The World from Berlin 'Certain Mistakes Just Can't Be Allowed to Happen'

Hundreds of millions of euros from a German government-owned bank went down the drain with Lehman Brothers on Monday after a strange deal that has left many people scratching their heads. Why would a German bank transfer €300 million to an American Wall Street firm after it filed for bankruptcy?

German Finance Minister Peer Steinbrück says he's as baffled as anyone.
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German Finance Minister Peer Steinbrück says he's as baffled as anyone.

The German Finance Ministry declared itself shocked -- shocked! -- on Wednesday at the news that a state lending bank, KfW, had transferred €300 million ($426 million) to Lehman Brothers in New York on Monday, just after the investment bank collapsed.

"What we have had to read today is astonishing and exasperating," Finance Ministry spokesman Torsten Albig told reporters. "We expect a swift explanation of such a technical failure, which is inexplicable to us."

The trouble is, KfW is overseen by the Finance Ministry, among other elements of the German government, and the country's finance minister, Peer Steinbrück, holds ultimate responsibility for the bank's health. Ratings agency S&P said KfW's sudden exposure to such a loss would not hurt the bank's credit; but KfW was already burdened by the collapse of another German bank, IKB, in the wake of the subprime crisis last winter. KfW was IKB's largest shareholder, and it oversaw a deal -- on behalf of the public -- to sell the bank to American investors at the firesale price of €100 million. The bargain basement sale, however, came only after taxpayers were required to pay billions to bail IKB out.

The money transfer between KfW and Lehman was called an erroneous swap -- a swap being a derivative agreement between two parties to exchange one stream of cash flow for another. German papers on Thursday morning are no less shocked by the deal than the Finance Ministry, and they want an explanation for what seems like terrific mismanagement of publicly insured money.

The center-left Süddeutsche Zeitung writes:

"Who is responsible when something goes wrong in a state-run bank? A range of politicians sit at the head of KfW's supervisory board -- from Finance Minister Peer Steinbrück (a Social Democrat) and Michael Glos (a Christian Democrat) to the head of the Left Party, Oskar Lafontaine. Of course these bank managers can't personally follow every securities transaction. But it must have been clear to these political leaders that something had gone wrong with the bank's risk-management capability -- at the very latest in February, when IKB, the medium-sized bank which the KfB controlled with a majority of shares, collapsed."

"The IKB debacle cost the KfW -- and, in the end, German taxpayers -- billions. Handlers around Steinbrück and Glos should have done everything in their power to prevent another collapse. Instead, Steinbrück has used every opportunity to wag his finger (at private banks) and talk down the damage this financial crisis will cause the German economy. Anyone who calls for better risk management in private banking has to first make sure that his own house is in order."

The business daily Handelsblatt writes:

"There are certain mistakes that just can't be allowed to happen at a bank. Transferring €300 million to Lehman Brothers -- an institution that had already shown itself to be a candidate for bankruptcy the night before -- is one of those mistakes. The state-owned lending bank KfW will now have to provide a detailed account of how it could have made such a misstep. What's more important, though, is that it needs to take a really close look at its in-house risk-management department and make the changes needed to make sure something like this can never happen again."

"KfW has undergone immense growth over the past few years. It has grown more entwined in the capital market and thereby diversified its own refinancing. But now is the time for Germany's ninth-largest bank (in total assets) to ask itself whether the growth of its internal structures has kept sufficient pace with the bank's other growth and whether it still has all of its other functions under complete control."

The center-right Frankfurter Allgemeine Zeitung writes:

"When the supervisory board of Germany's state-owned lender bank KfW meets on Thursday, there's likely to be an animated debate. The overseers on the hopelessly bloated 37-member board won't manage to dodge the question of how the bank ran billions and billions of taxpayer euros into the ground. So far, the government bailout of IKB Bank, partially owned by KfW and deeply exposed in the subprime crisis, has cost €11 billion, with €9 billion of that coming from the federal budget, from KfW and from the taxpayers. Freed of those liabilities, with €2 billion in fresh capital and a debtor warrant to the tune of over €1 billion, IKB is now being sold for just over €100 million. That isn't what good business deals look like. To top things off, the bank on Monday transferred €300 million to Lehman Brothers as it declared bankruptcy. It just doesn't get any more dilettantish than that. The board shouldn't let this pass with a nod -- instead they should be asking what right a KfW bank run like this has to exist."

The leftist daily Die Tageszeitung writes:

"Anyone who watched TV, listened to the radio or read the newspaper over the weekend saw or heard images showing Lehman Brothers employees rushing to clean out their offices. But the two KfW employees must have slept through all that on their well-earned weekend. Now they'll likely lose their jobs. Business-friendly opposition politicians like the Free Democratic Party aren't the only ones criticizing the bank and asking how state bank employees could deal so incompetently with money that is backed with almost limitless taxpayer guarantees?"

"The Lehman collapse could cost the German banking system a total of €6 billion. It's not even certain whether the Association of German Banks' Deposit Guarantee Fund will be sufficient to cover the sum. The banks may have to pump more money in to cover the losses, which could affect the overall economy. The same banks that for far too long earned easy money through mortgages for American junk real estate have now become overly cautious, and are demanding massive liability premiums. The economy is cooling off markedly -- and jobs will soon be lost. It's high time that politicians, not just in Germany, put regulation of the financial markets at the top of their agendas."

-- Michael Scott Moore, 11a.m. CET


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