Banks Are Pushing Germany to the Brink

Over the past three years, the benchmark measure of U.S. stocks, the Dow Jones Industrial Average, has fallen 24%, from 10,400 to 7,890.

During the same time period, the benchmark measure of the German stock market, the Frankfurt DAX has plunged 69%, from 7,960 to 2,547.

If the Dow had fallen as much as the DAX from its peak, it would be currently hovering around the 3,220 level.

Top 10 German Big-Caps
Company	Industry	Market cap ($ billions)	% Chg 1 yr	Rev growth yr/yr	Price/sales ratio	Last price
BASF (BF)	Chemicals maker	21.1	-6.1	-14.1	0.8	$11.47
E.ON (EON)	Power/energy	27	-15.3	-9	0.7	$20.90
Deutsche Telekom (DT)	Telecom	48.1	-21.3	11.7	1.1	$13.42
DaimlerChrysler (DCX)	Automaker	30.9	-26.3	15.3	0.2	$37.35
Deutsche Bank (DB)	Money center bank	25	-32.2	-14.5	0.4	$7.17
Siemens (SI)	Conglomerates	35.2	-34.3	-3.9	0.45	$39.73
Schering (SHR)	Drug maker	7.3	-35.1	2.2	1.6	$30.57
SAP (SAP)	Software maker	25.8	-40.8	19.2	3.3	$42.75
Bayer (BAY)	Drug maker	9.8	-58.4	-7.1	0.4	$40.70
Allianz (AZ)	Insurer	17.4	-68.7	18.2	0.2	$36.58
Infineon Technologies (IFX)	Semiconductor maker	4.6	-73.2	-8.6	0.8	$6.47

What a comedown for a country whose economy not long ago seemed as formidable as Japan's -- and now seems a candidate to follow Japan down a decadelong rat hole.

Debt Downgrade Ahead?

The analogy is more apt than you might imagine, for the trap for both countries' economic demise was set in a postwar system that allowed banks to invest heavily in the equities of companies to which they lent money. The problem was exacerbated in Germany in the early 1990s because the government encouraged banks to make ill-considered loans to bail out its Eastern Bloc cousins following the fall of the Iron Curtain.

West Germany, as the country was formerly known, was expected to be the locomotive of growth for East Germany and, for that matter, the entire European Monetary Union. But that growth did not materialize, ruining hundreds of business plans. Additionally, in many cases, West German banks ended up lending millions of marks against real estate and state-owned businesses in the east that had far more political than economic value. These deals have come dramatically undone, leaving the banks with massive losses.

The crisis has essentially led critics to view Germany, in the extreme, as if it were a gigantic junk bond. Buying into the debt or equity of the country's largest international firms, such as carmaker DaimlerChrysler(DCX Quote) or financial-services giant Allianz(AZ Quote), at the right moment will yield enormous profits. But blow the timing, and you're going to feel like a big, fat schweinhund.