ing on pay­ments to the bond­hold­ers could lead to dire finan­cial con­se­quences, the equiv­a­lent of a finan­cial “bomb” in the Irish econ­o­my, accord­ing to Ireland’s trans­port min­is­ter, Leo Varad­kar, who made the com­ments over the week­end on an Irish tele­vi­sion pro­gram.

But that has not quelled a pub­lic debate about whether tax­pay­ers should pay bond­hold­ers who bet on invest­ments in a bank that was bailed out and nation­al­ized in 2009 after the col­lapse of the Irish real estate mar­ket. In gen­er­al, unse­cured bond­hold­ers reap a high­er return because the bonds are not guar­an­teed and there­fore car­ry a high­er risk.

...

A year ago, David Nor­ris, an inde­pen­dent mem­ber of the Irish Sen­ate, used par­lia­men­tary priv­i­lege to read aloud the names of bond­hold­ers, includ­ing sev­er­al Lon­don finan­cial insti­tu­tions, before he was ruled out of order. He had drawn his infor­ma­tion from Paul Staines, a for­mer bond trad­er who writes a blog from Lon­don under the name Gui­do Fawkes. Mr. Staines post­ed a list of bond­hold­er names on his blog, although he did not dis­close his source.

“My sense is that the hold­ers of these type of bonds are com­plete­ly dif­fer­ent now, with a much greater sense of risk,” Mr. Staines said.

Bond­hold­ers and invest­ment banks are reluc­tant to talk about Ireland’s repay­ment. The Insti­tute of Inter­na­tion­al Finance, the lead­ing glob­al bank­ing lob­by group, declined Mon­day to com­ment on the issue. The group is rep­re­sent­ing bond­hold­ers in nego­ti­a­tions in Greece for write-downs of its bonds.

Also Note that it’s not clear if West­LB, which did have junior Anglo Irish debt (see list at end of arti­cle), is amongst the Anglo Irish banks that will be part of the new ECB-enforced bailout, but some signs point in that direc­tion:

Busi­ness World
Who are the Anglo Bond­hold­ers?

Wednes­day, Jan­u­ary 25 10:48:11

The names of the organ­i­sa­tions hold­ing Anglo Irish bonds are con­fi­den­tial, how­ev­er past leaks reveal that the likes of Gold­man Sachs, Cred­it Suisse and a host of hedge funds are the prin­ci­pal hold­ers.

The high­ly pop­u­lar Gui­do Fawkes blog this morn­ing re-pub­lished that first leaked in 2009 and, while out of date, shows that many of the world’s top finan­cial com­pa­nies have a stake in the bank that brought the Irish econ­o­my to its knees.

The list shows that Ger­man finan­cial organ­i­sa­tion rep­re­sent the biggest block of own­ers with Deutsche Asset Man­age­ment, WEW and WGZ banks promi­nent.

Anglo — now the IBRC — could end up cost­ing the Irish tax­pay­er more than E47 bil­lion.
...

Any­ways, this is all a reminder of the Lan­des­banks’ impor­tant role in the finan­cial crises, as both a facil­i­ta­tors of bub­bles and bailout black holes for the pub­lic in the after­math. It’s a famil­iar sto­ry around the globe, but in the con­text of the euro­zone’s cur­rent aus­ter­i­ty fetish and the bankster actions that destroyed the glob­al econ­o­my, the Lan­des­bank’s chap­ter in the his­to­ry of the finan­cial cri­sis is pret­ty rel­e­vant.

Here’s a 2006 arti­cle about West­LB and Aus­tri­a’s Raif­feisen Zen­tral­bank Oster­re­ich Aktienge­sellschaft (RZA) team­ing up to offer shari­ah-com­pli­ant invest­ments to the Gulf Finance House (GFH), high­light­ing West­L­B’s ear­ly role in this fair­ly new seg­ment of the finan­cial indus­try:

Raif­feisen Zen­tral­bank Öster­re­ich and West­LB launch US$100 m Stand­by Com­mod­i­ty Muraba­ha Financ­ing for Gulf Finance House
ameinfo.com
Bahrain: Tues­day, Novem­ber 07 — 2006 at 13:34

Gulf Finance House [GFH] today announced the syn­di­cat­ed launch of a 3‑year US$100 mil­lion Stand­by Com­mod­i­ty Muraba­ha Financ­ing for GFH facil­i­tat­ed by RZB and West­LB as joint lead arrangers, co-under­writ­ers and joint book run­ners. West­LB will also act as the invest­ment agent.

