ECB reveals multi-billion euro repo exposure
Lehman Brothers and the failed Icelandic banks leave their mark.
ECB faces significant losses from exposure to defaulted banks
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 euro system 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 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.
Despite being rated at single A, and that by only one agency – Standard & Poor’s – the CRE CDO still passed the ECB’s eligibility tests as acceptable repo collateral and the ECB advanced cash to Lehman against it. S&P has since downgraded the deal to BB+, citing the various key roles Lehman played in the transaction.
S&P’s presale report for Excalibur Funding No 1 contains no mention of loan-to-value ratios but, according to one banker, the issue was backed by assets of relatively low quality.