The question everyone is asking is, who is going to be left holding the worthless tranches of those sub-prime American mortgages? We’re beginning to see some answers:

In Germany, it emerged that the state-bank SachsenLB may have
accumulated $80bn of exposure to risky assets through a set of Irish
funds kept off balance sheet.

The regional government of Saxony agreed yesterday to
sell the East German bank – the biggest victim so far of the worldwide
credit rout – for a token €300m (£204m) to the Landesbank
Baden-Württemberg in Stuttgart (LBBW), ending a three-week saga that
has revealed the extent of German involvement in the some of the most
treacherous areas of US sub-prime debt.

Georg Milbrandt, prime minister of Saxony, said the sale of state-owned lender was the only viable option.

"Given
the market turbulence and the pressures on the bank, it could not have
gone on without a partner. We want to get our ship off the high waves
and into a safe port," he said.

Sachsen LB, founded
in 1992 after the fall of the Berlin Wall, was rescued two weeks ago in
a state orchestrated bail-out. A consortium of banks agreed to provide
a €17.3bn credit lifeline, but only on the understanding that it agreed
to be sold to a stronger player.

It allegedly used
no fewer than five Irish ‘conduits’ (off-balance sheet vehicles) to
invest in collateralised debt obligations (CDOs) and other high-risk
instruments, according to German newspaper Süddeutsche Zeitung.

The
biggest losses stemmed from structured investment vehicles (SIVs) which
involve using short-term credit to buy longer-term assets, creating a
mismatch in maturities.

It would appear that it’s the taxpayers of Saxony who have taken that haircut.

Aren’t we lucky that we don’t have State owned investment banks here?