This Muraba­ha trans­ac­tion sup­ports GFH’s efforts to cap­i­talise on the suc­cess of its invest­ment busi­ness mod­el and widen its investor base in line with 7 years of steady growth and unin­ter­rupt­ed prof­itabil­i­ty.

The Muraba­ha struc­ture is Shari­a’a-com­pli­ant, hav­ing been approved by the inter­nal Shari­a’a advi­sors of GFH. Trans­ac­tion dis­tri­b­u­tion has been geared towards a wide insti­tu­tion­al investor base both inside the Gulf region and out­side — par­tic­u­lar­ly to Euro­pean and South East Asian investors.

...

On an iron­ic side-note, GFH just got a con­tract from Tunisi­a’s new post-Arab-spring gov­ern­ment to raise inter­na­tion­al funds for infra­struc­ture devel­op­ment. It’s an iron­ic con­tract giv­en that GFH is based in Bahrain, not exact­ly an Arab-Spring-friend­ly loca­tion.

And here’s anoth­er arti­cle from 2006 dis­cussing West­L­B’s under­writ­ing of a Sukuk (Islam­ic bond) that appears to emu­late put and call options. (and with shari­ah-com­pli­ant syn­thet­ic deriv­a­tives, mod­ern finance offi­cial­ly jumps the shark). No doubt they’re some­how not spec­u­la­tive in nature, so it’s all good:

bankalkhair.com
Uni­corn Invest­ment Bank and West­LB close US$150m Sukuk for Invest­ment Dar

20 Sep­tem­ber 2006

Uni­corn Invest­ment Bank and West­LB Lon­don Branch have today suc­cess­ful­ly closed the US$150 mil­lion Mushara­ka Trust Sukuk for Kuwait­’s Invest­ment Dar.

This is the first Mushara­ka Sukuk struc­tured with a put option for the investors and a call option for the issuer. The put option allows each cer­tifi­cate hold­er (investor) to exit the trans­ac­tion at year three while the call option allows the issuer the same flex­i­bil­i­ty at the same date.

The Sukuk struc­ture is Shar­i’ah-com­pli­ant, hav­ing been approved by the Shar­i’ah Super­vi­so­ry Boards of Uni­corn and Invest­ment Dar.

Sal­im W. Abboud, Direc­tor of Cap­i­tal Mar­kets at Uni­corn, com­ment­ed: “This Sukuk attests to the capa­bil­i­ties of Uni­corn in deliv­er­ing on the cap­i­tal mar­kets needs of its clients in Islam­ic finance. With this Sukuk we have added val­ue to Invest­ment Dar by extend­ing their lia­bil­i­ty pro­file, low­er­ing their fund­ing cost and broad­en­ing their investor base, all through a Shar­i’ah-com­pli­ant struc­ture.

David Tes­ta, Exec­u­tive Direc­tor of Asset Secu­ri­ti­sa­tion — Islam­ic Finance at West­LB, added: “As sole bookrun­ner, we were par­tic­u­lar­ly pleased to bring in over 15 banks and insti­tu­tions into the trans­ac­tion, includ­ing investors in Europe and Asia”

The trans­ac­tion was launched on 6th June 2006 with Uni­corn and West­LB Lon­don Branch as joint-lead arrangers. Uni­corn also act­ed as the struc­tur­ing agent and West­L­B’s Lon­don Branch was the sole under­writer and bookrun­ner.

...

Inter­est­ing­ly, in this snazzy new world of shari­ah-com­pli­ant inter­na­tion­al finance (which was set to sur­pass $1 tril­lion in 2010), it looks like process of get­ting of the shari­ah-com­pli­ant stamp of approval for these prod­ucts relies on a cou­ple dozen “schol­ars”:

Insight: “Rock star” schol­ars a risk for Islam­ic finance

By Anjuli Davies and Mir­na Sleiman

LONDON/DUBAI | Thu Mar 1, 2012 8:14am EST

(Reuters) — Decades of pars­ing turgid legal doc­u­ments have not damp­ened the enthu­si­asm of octo­ge­nar­i­an Islam­ic schol­ar Sheikh Hus­sein Hamed Has­san. He gets agi­tat­ed as he search­es for a paper among piles of doc­u­ments strewn across his posh Dubai office.

