Outrage over last-minute payment to Lehman (2nd Roundup)

Sep 17, 2008, 16:06 GMT

Berlin - The German government reacted with fury Wednesday to an admission by federal bank KfW that it passed 300 million euros (420 million dollars) to Lehman Brothers only hours before the US bank failed.

The sum was part of a swap arrangement, said a KfW spokesman in Frankfurt. He said there had been a 'technical' blunder.

Critics said a prudent bank would have held on to the money, knowing from Sunday news reports that Lehman was broke. Swaps are often programmed in advance into computers so that they happen without human intervention.

Finance Ministry spokesman Torsten Albig said the remittance was 'infuriating' and those to blame must be found, but an aide to Economics Minister Michael Glos said it was too early to say if anyone would be punished.

KfW said its internal auditors were investigating, but it could not yet say if there had been a net loss.

Opposition politicians in parliament were scathing. Guido Westerwelle, leader of the Free Democrats, said, 'So they tossed another 300 million to the bankrupts.'

Set up in 1948 to administer Marshall Plan funds, KfW is the German federal government's in-house bank and lends to home-owners and industry.

It is already reeling after a subsidiary, IKB, lost billions of euros last year and had to be bailed out.

Some accounts said KfW staff tried in panic to unwind the Lehman transaction, but could not.

Financial sources said KfW could only hope to recover about half the sum, with Lehman expected to pay 40 to 50 cents in the dollar to its creditors as it is wound up.

Other sources told Deutsche Presse-Agentur dpa that the bank board would ask KfW chief executive Ulrich Schroeder at a meeting Thursday to explain the blunder.

The newspaper Handelsblatt said the Lehman Brothers 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.