WestLB lost $820M on German share bets — the trade that began the bank's dismantling

WestLB (Westdeutsche Landesbank) was a German state-owned bank based in North Rhine-Westphalia, one of Germany's largest Landesbanken. It operated a proprietary trading desk that speculated with the bank's own capital.

In the first half of 2007, WestLB's trading desk made massive bets on the price gap between common and preferred shares of German blue-chip companies including Volkswagen, BMW, and Metro. The strategy went disastrously wrong, and the bank reported a loss of approximately €604 million ($820 million) from proprietary trading.

The loss was so large that it triggered the beginning of the end for WestLB. The bank had already been weakened by the subprime crisis, and the trading loss destroyed confidence. Germany's financial regulator BaFin launched an investigation, and seven current and former executives were investigated for violating corporate law. CEO Thomas Fischer resigned in July 2007.

WestLB was eventually dismantled. Its brand was given up in 2012, remaining operations were transferred to Portigon Financial Services AG, and a 'bad bank' (Erste Abwicklungsanstalt) was created to handle €85 billion in problem assets. The $820 million trading loss was the first domino in the bank's collapse.

The concentrated bets on the spread between common and preferred shares lost $820 million, triggering CEO resignation and the bank's eventual dismantling.

WestLB's proprietary trading desk made concentrated bets on the spread between common and preferred shares of German blue chips — a strategy that worked until it did not.

The bank's executive board was aware of the risky trading practices since early 2007 but failed to provide adequate information to the supervisory board, according to BaFin's investigation.

A proprietary trading loss at a state-owned bank becomes a political crisis — and WestLB's already weak position meant the loss was fatal rather than survivable.

A proprietary trading loss at a state-owned bank is not a bad quarter — it is taxpayer money. WestLB's $820M loss was the beginning of the end for the entire bank.