Wear­ing a dark grey suit with no tie, the Egypt­ian-born aca­d­e­m­ic talks to a vis­i­tor for almost two hours about Islam­ic bank­ing, which he has been instru­men­tal in devel­op­ing over half a cen­tu­ry of writ­ing and lec­tur­ing.

“Lis­ten to me. You have to under­stand the basics of sharia, what’s allowed and not allowed in Islam. If you get it, then you’ll write it. And the whole world will under­stand,” he says.

Sheikh Hus­sein is one of the world’s most sought-after schol­ars in apply­ing sharia or Islam­ic law to finance, chair­ing no few­er than 22 of the boards which rule on whether prod­ucts and prac­tices in the indus­try obey reli­gious prin­ci­ples.

One posi­tion in par­tic­u­lar stands out. As chair­man of the sharia advi­so­ry board of Lon­don- and Dubai-based con­sul­tants Dar Al Istith­mar, he is hav­ing to answer some search­ing ques­tions on behalf of one of its most high-pro­file clients, U.S. invest­ment bank Gold­man Sachs.

Last Octo­ber Gold­man announced it would issue as much as $2 bil­lion in sukuk or Islam­ic bonds, mak­ing it one of the first top West­ern banks to raise mon­ey in that way. But the plan has run into con­tro­ver­sy among poten­tial investors over whether it fol­lows Islam­ic prin­ci­ples, as Dar Al Istith­mar insists it does. There is also con­tro­ver­sy over the fact that Gold­man pub­licly named at least three Islam­ic schol­ars as poten­tial advis­ers on the sukuk even though they had not even seen the prospec­tus.

“A copy of the Gold­man Sachs sukuk prospec­tus was sent to these schol­ars for con­sul­ta­tion but they nev­er respond­ed back,” Sheikh Hus­sein told Reuters. “They could be busy or did not approve the struc­ture, but we did­n’t hear from them. Their approval is not nec­es­sary any­way.”

The con­tro­ver­sy over the Gold­man sukuk illus­trates some of the weak­ness­es of the Islam­ic finance indus­try. These are lead­ing to grow­ing pres­sure for reform of the schol­ar sys­tem, though the pow­er of entrenched inter­ests, and the dif­fi­cul­ty of coor­di­nat­ing pol­i­cy in an indus­try where author­i­ty is spread across the Mid­dle East and south­east Asia, may slow any change.

Schol­ars such as Sheikh Hus­sein com­mand great influ­ence but their opin­ions, lack­ing defin­i­tive legal sanc­tion, are often chal­lenged, cre­at­ing an uncer­tain reg­u­la­to­ry envi­ron­ment. And some schol­ars sit on scores of boards, leav­ing them open to charges of con­flict of inter­est and mak­ing it hard for them to keep up with all areas of their work.

“The big prob­lem is that there just aren’t enough of them,” said one Dubai-based banker in the indus­try, who declined to be named because of the sen­si­tiv­i­ty of the issue. “It’s a bit like being a rock star. They are dis­pro­por­tion­ate­ly rec­og­nized, with peo­ple say­ing: ‘I want that name in Malaysia, I want that name in Bahrain.’ ”

CAPACITY

Islam­ic finance, based on prin­ci­ples such as bans on inter­est and pure mon­e­tary spec­u­la­tion, has grown rapid­ly over the last sev­er­al years because it draws on pools of invest­ment mon­ey in the oil-rich Gulf and Asia that have been rel­a­tive­ly untouched by the glob­al finan­cial cri­sis.

The indus­try’s glob­al assets are expect­ed to rise 33 per­cent from 2010 lev­els to $1.1 tril­lion by the end of 2012, accord­ing to con­sul­tants Ernst & Young. Islam­ic finance will remain far small­er than con­ven­tion­al finance, with its tens of tril­lions of dol­lars, but the gap may con­tin­ue nar­row­ing; Ernst & Young expects Islam­ic bank­ing in the Mid­dle East and North Africa to expand over the next five years at a com­pound annu­al rate of 20 per­cent, ver­sus less than 9 per­cent for con­ven­tion­al banks.

