Depfa, a Dublin-based lender that Hypo acquired last year, is at the center of its problems. Depfa underwrote a package of municipal bonds which were subsequently downgraded by ratings agencies. That step obliged Depfa to buy the bonds back, a contractual requirement that would create almost immediate liquidity problems at Hypo itself, given the difficulty of getting short-term funding in today’s drumtight credit markets. Banks from outside Hypo uncovered the problem after the bailout was cemented last week, and soon realized that the 35 billion euros that were supposed to sustain the bank through the end of 2009 was inadequate. Instead, it would need 50 billion euros by the end of this year, and another 10 billion in 2009. After the magnitude of the problem became clear, the banks — which were not publicly identified — revoked their participation in the plan, which had been a joint public-private deal.
New York Times