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German upper house approves bank expropriation law

Germany's Bundesrat upper house of parliament approved a law that gives the government the power to take control of banks hit by the financial crisis, potentially forcing shareholders to sell their stakes.

The law, agreed mainly to allow the government to take over stricken lender Hypo Real Estate, permits the state to expropriate shareholders in financially troubled banks under certain circumstances.

As a first step, the German government last weekend agreed to take an 8.7% stake in Hypo, which has said it lost €5.38 billion ($7.2 billion) before tax in 2008 and expects to stay in the red for at least two more years.

Hypo, Germany's highest-profile casualty of the financial crisis, has already been propped up with more than €100 billion in guarantees, mostly from the state.

The government, which wants to take control of Hypo as soon as possible, has resorted to the law because it has failed to reach a deal to buy the roughly 22% stake in Hypo owned by a group led by US investor J.C. Flowers.

After the Bundesrat backed the law, Flowers reiterated his stance that the government does not need complete control of the bank to revamp it and that there was no need for expropriation.

“J.C. Flowers remains open to constructive talks with (the state's bank rescue fund) SoFFin and the investors it advises remain committed to their strong preference to remain HRE shareholders,” said Flowers in a statement. But it added:

“Following the resolution by the Bundesrat, J.C. Flowers reserves the right to pursue all other options, including legal recourse, to safeguard the interests of its investors.”

The government has said it aims to launch a capital increase and a capital dilution in April and it is widely expected that Hypo will hold an emergency shareholders' meeting to approve this plan soon.

If that fails, the government, which has stressed that nationalisation is only a temporary measure, will resort to the expropriation option.

The new rules are an extension of last year's “financial markets stabilization law” which gave the government powers to seize control of banks whose failure would pose a risk to the stability of the financial system.

It will compensate shareholders forced to give up their holdings at the average share price calculated over the two weeks prior to nationalization, or over a shorter period if the price falls rapidly.

Germany is following Britain, which has already nationalized several of its banks, including Royal Bank of Scotland.

The new law can take effect once Germany's president signs it, a step widely viewed as a formality.

German Finance Minister Peer Steinbrueck said earlier this week that no other bank was calling for a rescue takeover in the way Hypo had.

Expropriating the bank's shareholders has fuelled controversy as such a step is linked in the minds of some Germans to crackdowns on private business by the Nazis and government in communist East Germany. (Reuters)