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German Bank Fraud, or Mid-East Peace Plan?

November 24, 2009

It sounds like the start of a bad joke: what happens when Israeli banks, Arab banks and an Irish bank walk into a German bank?

According to the investing banks, fraud happened.

Banks controlled by some of the wealthiest Israelis, the Arab Banking Corp, and the Anglo Irish Bank are suing the German Bank Westdeutsche Landesbank, known as WestLB, for fraud related to $230 million in investments the banks made in WestLB derivatives. The investing banks charge that WestLB overstated the value of the investments, misled them about the risk, and improperly transferred assets out of the investment pool, deriving “exorbitant financial benefits” while decimating the investors’ assets.

As Forbes noted, the case appears to be one in which the credit crisis is bringing Arabs and Israelis together. Bahrain-based Arab Banking Corp is owned by Libya’s central bank, the Kuwait Investment Authority and the Abu Dhabi Investment Authority. Israeli has no diplomatic relations with Bahrain, Libya or Kuwait. Kuwaiti law has an implicit ban on dealing with Israel, and Libyan leader Muammar Qaddafi recently blamed Israel for Africa’s problems and urged African governments to close their Israeli embassies.

According to Bloomberg, the German press yesterday reported that WestLB needs as much as 6 billion euros in bailout funds from the German government, about double what was previously anticipated. Already in 2008 German authorities transferred $23 billion worth of structured credit assets off of WestLB’s balance sheet in an early round of its banking bailouts. Another $85 billion in offloading from WestLB’s balance sheet was announced earlier this month.

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