April 2 (Bloomberg) -- WestLB AG, the government-owned German bank reeling from subprime-related investments, had its first loss in three years on writedowns and errant trading bets.

The loss of 1.6 billion euros ($2.5 billion) exceeded the company's 1 billion-euro estimate from February. Germany's third- biggest state lender said today it wrote down 2.01 billion euros and expects further markdowns in the first quarter.

WestLB named Heinz Hilgert, former deputy head at DZ Bank Group, as chief executive officer yesterday to reorganize the bank and cut about 1,350 jobs. The Dusseldorf-based bank hired Deutsche Bank AG and Pacific Investment Management Co. to run a new off-balance sheet unit to shield it from writedowns on another 23 billion euros of securities, government spokeswoman Stephie Hagelueken said today.

``WestLB is living on borrowed time,'' said Simon Adamson, an analyst at CreditSights in London. ``If it hadn't been for the support from the state and owners, WestLB wouldn't still exist. You always expect the worst from WestLB.''

Deutsche Bank, Germany's biggest bank, said yesterday it cut the value of securities and loans by 2.5 billion euros in the first quarter, while Zurich-based UBS AG reported a 12 billion-Swiss franc ($11.9 billion) quarterly loss. Overall the world's biggest banks and securities firms have announced more than $232 billion in writedowns and losses, a sum that may rise to $600 billion, according to German financial regulator BaFin.

`Challenging Market Conditions'

WestLB shareholders including the state of North Rhine- Westphalia and two regional savings-bank associations agreed in February to cover as much as 5 billion euros in potential losses from asset-backed securities that were shifted into the newly created off-balance sheet unit.

Last year a separate probe into trading practices cost former CEO Thomas Fischer his job.

WestLB still faces ``extremely challenging market conditions,'' Chief Financial Officer Hans-Juergen Niehaus said. While the reorganization will damp results this year, WestLB aims to increase pretax return on equity to a ``double-digit'' figure by 2010, he said in a statement.

The bank expects ``clearly positive'' earnings in the first quarter, taking into account the shield granted by its owners, he said. The guarantee will help WestLB play an ``active role'' in state-owned bank consolidation, he said.

WestLB said it hopes to raise its core capital to more than 7 percent from 5.6 percent.

`Worst Year in History'

Interim CEO Alexander Stuhlmann said he doesn't expect a loss for 2008. ``2007 was definitely the most difficult year in WestLB's history,'' he said at a news conference at the company's headquarters. WestLB earned 799 million euros in 2006.

Stuhlmann, who will be replaced by Hilgert in May, joined in July after WestLB lost 604 million euros in the first half on failed trades with the company's own money. A regulatory probe alleged management didn't properly disclose the risky bets.

WestLB said last year it invested 1.25 billion euros in subprime mortgages and provided credit lines to about $14 billion of investment funds to prevent a fire sale of their assets after they couldn't raise funding on the debt market.

WestLB said its plan to cut one quarter of its 5,900 employees will save about 300 million euros by 2010. It aims to boost revenue by about 100 million euros a year by increasing business with small and medium-sized companies and by offering more retail products through regional savings banks.

The company forecast 1 billion euros in revenue in the investment bank by 2010 and said it plans to reduce jobs and locations abroad to focus on hubs such as London and New York.

Banking Partners

Hilgert will help look for banking partners after the collapse of talks with smaller rival Landesbank Hessen- Thueringen, which would have created Germany's biggest state- owned bank by assets.

North Rhine-Westphalia, the largest single shareholder, last year rejected a merger with Landesbank Baden-Wuerttemberg, Germany's biggest state-owned bank, fearing a loss of influence as the junior partner. The state controls about 38 percent of WestLB. The Rhineland and Westphalia-Lippe savings banks associations together own more than 50 percent.

WestLB declined to comment on whether it has bid for IKB Deutsche Industriebank AG, the Dusseldorf-based lender bailed out over subprime losses. WestLB doesn't currently plan to sell its Weberbank unit, which it bought in 2005 to win wealthy clients.

To contact the reporter on this story: Aaron Kirchfeld in Frankfurt at akirchfeld@bloomberg.net

Last Updated: April 2, 2008 10:49 EDT