The European Central Bank is facing large potential losses arising from exposure to €10.3 billion of assets left behind from defaulting bank counterparties to the Eurosystem last autumn. In addition to Lehman Brothers, three Icelandic banks – Glitnir, Kaupthing and Landsbanki – and Dutch bank Indover have defaulted.
Among the assets that the ECB has been left holding is a massive collateralized debt obligation containing deteriorating commercial real estate assets. The €2.17 billion note was the senior part of a two-tranche transaction structured by Lehman Brothers in the spring of 2008 – when the firm was desperate for liquidity – precisely for the purpose of gaining access to the central bank’s generous repo facility.
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