Friday, January 20, 2012

ECB to recover most of its Lehman loans

In yet another example of how central banks are not like other investors, the NY Times Dealbook carried an article discussing how the ECB was going to recover most of its Lehman loans.

For most investors, recovering most of the money they lent out would imply recognition of a loss.  Not so with central banks like the ECB.

The determination of whether the ECB made or lost money is done by comparing how much money the ECB lent to Lehman versus the total of how much the ECB collected in both interest and principal repayment on the loan.

It is this unique characteristic of central banks that offers the potential for a 'free lunch' in the rebuilding of the financial system.

Some investors and creditors may have lost billions when Lehman Brothers went bankrupt in 2008, but it looks as if theEuropean Central Bank will get most of its money back. 
An effort of more than three years to unwind Lehman assets will recover almost all the 8.5 billion euros, or $11 billion, that the central bank stood to lose, Joachim Nagel, a member of the executive board of the German central bank, the Bundesbank, said Thursday. 
The Bundesbank has managed the disposal of assets that the failed investment bank used as collateral for European Central Bank loans. The Bundesbank said Thursday that it was close to selling one of the last remaining assets, a complex package of real estate loans known as Excalibur. 
“When we’re all done, we will come close,” Mr. Nagel told reporters at a briefing. 
Lehman’s German unit had used 33 securities as collateral to borrow the money from the European Central Bank before its collapse in September 2008. Afterward, the European Central Bank — or strictly speaking, the so-called Eurosystem network of euro zone central banks — was stuck with the assets. 
Initially, the Bundesbank estimated the probable losses at 5.7 billion euros, but continuously reduced that figure as markets for the assets recovered and they could be sold for more than expected. In addition, some of the holdings continued to pay interest or dividends. 
Of the 33 Lehman securities, 28 have been sold. The largest remaining asset is Excalibur, a package of loans and derivatives based on European commercial real estate mortgages. Lehman constructed Excalibur in 2008 and used it to borrow 2.16 billion euros from the European Central Bank, the Bundesbank said.... 
Mr. Nagel conceded that central bankers might not have scrutinized the assets closely enough when accepting them as collateral. Standards have since been tightened, he said. 
“It went well,” Mr. Nagel said of the asset sales, “but should remain the exception.”

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