Thursday, September 18, 2008

German bank is dubbed 'dumbest' for transfer to bankrupt Lehman Brothers

International Herald Tribune
By Nicholas Kulish
Thursday, September 18, 2008

BERLIN: Just as the rest of the financial community was scrambling to get its money out, a state-owned German lender gave Lehman Brothers what might be called a parting shot in the arm, transferring €300 million to the investment bank on the same day it declared insolvency.

The $426 million payment, described by the bank as an "automated transfer," provoked an outcry across the political spectrum, and earned the lender, KfW Bankengruppe, the dubious title of "Germany's dumbest bank," which the largest-circulation German newspaper, Bild, splashed across its front page Thursday.

The two management board members at KfW development bank, Peter Fleischer and Detlef Leinberger, were suspended with immediate effect until the incident is resolved, the German economy and finance ministers said in a joint statement. A lower-ranking department head responsible for risk control also was suspended, the statement said.

The bank's administrative board, made up of politicians and business leaders, had met in Berlin amid calls for heads to roll.

Finance Minister Peer Steinbrück said there should be "consequences" for bank managers. "I've never experienced anything like this in my life," he said.

KfW is 80 percent owned by the national government and 20 percent by German states. It was established in 1948 to finance reconstruction projects.

It makes loans to small and medium-size businesses, as well as individuals, to encourage needed investment in areas neglected by private sector banks.

Failing American investment banks were not part of its mission.

A bank spokesman, Wolfram Schweickhardt, said the transaction was part of a regular currency swap.

"It's a complex process," Schweickhardt said. "It has to be approved by several parts of the bank."

With Lehman going into bankruptcy, the swap became a one-sided deal, with euros going to Lehman but no dollars coming back to KfW, he said. This, even though, according to the Frankfurter Allgemeine Zeitung, capital markets experts at the bank met through the weekend to discuss the fallout of a potential Lehman bankruptcy. The transfer went through Monday.

KfW hopes to get some of the money back, though it did not say how much. Its total exposure to Lehman Brothers was in the neighborhood of €500 million, according to internal estimates.

Calling the accidental transfer scandalous, the German Taxpayers Association demanded an investigation and recommended paring back the unwieldy, 37-member administrative board to encourage better oversight.

"It is not sufficient to downplay financial transactions as technical errors," it said. Money transfers "belong to the basics of the bank business."

It was not KfW's first brush with the financial crisis. In August it sold IKB Deutsche Industriebank, which had lost billions speculating on mortgage-backed securities, to the private equity firm Lone Star, for a price well below government expectations.

KfW began as a minority shareholder in IKB but ended up with a share of 90.8 percent after a series of bailouts.

The German banking industry has weathered the most recent turmoil relatively well. In a speech Wednesday, Chancellor Angela Merkel said that in the case of Lehman Brothers, "German banks have fortunately only been involved to a manageable extent."

The consequences for the German economy "have been moderate so far," Merkel said.

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