March 16 (Bloomberg) -- J. Christopher Flowers, seeking to fend off a government takeover of Hypo Real Estate Holding AG, told German lawmakers that a seizure of the lender would be an “extreme step” that would deter other investors in the country.

“Germany is a very attractive place to invest because of its transparency and because of the rule of law,” Flowers, the head of New York-based investment firm J.C. Flowers & Co., told a parliament committee hearing in Berlin today. “Yet investors would see expropriation as unusual even in these circumstances.”

Flowers, who controls about 24 percent of the Munich-based lender, is battling to remain a shareholder after Chancellor Angela Merkel’s coalition backed plans to seize control of Hypo as a last resort. Lawmakers will vote March 20 on a bill that would allow Germany’s first bank nationalization since the 1930s.

“The moment of truth” is nearing for some banks, as the end of the first quarter on March 31 may show their capital reserves have fallen below the required minimum, Jochen Sanio, president of German banking regulator BaFin, told the committee. In the case of Hypo Real Estate, the government may have to “act quickly,” he said.

The government has already made available 102 billion euros ($133 billion) in loans and guarantees to ensure Hypo Real Estate’s survival. Finance Minister Peer Steinbrueck said March 6 that the government needs more than a 75 percent stake to save Hypo Real Estate from insolvency.

‘A Good Service’

“Of course Hypo Real could not survive without the assistance of the German state and Germany; the government and the people have done the bank a good service,” Flowers told the Bundestag, or lower house of parliament, finance committee hearing. “Steps taken were very necessary and appropriate though not unique, being taken by other states around the world.”

Flowers told Finance Ministry officials in Berlin yesterday that he wants to keep the shares, said three people familiar with the talks, speaking on terms of anonymity. The officials said the government favors buying all the bank’s stock. Further talks have been postponed until the law is passed.

While Flowers supports the government’s plan to restructure the bank’s business after a capital increase, they disagree on the price paid for shares. Steinbrueck wants Hypo shareholders to sell their stock at market rates before putting up fresh capital, the people familiar with the talks said. Hypo Real shares were trading at 86 cents at 3:48 p.m. in Frankfurt, a drop of 94 percent from a year ago.

‘Long-Term Recovery’

“Hypo’s shares have positive value and with restructuring of the bank we believe the shares with state support have the prospect for long-term recovery,” said Flowers.

By taking full control of the bank, Steinbrueck can exclude the risk of shareholders’ blocking planned restructuring measures, the people said. German stock-market law permits the owner of a single share in an incorporated company to launch a legal injunction against business strategy, they said.

“It doesn’t surprise me” that Flowers is insisting on keeping his stake in Hypo Real Estate, Merkel told reporters in Berlin. What’s decisive is the German parliament’s vote on the planned expropriation law, she said.

She reiterated that Hypo cannot be allowed to fail because of the bank’s “systemic” importance. “That’s why we need that ‘last resort,’” she said.

To contact the reporter on this story: Brian Parkin in Berlin at bparkin@bloomberg.net

Last Updated: March 16, 2009 11:00 EDT