Sharia schol­ars, with exper­tise in both reli­gious and con­ven­tion­al law, are key to this growth. Investors will not buy instru­ments with­out believ­ing they are reli­gious­ly accept­able, so most whol­ly Islam­ic finan­cial firms have their own board of sharia schol­ars which cer­ti­fies prod­ucts and mon­i­tors the fir­m’s busi­ness. “Inde­pen­dent” sharia boards also exist, offer­ing their ser­vices to finan­cial firms for a price.

There are over 400 sharia schol­ars world­wide but only around 15 to 20 promi­nent and expe­ri­enced ones, which cre­ates demand for schol­ars to sit on mul­ti­ple boards. The top 20 schol­ars hold 14 to 85 posi­tions each, occu­py­ing a total of around 620 board posi­tions or 55 per­cent of the indus­try, data com­piled by invest­ment research firm Funds@Work show.

...

While the West­ern mod­el finan­cial reg­u­la­tion has become sort of a joke in recent decades, the schol­ar-shop­ping mod­el does­n’t appear to be an improve­ment.

Also, on an inter­est­ing side note, schol­ar­ly sources indi­cate that tax shel­ter­ing is shari­ah-com­pli­ant:

Islam­ic Finance: Islam­ic Sukuk By Gold­man Sachs Caus­es Debate

First Post­ed: 02/23/2012 9:51 am Updat­ed: 02/23/2012 11:55 am

By Anjuli Davies

LONDON, Feb 23 (Reuters) — A con­tro­ver­sial plan by Gold­man Sachs to issue an Islam­ic bond has ignit­ed a wider debate on whether con­ven­tion­al banks in the West should be allowed to engage in Islam­ic finance.

At a major con­fer­ence of Islam­ic schol­ars and bankers in Lon­don this week, much of the pub­lic and pri­vate dis­cus­sion was devot­ed to whether grow­ing West­ern inter­est in Islam­ic finance could dam­age the indus­try by com­pro­mis­ing its reli­gious prin­ci­ples.

Some par­tic­i­pants argued invest­ment banks such as Gold­man should be banned from issu­ing Islam­ic bonds, or sukuk, because the funds they raised could help to finance oth­er parts of their busi­ness that did not com­ply with sharia or Islam­ic law.

...

Aznan Hasan, one of the schol­ars who signed the Gold­man fat­wa, said there were no sharia-relat­ed prob­lems with the sukuk. The inten­tion to list on the Irish exchange is pure­ly for tax pur­pos­es, he said. But he added that Gold­man should con­sid­er more mea­sures to address doubts.

...

@Pterrafractyl–

Not an expert in sharia finance myself, I’d be very sur­prised if the shenani­gans engaged in by Gold­man Sachs and the rest of the major hous­es was in keep­ing with the prin­ci­ples of what Islam­ic invest­ment was SUPPOSED to be.

@Dave: Yeah, Gold­man Sachs seems to have the anti-Midas touch. Any­thing they touch turns to fools gold or some oth­er scam.

It’s going to be real­ly inter­est­ing to watch the impact that Gold­man Sachs and the oth­er big banks have on this area of finances that’s still sort of in its infan­cy. One of the advan­tages Gold­man & friends seems to have in the debate is that there is no uni­form set of views because it all comes down to the opin­ions and inter­pre­ta­tion by a hand­ful of schol­ars. With around 20 “rock­star” schol­ars appar­ent­ly run­ning the entire globe’s shari­ah-com­pli­ance rack­et there’s going to be an incred­i­ble amount of resources by all sorts of dif­fer­ent actors to influ­ence these guys. It sounds like there’s going to have to be a con­sen­sus view emerg­ing on what exact­ly con­sti­tutes shari­ah-com­pli­ance just to keep the grow­ing mar­ket func­tion­ing because there’s too much diver­gence in opin­ion amongst these schol­ars. That should be one inter­est­ing set of fat­was.

