Europe's Enron; A lurid corporate scandal highlights the weaknesses in the German system. Too bad no one seems to care.(Bankgesellschaft Berlin)

Byline: Stefan Theil

It is a spectacular tale of incompetence, greed and charges of corruption. It has pushed one of Germany's biggest banks to the brink of collapse. It allegedly involves ingenious pyramid schemes, runaway debts and uncovered losses concealed in a maze of shadowy companies and Cayman Islands trusts. It features officials at the most senior levels of government and business ignoring--and, by some accounts, suppressing--auditing reports that could have stopped the shenanigans years ago. Worse, it represents a more general problem for Germany that shows no sign of going away.

Call it Europe's Enron. For the financial scandal that has swept up Bankgesellschaft Berlin is every bit as breathtaking as its American counterpart, both in the scale of its losses and the connivance with which they purportedly were covered up. But here the parallels stop. In the United States, Enron touched off a public outcry leading to a criminal investigation, jailed executives, the collapse of a major auditing company and a host of new laws cracking down on intransparent corporate reporting. In Germany the response has been almost the opposite--public indifference and an official response that, at best, has been tepid and, at worst, amounts to a deliberate effort to enshroud the case in "extreme secrecy," according to corruption watchdog group Transparency International.

The troubles enveloping BGB aren't new. The scandal first broke in late 2000, and investigators have since been gathering evidence against the bank's management and directors, as well as dozens of other public and private officials. Last month the first trial of bank officers began, featuring the chairman of a major subsidiary and one of his fellow board members. Prosecutors say they cooked the bank's books, illegally hiding billions in liabilities--which both executives deny. Yet the case has generated little media attention. Key suspects in the schemes that brought the bank low and cost taxpayers as much as 40 billion Euro are free and collecting lavish private and civil servants' pensions. A special investigative commission in Berlin's state Parliament tells NEWSWEEK that it's making little headway, blocked by the bank and the courts from access to key documents. Federal banking regulations prevent BGB from disclosing records, according to a spokeswoman, who declined to comment on specific allegations for fear of "interfering with an ongoing investigation."

If Enron was a case of U.S. capitalism run amok, BGB is a very Continental tale of cronyism and private enrichment at taxpayers' expense. Created in 1994 through the merger of a poor, state-controlled commercial bank with a rich but tightly regulated public savings bank, BGB coupled a public bank's unlimited government protection from bankruptcy with the private bank's freedom from oversight by Parliament and budget-office auditors. For the executives and politicians running the show, investigators say, it was a carte blanche to do deals that helped well-placed friends with little fear of adverse consequences.

Consider the bank's real-estate operations during the postunification building boom in the former East Germany. According to parliamentary investigators, the bank began doling out risky real-estate credits to well-connected developers, often for projects that the bank's own advisers warned might never generate enough cash to pay back the loans. Coincidentally or not, these sources say, some of the former borrowers were high-ranking politicians turned real-estate developers and others with personal ties to the bank's management and ...