(1) On 30 September 2008 Germany notified the measure as rescue aid.

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1 EUROPEAN COMMISSION Brussels, 02.X.2008 C(2008)5735 In the published version of this decision, some information has been omitted, pursuant to articles 24 and 25 of Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 93 of the EC Treaty, concerning non-disclosure of information covered by professional secrecy. The omissions are shown thus [ ]. PUBLIC VERSION WORKING LANGUAGE This document is made available for information purposes only. Subject: State aid NN 44/ Germany Rescue aid for Hypo Real Estate Sir, 1. PROCEDURE (1) On 30 September 2008 Germany notified the measure as rescue aid. 2. DESCRIPTION OF THE AID 2.1. The beneficiary (2) Hypo Real Estate Holding AG (hereinafter "HRE") is the beneficiary. HRE's shares are listed in the DAX 30 index, the blue chip segment of the German stock exchange. Since it was founded in October 2003, the Munich-based HRE quickly established itself as an international bank for the financing of commercial real estate. The company operates in Europe, America and Asia, and has assets of almost 400 billion and around employees. With HRE's 2007 takeover of DEPFA Bank Plc (hereinafter "Depfa"), public sector financing and infrastructure financing became the group's second strategic mainstay. Thus, HRE is a globally-operating financial service provider for the public sector and investors in commercial real estate markets. (3) In the commercial real estate sector, HRE, with its registered office in Munich, is one of the leading financers for professional real estate investors, construction companies, project developers and real estate funds. The bank operates worldwide from 20 His Excellency Mr Frank-Walter Steinmeier Federal Minister for Foreign Affairs Werderscher Markt 1 DE BERLIN European Commission, 1049 BRUSSELS, BELGIUM Telephone: (32-2)

2 locations in Europe, America and Asia. Its range of services includes classic mortgage loans covered by covered bonds, as well as large-scale investment banking products. (4) In the area of public sector financing, Depfa, with its registered office in Dublin, together with DEPFA Deutsche Pfandbriefbank AG (hereinafter "Depfa Pfandbriefbank") in Germany, is among the leading providers both internationally and in Germany. Depfa provides services to various public institutions representing all levels of regional authorities, and also public private partnerships The events leading up to the granting of the rescue aid (5) HRE's problems, unlike those of other banks, are not due to the bank having been too deeply involved in the US market for subprime mortgages. Rather, they are the result of the activities of Depfa, which was taken over in 2007, and which is primarily involved in public sector financing. This business is characterised by low risk premiums, and therefore the mostly long-term credits are refinanced using short- or medium-term credit lines ("term transformation"). (6) The rescue measure is necessary because a large part of Depfa's short-term refinancing measures expire at the end of the quarter and need to be renewed. Depfa could no longer obtain refinancing at short notice because the interbank market, through which commercial banks have rapid access to financing, all but collapsed as a result of the year-long financial crisis and especially after the events of September 2008 (in particular the collapse of the Lehman Brothers investment bank and the rejection of the US rescue package). This meant that HRE had to provide refinancing for Depfa's short-term liquidity needs. The amount of the credit line to be repaid on 30 September was, however, too large for HRE. (7) From 26 to 29 September intensive consultations took place at the Federal Financial Supervisory Authority (hereinafter "BaFin") between representatives of HRE, private banks, the Federal Bank and BaFin. The aim of these discussions was to find a solution for HRE's liquidity problems which had arisen at short notice. The starting point was that a credit line of 35 billion is necessary in order to ensure HRE's liquidity in the medium term. A liquidity forecast was used to justify this to the Commission (8) In the night from 28 to 29 September, the German Federal Bank and BaFin announced that the German financial sector and the Federal Bank would grant HRE a credit line of 35 billion. The Federal Bank and BaFin assume that HRE's commercial viability is ensured. Thus, the systemic reduction of HRE s risk positions should be enabled and damage to the German and European financial markets should be avoided The measure (9) The financial sector will grant HRE a bridging loan of up to 15 billion to cover its short-term liquidity requirements. The loan is granted on the basis of collateral which is not eligible for central bank refinancing (loans, securities), which has a nominal value of around [ ] and a loan value of at least 15 billion under a mark-to-market Confidential information

