August 21, 2008 – 2:31 pm

The long-suffering IKB has possibly received its final bailout, but even that comes at a price. Lone Star funds will purchase 90 percent of the remains of the subprime-battered German bank.

Lone Star Funds, the Dallas-based private equity firm, agreed to buy IKB Deutsche Industriebank AG, Germany’s first casualty of the subprime mortgage crisis, for less than 20 percent of what the government initially sought.

The parent bank, KfW, has been in a frantic 11-month-long quest for a buyer. During that time, Lone Star has become a resourceful buyer of last resort, but KfW clearly did not get its asking price.

“This will finally bring clarity and calm,” Green party lawmaker and KfW administrative board member Christine Scheel said in a telephone interview today. “It was the right decision to sell the bank as quickly as possible.”

KfW received a “low three-digit million-euro sum” for its stake, KfW Chief Executive Officer Wolfgang Kroh told reporters in Frankfurt today. He described the price as “reasonable” and declined to be more specific.

Hmm… he says that as if he just sold his own stake in the bank. The deal won’t be finalized until October, so the 80 percent write-downs will drop onto KfW’s balance sheet with a rather resounding thud. For its part, Lone Star will inject cash onto the balance sheet as it has done many times before, most recently with Merrill Lynch.

One has to wonder what the true risks, if any, are to Lone Star. Is Lone Star to be the instrument of choice by which governments transfer private risk to public taxpayers? There’s no way to know, but it’s eerily similar to JP Morgan in the so-called rescue of Bear Stearns.

The question that needs to be answered, but no one wants to ask, is what happens if Lone Star bites off more than it can chew and collapses at the table? Will Hank Paulson climb Capitol Hill to urge legislators to write a blank check to Lone Star? Only time will tell, but this much is for sure: if Lone Star makes a killing, Paulson will not urge them to share it with the public.

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