German state-owned bank KfW, in business for over 60 years, saw its Frankfurt headquarters raided yesterday by German prosecutors and police yesterday over “suspected criminal breach of trust,” The Guardian reports. The investigation is looking into whether the bank’s executives acted criminally in allowing KfW to transfer €319m (approximately $426 million) to Lehman Brothers on September 15, the day it went bankrupt.
KfW was immediately dubbed “Germany’s dumbest bank” by Bild, Germany’s largest circulation newspaper.
Lehman was supposed to pay KfW back $500m in a swap arrangement, but “sent no money in return, causing KfW a net loss of €536m when other charges are included.”
According to The Guardian,
The investigation has been set up to establish whether executives breached fiduciary duties by failing to prevent the transfer when knowledge of Lehman’s liquidity problems was in the public domain.
It is targeted “right at the top” of the executive board, the prosecutor’s office in Germany’s financial capital said. Ulrich Schröder, the chief executive, and four other executive directors are affected – along with a departmental head.
Peer Steinbrück, Germany’s finance minister and a KfW supervisory board member, and other ministers were aware of Lehman’s difficulties throughout the weekend leading up to Monday September 15 – the day it collapsed.
When news of the money transfer broke, enraged cabinet ministers forced the resignation of two executive board members. The head of risk management also quit. The three are now under investigation.
KfW has admitted that its risk department simply did not know of Lehman’s pending insolvency. It had been due to hold a meeting the day of the transfer, but the transaction was completed an hour before the meeting took place.