3 valuation. In addition, the shares of HRE's four subsidiaries 1 are to be ceded to the lender by security. The loan of 15 billion is meant to bridge the period until a sustainable financing solution is put in place. (10) As follow-up financing for the temporary loan described above, a financing platform in the form of an SPV (special purpose vehicle) with a banking licence, which is financed by a consortium from the financial sector (hereinafter "consortium") and the German Federal Bank, grants HRE a loan of up to 35 billion at normal market conditions (this amount serves to redeem the 15 million bridging loan). "Normal market conditions" signifies that HRE is to pay at least the reference interest rate 2 to the SPV (i.e. the Euribor rate plus 100 base points). The SPV uses a liquidity line provided by the consortium for refinancing of 15 billion, and a liquidity line provided by the German Federal Bank for refinancing of 20 billion (see figure 1). In return, the securities with a nominal value of [ ] that serve as collateral are transferred to the SPV. In addition, the shares of HRE's four subsidiaries, which were ceded by security, are transferred to the SPV. (11) The Federal Government provides a default guarantee for the repayment of the liquidity lines to the consortium and the Federal Bank for an amount of 35 billion, of which the financial sector bears 8.5 billion at maximum (see below, paragraph 14). The default guarantee is also necessary to enable the German Federal Bank to increase the liquidity lines provided to the SPV by 20 billion to 35 billion. It is intended that the SPV pay the Federal Government a fee of [...] for the default guarantee. 1 Depfa, Depfa Pfandbrief, HRE Bank International AG and HRE Bank AG. 2 Communication from the Commission on the revision of the method for setting the reference and discount rates, OJ 2008, C 14/02.

4 Figure 1 De pfa Ba nk plc Ir ela nd HR E H o ldin g A G Dep fa De uts che Pfandbrief - ban k A G HR E Bank In ter na tionalag 35 b ilion liquidity line HRE B ank A G SPV with ba nkin g licen ce 3 5 billion default g uarantee against a fe e of [ ] Ge rm an Gov ern m ent Ceding by secu rity of the shar es/stakes and secur ities t hat serve as colla teral with a nomin al value of [ ] 15 billio n liq uid it yline Co nso rtiu m 20 b illion liquidity line against collater al German Federal Bank

5 (12) Point 5 of Section 3(1) of the 2008 Budget Act forms the legal basis of the measure in which the amount of the guarantee authorisation for 2008 is established. (13) Possible losses by the financing platform can be covered by recovering the portfolio of securities amounting to [ ] that serve as collateral, and by the revenue from the sale of the four subsidiary banks, whose shares have been ceded by security. (14) Any losses by the financing platform over and above this would be shared up to an amount of 14.2 billion at a ratio of 60:40 between the consortium and the Federal Government, with the burden on the consortium being capped at 8.5 billion, and any losses exceeding 14.2 billion being borne by the State alone. (15) The Federal Bank initially granted HRE an emergency liquidity line amounting to [...] in order to bridge the period until the availability of HRE's short-term liquidity line of 15 billion. Owing to a lack of eligible securities, the emergency liquditity line is already covered by the default guarantee. This short-term liquidity line is redeemed by the bridging loan of 15 billion. The total volume of the liquidity lines never exceeds 35 billion at any time. 3. COMMENTS FROM GERMANY (16) Germany notified the measure on 30 September 2008 as rescue aid and deems the guarantee to fulfil all the requirements for a rescue measure to be eligible for approval as set out in paragraph 25 of the Community guidelines on State aid for rescuing and restructuring firms in difficulty 3 (hereinafter the "Guidelines"). This concerns liquidity support in the form of a loan guarantee. A fee in line with normal market conditions will be charged for the guarantee. The guarantee is valid for a maximum of six months and is reversible. It is warranted on the grounds of serious social difficulties and has no unduly adverse spillover effects in other Member States. The Federal Government undertakes within six months after the first implementation of the rescue aid to submit to the Commission either a restructuring or liquidation plan, or proof that the loan has been reimbursed in full and/or that the guarantee has been terminated. The amount of the guarantee is limited to what is needed to continue operating the company during the period for which the aid is approved. The guarantee is in line with the principle of one-off aid. (17) Germany points out that the state guarantee is absolutely necessary in order not to jeopardise the German and European financial market in the light of the financial market crisis that has been steadily worsening since summer (18) If HRE were to become insolvent, this would have dramatic consequences. Firstly, it would lead to very serious disturbances in the money markets in Germany and in the European Union. Secondly, there is a danger of serious distortions of payment transactions, for example in the case of transactions involving foreign exchange, securities or derivatives. Thirdly, it would damage the covered bond market, which plays an important role in refinancing the banks, particularly at this time of crisis. At around 900 billion, the German covered bond market is the second largest in the world. HRE represents around one fifth of this market. Covered bonds are a popular form of investment abroad, including in the USA, and confidence in them is high. Germany considers that the consequences of an uncontrolled collapse would be 3 Commission communication - Community guidelines on State aid for rescuing and restructuring firms in difficulty, OJ C 244, , p.2.

