Banks from every sector of the German market have coughed up Eu3.5bn to cover potential losses of up to 20% on IKBs Eu17.5bn of investments in asset backed securities, both on and off balance sheet.
KfW, the German state development bank which owns 38% of IKB is bearing the brunt. It is contributing Eu2.5bn of that rescue package, on top of an Eu8.1bn commitment to cover IKBs liquidity loan to its asset backed commercial paper conduit, where some Eu10bn of the ABS are held.
The episode is a frightening indicator of how quickly a fully regulated and supervised bank can founder, despite capital adequacy rules and risk management procedures.
Talk by Jochen Sanio, head of financial regulator BaFin, that Germany was facing its "worst banking crisis since 1931" was greatly exaggerated, and later repudiated by the head of the Federal Association of German Banks.
But the emergency services have had to be called out, for a full scale, state-backed rescue operation. If the guesstimate of a 20% loss on the ABS is right, that would indeed wipe out IKBs equity, which is now languishing at Eu1.12bn after catastrophic share price falls this week.
Yet so far, the losses causing the hullabaloo are nearly all potential, rather than actual. That makes the episode very different from the collapses of Barings Bank or Long-Term Capital Management, when regulators also had to orchestrate rescues.
IKB still claims to have Eu12bn of liquid reserves, enough to cover its outgoings for a year; it is still rated Aa3/A+ by Moodys and Fitch for long term debt, P1/F1 for short term debt and A1 and A2 for its subordinated capital.
None of these ratings has been lowered, though Moodys placed its long term senior and subordinated ratings on review for possible downgrade on Tuesday, while affirming the short term rating.
Both agencies have lowered their individual or bank financial strength ratings: Fitch from B/C to C and Moodys from C+ to C.
Top heads roll
IKBs management has paid for the debacle. Stefan Ortseifen, speaker of the board of managing directors, retired this week. Günther Bräunig, member of the board of managing directors at KfW, has taken over as chief executive of IKB.
Bräunig, who joined KfW as head of international capital markets in 1989, will also be responsible for corporate development and communications and group audit.
Dieter Glüder, head of securitisation at KfW, has joined IKBs board of managing directors.
And yesterday (Thursday) IKB said that Winfried Reinke, managing director of IKB Credit Asset Management, which managed the conduit, had been "relieved of his duties".
There were unconfirmed reports that the asset management arm had appointed a new chairman.
Eggs in one basket
IKB is known in the structured credit market as one of the bigger accounts one banker estimated that it was one of the five or six largest investors in central Europe.
But it has never before attracted attention as unduly cavalier about risk. At first sight, the problem would appear to be a very basic one: IKB had too many eggs in the same basket.
Remarkably, as recently as July 20 IKB released a confident statement announcing its preliminary first quarter results. The bank noted the extreme market volatility, especially in the US mortgage market, but predicted annual profits of Eu280m.
"In this context," the report stated, "Moodys has put quite a number of tranches on watch for possible downgrade, whereof IKB is only affected by a single digit million figure.
"Furthermore, IKB is in no respect affected by the most recent analysis carried out by Standard & Poors with regard to the CDO market. It is worth noticing that the bulk of our investments are in portfolios of corporate loans."
How management could have made this statement so soon before the bank needed rescuing, and the role of IKBs auditors, KPMG, are likely to be carefully scrutinised in the months to come as politicians and shareholders demand to know who to blame.
Deutsche says no
IKBs problems appear to have come to the surface only last week, when Rhineland Funding had difficulty issuing ABCP.
Rumours were circulating among investors that the conduits exposure to US subprime mortgages amounted to between 40% and 50% of its assets.
Last week, Rhineland placed only $350m of paper in the ECP market.
German media have reported that the next stage came last Friday (July 27), when Deutsche Bank refused to extend credit to IKB.
Royal Bank of Scotland, ABN Amro and Wachovia are also reported to have declined to lend to IKB.
It is not known why Deutsche refused, or why IKB had asked for the advance, but the conjunction of events suggests that IKB could have needed money because it was facing a draw on the liquidity facility it provides to Rhineland.
All asset backed commercial paper conduits are covered by liquidity facilities from highly rated banks, usually to 100% of the value of their outstanding CP.
Rhineland has Eu19bn of CP outstanding and IKB provides 52% of the programmes liquidity, with the rest syndicated to other banks.
The liquidity facility is there to make sure the conduit can redeem all maturing CP, in case for some reason, such as a market disruption, it cannot issue fresh CP.
Liquidity lines are not intended to cover the credit risk of the assets in the conduit, and may not be drawn against defaulted assets, which usually includes any rated triple-C or below.
If Rhineland could not roll over all the CP it needed to last week, it would have had to call on liquidity facilities.
Whether or not this was what led to banks refusing credit, it is clear that the banks refusal led directly to the rescue plan organised over the weekend by finance minister Peer Steinbrück; Jochen Sanio at BaFin; KfW; and the Federal Association of German Banks (BdB).