Oct. 22 (Bloomberg) -- KfW Group, the German government- owned development bank, was searched by prosecutors probing a 319 million-euro ($411 million) payment to Lehman Brothers Holdings Inc.

Frankfurt prosecutors said they are investigating KfW management board members over the automated payment to Lehman on Sept. 15, the same day the New York-based securities firm filed the biggest bankruptcy case in U.S. history.

KfW said it will have a full-year loss and faces increased public scrutiny after politicians complained that the bank's board should have stopped the payment as soon as Lehman's financial situation worsened. The German government on Sept. 29 fired KfW management board members Peter Fleischer and Detlef Leinberger over the payment.

``KfW is a bottomless pit, it's unbelievable this could happen at a professional bank,'' said Dirk Becker, a Frankfurt- based finance analyst at Landsbanki Kepler. ``The prosecutors are trying to get to the bottom of the scandal.''

KfW, formed after World War II as part of the Marshall Plan to help Germany rebuild, is cooperating with prosecutors, the Frankfurt-based lender said in an e-mailed statement.

``We are investigating whether responsible people at KfW criminally violated their duty to protect the bank's assets by not stopping the transfer despite the palpable problems at Lehman and the international banking crisis,'' Doris Moeller- Scheu, the prosecutors' spokeswoman, said in a statement.

Currency Swaps

The payment was made for currency swaps on that day. KfW made the payment in euros to Lehman with the expectation it would receive a similar amount in dollars back from the U.S. securities firm.

Frankfurt-based KfW said on Sept. 22 that documents and protocols show no sign the transfer to Lehman was a ``conscious decision.'' Chief Executive Officer Ulrich Schroeder told KfW's administrative board on Sept. 18 that the department in charge of the transaction miscalculated the risk of insolvency at Lehman and the chance of not getting back the money and therefore the bank couldn't intervene in the automated payment, the bank said.

Bild, the biggest-selling newspaper, ran a headline on its front page on Sept. 18 calling KfW ``Germany's dumbest bank.''

German Economy Minister Michael Glos and Finance Minister Peer Steinbrueck, who head KfW's administrative board, said on Sept. 18 they would overhaul the bank's risk management as soon as possible.

`Typical Example'

The investigation is ``a typical example how the line between risky business decisions and what we consider criminal seems to increasingly blur in Germany,'' said Juergen Wessing, a lawyer in Dusseldorf who specializes in cases involving business crimes. ``Whenever a manager makes a mistake, people call for the prosecutor, but not all wrong choices are crimes.''

Lehman is the subject of at least three federal criminal probes in the U.S. More than a dozen individuals and at least seven companies have been subpoenaed, according to a lawyer for the bank and people familiar with the probes. U.S. attorneys in Brooklyn, New York, Manhattan and Newark, New Jersey are focusing in part of Lehman's role in the auction-rate securities market and possible crimes associated with its $6 billion stock issue in June, according to the people.

KfW has already been criticized for agreeing on Aug. 21 to sell IKB Deutsche Industriebank AG, the first German casualty of the subprime mortgage market collapse, to Lone Star Funds for less than 20 percent of the price the government initially sought.

KfW is 100 percent owned by the federal government and the 16 German states. The lender has a key role in helping small and medium-sized companies, a backbone of Europe's largest economy, and also provides loans to homeowners, exporters as well as development projects abroad.

To contact the reporter on this story: Karin Matussek in Berlin at kmatussek@bloomberg.net; Aaron Kirchfeld in Frankfurt at akirchfeld@bloomberg.net.

Last Updated: October 22, 2008 09:41 EDT