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Goldman Loses German Bank's Business—Are Bonds Next?

The headlines crashed into markets with a bang: BayernLB bank, one of Germany's Landesbanken,* is cutting its business ties to Goldman Sachs "with immediate effect," now that the U.S. Securities and Exchange Commission has accused the investment bank of fraud.

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Matthias Luecke, a spokesman for Munich-based public-sector bank, only confirmed a news report Wednesday by the daily Handelsblatt with the spartan sentence, "Yes. It is correct. Our CEO Gerd Haeusler has informed Goldman Sachs of this decision yesterday."

No more details, explanations, qualifiers were to be had.

A source from the Bavarian Finance Ministry was a little more forthcoming. The Bavarian government had advised BayernLB to "suspend" business dealings with Goldman until they are fully cleared off all allegations, the source told CNBC, adding: "Banking relations are built on trust and as long as this 'cloud of uncertainty and distrust' hangs over Goldman we think it only prudent to take a step back."

Goldman had advised BayernLB on capitalization and on risk management regarding toxic assets since late 2008 and is no doubt wondering how much that advice might have been worth.

BayernLB, in good-bad company with other German Landesbanken, had suffered badly through a string of ill-advised investments and had to be bailed out piecemeal by German tax euros. Keeping Goldman on as financial advisors would no doubt be politically untenable.

But the far bigger question now is: Who's next? Will the other Landesbanken or indeed other banking clients in Germany follow suit? And — even more importantly: What will happen to Goldman's seat in Germany´s Federal bond consortium, the prestigious group of banks that place German government paper? A seat on this consortium is highly coveted; this year alone, Germany plans to refinance about 350 billion euros of government debt.

Already, rumor has it that the German finance ministry wants to suspend Goldman's role in the bond consortium or maybe replace the US-based institution by another bank altogether.

That would be the big prize to lose in Europe and a huge blow to Goldman. Not only a blow to prestige, but also — maybe more so — a big blow to profits, because the Bund market is the most profitable bond segment in the world next to US government paper.

Bunds, US Treasurys, London Gilts: Check Prices & Yields Now

* Landesbanken: Germany's state-owned clearing banks of the public sector savings and loans.

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