BERLIN, Oct. 22 (UPI) -- Prosecutors have raided the offices of a troubled German financial institution, and Berlin will have to spend billions to bail out the largest state bank in Bavaria. The financial crisis in Germany is far from over.
On Wednesday, prosecutors raided the offices of the KfW bank (Reconstruction Credit Institute), in connection with an investigation launched by the prosecution in Frankfurt against the bank's top managers.
KfW, a federally owned lender, dominated headlines in Germany last month when it surfaced that it had transferred nearly $500 million to U.S. bank Lehman Brothers -- on the day it filed for bankruptcy protection.
Prosecutors are now trying to find out whether the managers at the bank with the transfer "criminally violated" their obligation to safeguard the bank's assets.
KfW said in a statement it would cooperate with authorities on all allegations. It previously called the transfer a "mishap."
Already, two executive board members and the head of the risk-management division at KfW were fired. These three, and two additional board members, are the focus of the investigation, a spokeswoman for the Frankfurt prosecutor's office told German news channel n-tv.
Apart from the money lost at KfW, the German government also will have to shoulder some $7 billion to help the BayernLB bank, which is half-owned by the state of Bavaria.
BayernLB thus has become the first bank in Germany to take advantage of the federal government's giant $680 billion bailout program.
The bank announced the decision Tuesday after a five-hour emergency session that revealed the situation at Bavaria's biggest state bank was graver than had been thought.
The bank needs roughly $8.5 billion to survive the coming months, with $7 billion coming from the federal government and the remaining money delivered by state sources.
Bavarian Finance Minister Erwin Huber, who also heads the bank's administrative board, warns of more crises: "Nobody knows how this will play out," he told the Passauer Neue Presse newspaper.
Huber, of the Christian Social Union that has governed Bavaria for several decades, has come under fire since the real extent of the crisis at BayernLB became known.
Newspaper reports claim senior Bavarian government officials (including Huber) knew of the cash deficit at the bank before Bavarians went to the polls last month to vote on a new Parliament. The real crisis was kept secret, they say, in order to prevent a public outcry that could have resulted in lesser support at the polls.
BayernLB is due to hand over a significant share of its decision-making to Berlin: It would increase the government's say over the bank's equity capital and dividend strategy. It also would severely limit payments to its managers. A bank would agree to such power losses only if it were indeed in very serious trouble, observers say.
Meanwhile, the financial crisis in Germany continues, with only the federal bailout package providing security. The country's blue-chip stock index DAX continues to fall, with experts lowering their economic growth forecasts for 2009.
Some institutes say Germany -- despite strong economic and job growth over the past 18 months -- may even slide into recession next year.
That's why Berlin is looking at drafting a set of measures to encourage investments in industries. Germany's finance and economy ministers will come up with incentives to strengthen the car and construction sectors and present them to the Cabinet within the next two weeks, deputy government spokesman Thomas Steg said at his regular briefing Monday. His boss backs the idea.
"We have to do all we can to try to lift the economic growth rates through various incentives," Chancellor Angela Merkel said.
