March 20 (Bloomberg) -- Chancellor Angela Merkel’s coalition mobilized its parliamentary majority to push through a law enabling the state to seize Hypo Real Estate Holding AG, moving closer to Germany’s first bank nationalization since the 1930s.

The law, an extension of a 500 billion euro ($684 billion) bank-rescue fund enacted in October, allows for Finance Minister Peer Steinbrueck to expropriate all the stock of Munich-based Hypo Real Estate if shareholders balk at planned bailout steps. It includes a caveat that such a measure can only be taken once all other means have been exhausted.

“Bank rescue keeps us from chaos,” Steffen Kampeter, the budget spokesman for Merkel’s Christian Democratic Union, told lawmakers in the lower house of parliament, the Bundestag, in Berlin today. “This step is the necessary answer from the government to the financial crisis.”

The moves to save Hypo have exposed a growing divide between the coalition parties as they prepare to fight Sept. 27 national elections. The Christian Democrats, wary of scaring investors, want to avert seizure if at all possible. Steinbrueck’s Social Democrats have no such scruples, after granting Hypo more than 100 billion euros in credit and guarantees since September.

“The law is very explicit: expropriation as a last resort, and we’ll be monitoring all the way,” Eduard Oswald, chairman of parliament’s all-party finance committee, said in an interview in Berlin on March 18. “I can only say it’s in the government’s interests to follow the letter of the law assiduously.”

J.C. Flowers

J.C. Flowers, Hypo’s biggest investor, who holds about 24 percent of the lender, told a parliamentary hearing on March 16 that he “would be ready to consider joining” a capital increase at the bank. Flowers said he sees long-term prospects of recovery for the stock.

Jochen Sanio, the president of the BaFin financial-market regulator, told the same hearing that the “hour of truth” is approaching for some banks as they present annual statements to the regulator by March 31. BaFin may have to act quickly to aid banks whose core reserves dip below a legal minimum of four percent of their total capital, he said.

Lawmakers approved the bank seizure bill by 425 for to 106 against. There were four abstentions. The bill will now go to the upper chamber, the Bundesrat, where Germany’s 16 states are represented.

The Bundesrat has the power to delay the Hypo bill but not to block it. Camilla Linke, a spokeswoman for the chamber, said the bill could become law as early as April 6. The government may then call on the banks shareholders to attend an extraordinary meeting to vote on the capital increase.

Market Rates

Steinbrueck’s ministry has so far failed to persuade Flowers, the head of New York-based investment firm J.C. Flowers & Co., to sell his shares at market rates before it goes ahead with a capital increase. The stock has fallen 95 percent since September and treaded at 83 eurocents at 9:15 a.m. in Frankfurt.

The bank may need as much as 10 billion euros in fresh capital to help it meet minimum capital reserve requirements, analysts have said.

“The ifs and buts, checks and balances within this legislation somehow still leave the impression that Steinbrueck wants nothing else, will be satisfied with nothing less than seizing the bank,” Carl-Ludwig Thiele, finance spokesman for the opposition Free Democrats, said in an interview.

Steinbrueck told lawmakers during the bill’s first reading in parliament on March 6 that the government needs more than a 75 percent stake to save Hypo Real Estate from insolvency.

“Why stop at 75 percent and one share?” Reinhard Schultz, a member of the finance committee, said in an interview. “That would leave lots of scope for legal problems and meddling from minority shareholders.”

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

Last Updated: March 20, 2009 05:52 EDT