Frankfurt-based Lehman Brothers Bankhaus AG (LBB) settled its monetary policy transactions with the Eurosystem (the organisation comprising the European Central Bank and the euro area’s national central banks) via the Bundesbank. The business relationship between the German subsidiary and the Bundesbank was the central point of access for the Lehman group to the Eurosystem’s monetary policy.

In September 2008, the Lehman group and its US parent Lehman Brothers Holding Inc. (LBHI) filed for bankruptcy. BaFin subsequently ordered a moratorium on Lehman’s German subsidiary LBB. At this time, liabilities vis-à-vis the Bundesbank stood at €8.5 billion. These liabilities originated exclusively from monetary policy refinancing operations, for which LBB had pledged a total of 33 securities, chiefly highly complex instruments. These instruments were not purchased by the Bundesbank owing to an investment decision; they come from the collateralisation of monetary policy operations.

Owing to the outstanding claims against LBB, the Bundesbank has had to be involved (mainly) in three parallel but closely related proceedings, namely

• realisation of the 33 LBB securities pledged,
• LBB’s bankruptcy proceedings in Germany and
• the bankruptcy proceedings of the parent LBHI in the United States.    

Since autumn 2008 the Bundesbank has gradually resolved the pledged securities, in some cases having to restructure them. In 2012, Diversity and Excalibur, the two largest positions in the LBB collateral portfolio, were sold, amongst other assets. The process of winding down the pledged securities is now complete.

The situation after more than four years of resolving collateral is as follows. With proceeds from sales as well as interest and redemption payments totalling €7.4 billion, a considerable percentage of the original claims against LBB have been covered.

After subtracting these €7.4 billion from the original claim of €8.5 billion, a difference of €1.1 billion is left over.

After accounting for interest claims and costs totalling €0.8 billion, a residual claim of €1.9 billion is left over and will go into the German LBB bankruptcy proceedings. In addition, the Bundesbank is a creditor in the US LBHI bankruptcy proceedings; it has a nominal guaranteed claim of $3.5 billion against LBHI.  Payments are expected from both bankruptcy proceedings.

For this reason, the Eurosystem’s provisions for counterparties in default, calculated according to the principle of prudence, and of which LBB is the largest position, were able to be reduced from €5.6 billion at end-2008 to €0.3 billion at end-2012.

If, at the close of the bankruptcy proceedings, the original LBB loans are (contrary to expectations) not covered, the loss would be distributed among the Eurosystem central banks.

The Eurosystem has adjusted its framework for monetary policy instruments and procedures (including risk control measures) as a consequence of the Lehman failure. In addition, monetary policy counterparties are being monitored more closely.