@Dave: Here’s a 2007 FT piece from the author of “Islam­ic Bank­ing: a $300 bil­lion decep­tion” that makes two reveal­ing obser­va­tions. First, the way Islam­ic finance is cur­rent­ly prac­ticed is almost iden­ti­cal to the inter­est-based financ­ing that its sup­posed to be avoid­ing in the first place. Sec­ond­ly, the author asserts that the form of finance that most close­ly fol­lows the spir­it of shari­ah would be ven­ture cap­i­tal (where the bank is actu­al­ly invest­ing in the busi­ness and shar­ing the prof­its and loss­es). Since the pur­pose of Islam­ic finance cur­rent­ly seems to be find­ing the­o­log­i­cal cov­er for the Islam­ic banks to engage in West­ern-style lending/borrowing bank­ing, it’s not a per­spec­tive I’d expect to win out in the end:

Finan­cial Times
Jan­u­ary 18, 2007 8:44 pm
Islam­ic finance has much to learn from the west

By Muham­mad Saleem

Pro­po­nents of Islam­ic finance main­tain that as the Koran pro­hibits inter­est all financ­ing must be done on a prof­it and loss shar­ing basis. In spite of all the lofty rhetoric, in prac­tice no more than 5 per cent of Islam­ic financ­ing is done this way.

Instead, Islam­ic banks use a struc­ture called muraba­ha, or cost plus pre-deter­mined prof­it, for the vast major­i­ty of their finance deals. Remark­ably, the “prof­it” for an Islam­ic bank in a muraba­ha trans­ac­tion and the inter­est a con­ven­tion­al bank would have charged on the same trans­ac­tion hap­pen to be exact­ly the same. Indeed, Islam­ic banks in deter­min­ing their “prof­it” even quote the rate as a mar­gin over Libor or oth­er sim­i­lar indices.

Muraba­ha was a crude trad­ing prac­tice designed for trans­ac­tions between real sell­ers and real buy­ers involv­ing phys­i­cal goods. By struc­tur­ing a financ­ing trans­ac­tion while dis­guis­ing it as a trad­ing trans­ac­tion – and charg­ing inter­est con­cealed in Islam­ic garb – Islam­ic banks turn the entire enter­prise into a cha­rade.

Oth­er modes of financ­ing are just as dubi­ous. Take Islam­ic house finance, struc­tured as a lease: lease pay­ments are equal to inter­est that a con­ven­tion­al bank would charge on a home mort­gage loan. Sukuks, or Islam­ic bonds, are sim­i­lar in many respects to muraba­ha and just as taint­ed. Bran­dish­ing a fat­wa from a schol­ar of sharia law (who, like mer­ce­nar­ies, are some­times for sale at the right price), bless­ing the struc­ture does not absolve the bankers from the respon­si­bil­i­ty of meet­ing the spir­it of the sharia.

The real prob­lem with the Islam­ic finance indus­try is that despite a 30-year his­to­ry and cur­rent assets of about $300bn they have yet to add any val­ue. Islam­ic banks have not cre­at­ed any new jobs (employ­ment at Islam­ic banks does not count), financed new inven­tions or inno­va­tions or made the Islam­ic com­mu­ni­ties more just and equi­table. The smoke and mir­rors Islam­ic finance indus­try appears to be all about cre­at­ing finan­cial struc­tures to com­ply with the let­ter of the law, not the spir­it and intent of the Koran.

Islam­ic banks need to move away from the decep­tive modes of financ­ing they cur­rent­ly use and step towards the Amer­i­can style of ven­ture cap­i­tal. This has two advan­tages. First, the stat­ed prin­ci­ples of Islam­ic bank­ing – favour­ing prof­it and loss shar­ing over inter­est – are very sim­i­lar to the financ­ing tech­niques used by the ven­ture cap­i­tal indus­try, espe­cial­ly in the US. These pri­vate equi­ty groups are the real Islam­ic finance, the gen­uine arti­cle. Sec­ond, by pro­vid­ing funds to entre­pre­neurs with bright ideas, the banks can assist in pro­mot­ing inno­va­tion, inven­tion and cre­ation of new jobs and indus­tries.

...

@ Ter­rafractyl and @ Dave: I am not an expert either on Sharia finance but I can’t help but to think that it looks just like anoth­er way of doing eco­nom­ic war­fare. Sharia finance won’t fund projects that are not com­pli­ant with sharia law, right? So all the projects and busi­ness­es orga­nized and man­aged by Chris­tians, Jews, poly­the­ists, athe­ists, etc, in the Mid­dle East are vul­ner­a­ble to refusal. In oth­er terms, with­out mon­ey to cap­i­tal­ize their enter­pris­es, these projects, busi­ness­es and com­mu­ni­ties risk anni­hi­la­tion and dis­in­te­gra­tion, with­out Islamists and the like fir­ing a sin­gle shot. This could prove to be worse than Al-Qae­da.

@Claude: You may be right, I’m afraid. =(