Collapse on the Rhine

Like many another middle-income West German, Klaus Goerdel sought to put his savings in a bank that would pay the most interest. So several months ago the 45-year-old government official switched his life savings of $12,000 from a government-owned bank to Bankhaus I.D. Herstatt KGaA, one of the country's largest private banks, with 31 branches chiefly in the Rhineland city of Cologne. Last week Goerdel and thousands of other Herstatt depositors had their dreams, and quite possibly their savings, wiped out in the most disastrous German banking collapse since the turmoil of the '30s.

West German banking authorities suddenly and dramatically revoked Herstatt's license to do business; they also locked its doors. The news caused hundreds of angry, shouting depositors to mill round the bank's headquarters, trying to find out if they could get any of their savings back. Police with bullhorns managed to calm them but could not answer the question. Germany has no equivalent of the Federal Deposit Insurance Corporation, which insures bank deposits in the U.S. On the West German stock exchanges, jittery investors bid share prices of banks and insurance companies down to seven-year lows.

The reasons for Herstatt's demise do nothing to bolster confidence in the German banking system, or indeed banking generally. Herstatt had incurred, and concealed, massive losses through speculation in foreign currencies. Similar fates have overtaken banks in other countries. In the U.S., currency trading has cost the Franklin National Bank dearly (TIME, July 1); in Switzerland, the Union Bank reportedly dropped $50 million; in Germany, Westdeutsche Landesbank Girozentrale has lost perhaps $110 million.

Free Float. Currency trading was a relatively riskless operation during the long era when values of major currencies were fixed. But now that they are free to float up and down in response to supply and demand, trading has become chancy indeed. Herstatt apparently contracted to deliver huge quantities of U.S. dollars and other currencies to corporate customers on fixed future dates at highly speculative prices.

Just how much Herstatt lost is not known, but one estimate puts the red ink at $200 million, equal to a fourth of the bank's reported assets. In theory, the bank's founder, I.D. Herstatt, is personally liable for all losses, but he and other shareholders have only $30 million capital equity in the bank.

The Herstatt scandal also exposed a dubious aspect of the German banking system, one of the least regulated in Europe. In recent years, many German banks have been speculating heavily in currency, gold, real estate and commodities. For more than a year, other European bankers have been voicing worry about the size of the risks. Now, more Herstatt cases are expected.

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