6 inestimable for the many creditors of HRE, with many banks being involved. Germany also states that pension schemes, professional associations, Bundesländer and municipalities had, in some cases, invested hundreds of millions in the Munich-based institute. (19) A letter from the German Federal Bank of 1 October 2008 confirms that the public guarantee was necessary in order to avoid the German and European financial market being damaged by a domino effect. 4. ASSESSMENT 4.1 Existence of aid (20) Firstly, the Commission notes that the measure constitutes state aid within the meaning of Article 87(1) of the EC Treaty. The reason for this is that the provision by the consortium and the Federal Bank of the liquidity lines guaranteed through the Federal Government's default guarantee constitutes state resources benefitting HRE, and thus distorting or threatening to distort competition, and affecting trade between Member States in which HRE takes part as an international bank. (21) In particular, the Commission notes that HRE derives a selective advantage from the measure. The Commission would recall that any intervention financed using public resources that gives a company an advantage constitutes state aid under Article 87(1) of the EC Treaty, unless an investor acting under normal market conditions would have also taken such a measure 4. The Federal Government's decision to provide the default guarantee in question must therefore satisfy the principle of the market-economy investor in order to exclude state aid elements. (22) It must first be established that the consortium's private participation in the liquidity line for HRE does not disqualify the measures from the outset from being state aid. The Commission would point out that where there is a public shareholder operating alongside private investors, the provision of capital must be proportionate and must take place under the same conditions 5 and according to the same commercial rationale 6. The Commission would recall that the Federal Government is taking a far greater risk than the institutes belonging to the consortium, since it, in contrast to the institutes, is providing and guaranteeing liquidity over and above the mark-to-market amount of the collateral. The Federal Government is thus much more exposed than the consortium's banks. It seems, however, that the entire amount is needed in order to overcome HRE's present difficulties. Consequently, it can be assumed that, without the Federal Government's above-average involvement, no private participation at all would have been possible. For this reason, the Commission concludes that an investor acting under normal market conditions would at least not have granted HRE such a high liquidity line or default guarantee. The measure in question therefore constitutes state aid, despite the participation of private parties. Moreover, the Commission notes that Germany notified the measure as state aid, and therefore does not call the classification as such into question See Commission communication on public undertakings in the manufacturing sector, OJ C 307, , p. 13. See Commission communication on public undertakings in the manufacturing sector, OJ C 307, , p. 13. See Commission decision in Case C25/2002, Carsid, OJ L 47, , p. 28, paragraphs 67 to 70.

