The bank left holding the bag

"Who's on the other side, who's the idiot?" is the question posed by one of the characters in "The Big Short," Michael Lewis' new book on those few investors who bet against the subprime-mortgage market.

"Düsseldorf. Stupid Germans," is the answer they keep getting. "They take rating agencies seriously. They play by the rules."

For Düsseldorf, read IKB Deutsche Industriebank, a bank that plays the role of hapless victim in the Securities and Exchange Commission's complaint against Goldman Sachs and a strong contender for the title of leading chump in the financial crisis.

This was a firm that was supposed to lend to Germany's famed legion of middle-sized companies, or Mittelstand. When about one-third of the bank came onto the market in 2001, KfW, Germany's state-owned development bank, bought into IKB to "maintain its role as a key provider" of finance to small businesses.

But instead of just sticking to the dull-but-profitable business of keeping the engine of Germany's economy turning, IKB turned its hand to dabbling in America's housing markets.

IKB was far from being the only German bank to burn its fingers doing so. WestLB, a fellow-citizen of Düsseldorf, has had to be rescued four times in the past four years after it managed to accumulate a portfolio of $114 billion of toxic assets that are now worth a fraction of that value.

Most German Landesbanken suffered from poor governance. "All these toxic assets seem to have accumulated in those places where oversight was poorest, and the risk-return ratio was ignored," says Jörg Rocholl of the European School of Management and Technology in Berlin.

Yet even by these dismal standards, IKB stands out. It was one of the first banks to be bailed out, in the summer of 2007, and its reliance on investments in structured finance was extreme.

"Between 2002 and 2007 almost all of their profits came from the capital markets," said Achim Dübel, a consultant in Berlin. "Almost none came from their Mittelstand business. The question is why they were allowed to go from funding the Mittelstand to being invested in American mortgages."

One possible reason was poor oversight by KfW -- another contender for the chump title after it mistakenly transferred $400 million to Lehman Brothers on the day the American investment bank filed for bankruptcy.