Sachsen LB's Irish SIVs were 20x its capital — and needed a €17.3B rescue

Sachsen LB (Landesbank Sachsen) was a German public-sector Landesbank headquartered in Leipzig, owned primarily by the state of Saxony. Its Irish subsidiaries, including Sachsen LB Europe plc, operated a stable of off-balance-sheet structured investment vehicles including the Ormond Quay SIV. These vehicles invested in US subprime mortgage-backed securities, building up exposure of approximately €30 billion — roughly 20 times the parent bank's capitalisation.

As early as 2004, the German regulator BaFin had warned the Irish Financial Regulator that Sachsen LB's Irish operations were involved in highly risky transactions with insufficient scrutiny. Despite this warning, the Irish regulator approved another Sachsen investment vehicle in 2007. Two months later, when the US subprime market collapsed, the entire stable of SIVs needed a €17.3 billion rescue from the German association of savings banks to keep Sachsen afloat.

The scandal had political consequences. Saxony's state premier, Georg Milbradt, was forced to resign in April 2008 after it emerged that he had taken private loans from the bank while it was running this risk. The state government sold its 51% stake in Sachsen LB to Landesbank Baden-Württemberg for €328 million in 2008. The bank was later reorganized under the umbrella of Sachsen Bank.