German banks launch rescue for second subprime casualty

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By Catherine Hornby and John O'Donnell

FRANKFURT, Aug 17 (Reuters) - A group of German state banks said on Friday they would rescue a local German lender that had been hit by U.S. subprime mortgage difficulties.

SachsenLB has become the second German bank to run into serious trouble after difficulties which began with unpaid U.S. home loans buckled global credit markets.

The group of powerful German savings banks extended a credit line of more than 17 billion euros to keep the state bank's stricken investment vehicle afloat, SachsenLB said.

Late last month, Germany's IKB (IKBG.DE) became Europe's most high profile casualty from the crisis which started in risky U.S. subprime mortgages.

A group of banks including state-owned lender KfW put together a rescue package to stop IKB going bust.

Now Germany's savings banks are doing the same for regional state lender SachsenLB.

"The ongoing market disruption in selling asset backed commercial papers resulted in there being doubt on securing funding for the Ormond Quay conduit," said SachsenLB in a statement.

But it added that with the help of the new credit facility, all liabilities would be met when they fall due.

Ormond Quay, named after an address in Dublin, invested in asset-backed securities-- packages of debt-- which included U.S. subprime home mortgages.

The bank said the reorganisation would hit its profits, but declined to comment further.

Germany's financial watchdog BaFin, which brokered the deal, and the country's central bank welcomed the solution in a joint statement.

QUICK AND CONSTRUCTIVE

"We are especially pleased with the quick and constructive way that a solution was reached," they said.