7 (23) The granting of the emergency liquidity line amounting to [ ] by the German Federal Bank is an aid measure too because, according to the Commission's decision-making practice 7, it does not satisfy the criteria for central bank liquidity lines not constituting aid, as the liquidity line could be granted without eligible securities and thus only on the basis of the Federal Government's default guarantee. 4.2 Compatibility with the common market (24) The Commission has checked to a large degree whether this measure can be considered as rescue aid that is compatible with the common market on the basis of Article 87(3)(c) of the EC Treaty, using as a basis the Community Guidelines for rescuing and restructuring firms in difficulty 8. (25) HRE is undoubtedly an undertaking in difficulty according to paragraph 9 et seq. of the Guidelines, as it is obviously not able, using its own financial resources or external financial resources provided to it by its owners/shareholders or creditors, to cover losses which all but certain will lead to the economic ruin in the short- or medium-term if the State does not intervene. As described above in paragraph 5, HRE no longer had sufficient cash resources to ensure its refinancing. This would have resulted in the bank's close-down, which would also have fulfilled the conditions in paragraph 10(c) of the Guidelines. (26) Furthermore, the rescue aid must fulfil all five requirements under paragraph 25 of the Guidelines. (27) Thus, according to paragraph 25(a), it must involve above all aid in the form of a loan or a guarantee on which interest is paid at the normal market rate. The liquidity line can surely be considered to be a loan. The default guarantee is a guarantee for this loan. In addition to the guarantee fee amounting to [ ], the loan conditions described under paragraph 10 are in line with market conditions; it can therefore be assumed that at least an interest rate is charged that is comparable to those observed for loans to healthy firms. (28) Secondly, within the meaning of paragraph 25(b) the aid measure is warranted on the grounds of serious social difficulties, and has no unduly adverse spillover effects in other Member States. The measure is warranted on the grounds of serious social difficulties, since without it HRE would have had to be liquidated, which would have resulted in redundancies. In addition, HRE's insolvency would cause pension schemes, professional associations and municipalities to suffer considerable losses. The measure does not have any unduly adverse spillover effects in other Member States, as the bank's economic situation means that it is not able to act aggressively on the market See Commission decision of 5 December 2007 in Case NN 70/2007, Rescue aid for Northern Rock, OJ C 43, , p. 1, paragraph 32. Commission communication - Community guidelines on State aid for rescuing and restructuring firms in difficulty, OJ C 244, , p.2. See Commission decision of 30 April 2008 in Case NN 25/2008, Rescue aid for WestLB, OJ C 189, , p. 3.

8 (29) Thirdly, the duration of the guarantee is limited to six months in accordance with paragraph 25(c), and Germany has confirmed that, within six months after the first implementation of the rescue aid, it will submit either a restructuring or a liquidation plan, or proof that the guarantee has been terminated, for which the necessary undertaking has been given, as stated above in paragraph 16. The Commission assumes that the Federal Bank's liquidity line would not be extended either without the default guarantee. (30) Fourthly, under paragraph 25(d), the amount of the aid must be limited to what is needed to continue operating the company during the six months for which the aid is granted. The liquidity provided amounts to 35 billion. This corresponds to the part of the company's liquidity requirements that cannot be financed using its own resources. The liquidity requirement stated in paragraph 7 above was duly motivated on the basis of the liquidity forecast. Having examined the liquidity forecast, the Commission regards the assumption to be plausible. The Commission therefore believes that the requested measure does not exceed the minimum liquidity requirement that is needed. (31) Finally, the German authorities confirmed pursuant to paragraph 25(e) that HRE has not received either rescue aid or restructuring aid during the last ten years, thus fulfilling the principle of one-off aid under paragraph 72. (32) The Commission therefore concludes that the rescue aid fulfils all the requirements under paragraph 25 of the Guidelines. It is not necessary at present to examine the aid measure under Article 87(3)(b) of the EC Treaty. DECISION The Commission concludes that the measure constitutes state aid within the meaning of Article 87(1) of the EC Treaty. Since Germany implemented a part of the aid measure in violation of Article 88(3) of the EC Treaty, this part is regarded as non-notified state aid. As this measure is, however, compatible with the common market under Article 87(3)(c) of the EC Treaty, the Commission does not raise any objections against it. The Commission expects the German authorities to fulfil their commitment to submit by no later than 1 April a credible and substantiated restructuring plan, or proof of the whole termination of the guarantee. The Commission would point out that the aid measure has been approved until 1 April or, if the German authorities submit by then a credible and substantiated restructuring plan, until such time as the Commission makes a decision regarding this plan, unless the Commission decides pursuant to paragraph 26 of the Guidelines that such an extension cannot be justified. The Commission would remind the German authorities that it will pursue any measure that remains in place beyond the approved period and that cannot be found compatible with the common market, and will aim to have the aid reimbursed. If this letter contains confidential information which should not be disclosed to third parties, please inform the Commission within fifteen working days of the date of receipt. If the Commission does not receive a reasoned request by that deadline, you will be deemed to Clerical error: should read 1 April 2009 Clerical error: should read 1 April 2009

9 agree to the disclosure to third parties and to the publication of the full text of the letter in the authentic language on the Internet site: Your request should be sent by registered letter or fax to: European Commission Directorate-General for Competition State aid Registry B-1049 Brussels, Belgium Fax No: (+32) Yours faithfully, For the Commission Neelie KROES Member of the Commission