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Big Mistake

DW staff (sp)September 17, 2008

Berlin demanded an inquiry Wednesday into why a German government bank transferred 300 million euros ($427 million) to Lehman Brothers just hours before the US bank collapsed amid continuing turmoil on Wall Street.

Lehman Brothers headquarters in New York
German bank KfW has to explain why it didn't notice the dark clouds hovering over LehmanImage: AP

Anger mounted in Berlin on Wednesday, Sept 17, after it emerged that German state development bank KfW transferred 300 million euros ($427 million) by mistake to Lehman Brothers hours before the US investment bank folded.

The news overshadowed calls in the parliament by Chancellor Angela Merkel for an improved regulatory framework following continuing turmoil on Wall Street.

A KfW spokesman told German daily Frankfurter Allgemeine Zeitung that there had been "an erroneous swap payment on Monday ... the reasons for which are being examined internally."

The logo of Germany's Kfw government bank
KfW's mistaken transaction is likely to cost the German government dearlyImage: picture-alliance/ dpa

The paper reported that the German bank, which was set up as a reconstruction bank and handles most federal-government investments, had tried frantically to stop the transaction on Monday but without success.

The impending crash of Lehman, America's fourth largest investment bank and a 158-year-old institute, had been world news on Sunday.

KfW conceded that it had an exposure of hundreds of millions of euros from the insolvency after the "improperly released payment," according to the newspaper.

Ministry demands inquiry

The paper reported that KfW could only hope to recover about half the 300-million euro sum, with Lehman expected to pay 40 cents to 50 cents in the dollar to its creditors as it is wound up.

The Finance Ministry in Berlin, which controls KfW, said there would be an inquiry to find who was to blame. KfW's in-house auditors would study how it was possible for the payment to have been released.

Lehman Brothers offices in New York
Lehman appears to have received the KfW's money just before declaring bankruptcyImage: picture-alliance/ dpa

"We are working to shed light very quickly on this technical fault," a finance ministry spokesman said at a press conference, calling the move "baffling" and "annoying." He warned the incident "will have consequences."

The transfer happened on Monday after the US investment bank had filed for bankruptcy protection.

Politicians from Germany's main parties demanded KfW clarify how it had spent taxpayers' money. German news agency dpa reported the bank's board would ask KfW Chief Executive Ulrich Schroeder at a meeting Thursday to explain the blunder.

German business newspaper Handelsblatt said the Lehman crash could also prompt the biggest payout in the history of the German banking industry's deposit guarantee fund.

Lehman's German subsidiary had been a member of the mutual-aid arrangement, in which banks jointly guarantee the safety of customers' deposits.

Merkel calls for better controls

Markets around the world have taken fright at the upheaval on Wall Street triggered by the collapse and rescue of a few heavyweight financial institutions. On Wednesday, the US Federal Reserve bailed out insurance giant American International Group (AIG) with $85 billion.

European shares fell to their lowest since May 2005 on Wednesday after AIG's rescue. The crisis has prompted Merkel to push for better regulation of global financial markets.

German Chancellor Angela Merkel
Merkel in parliament before news broke of KfW's transactionImage: AP

"We are in desperate need of an improved regulatory framework," Merkel said in parliament, adding only moderate progress had been made since Germany pressed for greater transparency of markets as head of the G8 in 2007.

"We cannot stand by and do nothing," she said. "Politicians must act."

The chancellor said the much-criticized rating agencies that assess companies' financial health should be subject to a code of conduct.

Merkel also added her voice to those seeking to calm the public, saying that the effect on the German economy from the current crisis looked set to be "moderate."

Her comments were echoed by Jean-Claude Juncker, the Luxembourg prime minister who chairs the group of finance ministers from the euro-zone.

Juncker told German radio station Deutschlandfunk he didn't believe Europe would be hit to the same extent as the US by the current financial crisis.

"Our financial system is more stable and we haven't made risky business deals in our financial markets to the same extent as was done in the US," Juncker said.