Subprime-hit German banks search for partners

By John O'Donnell

FRANKFURT (Reuters) - The owners of battered German lender WestLB emerged from crisis talks on Wednesday saying that they would be happy to sell a stake in their subprime-hit bank.

The comments are the latest sign of the worsening condition of German banks in the wake of the subprime storm.

Earlier, the state of Saxony, which owns rival lender SachsenLB, said it hoped to sign a deal to sell the stricken bank to a rival despite a row over who pays for the bank's dud investments in subprime mortgages.

Last week, WestLB warned that the crisis in financial markets was getting worse as it skidded into the red and said 2007 losses would mount to hundreds of millions of euros.

The owners of WestLB, one of Germany's biggest regional lenders, local savings banks and the state government, embarked on emergency discussions as its exposure to risky debt ate into WestLB's capital.

On Wednesday, they said financial investors would be welcome to buy a stake in WestLB and told neighbouring state bank Helaba that it would like to merge with it. Helaba responded that it would be open to talks.

In a statement, the bank's owners raised a number of other options such as overhauling its business by bidding for IKB, a bank which almost collapsed under the weight of subprime losses.

WestLB's owners said that by buying small-company lender IKB , it could bolster its business. It remains unclear, however, how it could pay for such a purchase.

Meanwhile, the state of Saxony sought to keep the planned emergency sale of its SachsenLB on track.

SachsenLB is one of Germany's highest-profile casualties in the subprime mortgage crisis. It was saved from collapse by a rescue package which forced its sale to a rival, but now rising losses have thrown the negotiations into disarray.

On Wednesday, the Saxony finance minister told the local parliament that he expected a deal to be agreed within days.

In a row about who shoulders the brunt of its failed subprime investments, however, the minister had previously warned that the government would not pay for all of the bank's subprime losses.

Landesbank Baden-Wuerttemberg (LBBW), the would-be buyer for the bank, is threatening to drop the takeover unless the state of Saxony shoulders up to 4 billion euros ($5.9 billion) of losses, a source familiar with the matter told Reuters earlier in the week.

Germany, Europe's biggest economy, has taken an especially hard beating from the credit market turbulence, triggered when high-risk U.S. home owners were squeezed by falling property prices and rising interest rates.

(Reporting by Lars Rischke, Jonathan Gould, Patricia Nann and Matthias Inverardi; Editing by Paul Bolding)