Deutsche Bank failed to recognise up to $12bn of paper losses during the financial crisis, helping the bank avoid a government bail-out, three former bank employees have alleged in complaints to US regulators.
The three complaints, made to regulators including the US Securities and Exchange Commission, claim that Deutsche misvalued a giant position in derivatives structures known as leveraged super senior trades, according to people familiar with the complaint.
All three allege that if Deutsche had accounted properly for its positions – worth $130bn on a notional level – its capital would have fallen to dangerous levels during the financial crisis and it might have required a government bail-out to survive.
These are indeed very serious allegations, and there is no question that Deutsche Bank engaged in deceptive trading practices in New York and London during the tenure of Joseph Ackermann. But in this particular instance I'm inclined to side with DB against the whistleblowers. Why? To fully understand what's at play here takes us into the arcane world of senior super leveraged trades. In this case, DB traders bought credit insurance on a portfolio of very safe companies from Canadian pension funds. At the same time the bankers were taking another position where they sold a slightly different insurance contract where they were paid slightly more than what they paid out to the Canadians. DB was simply taking advantage of a market anomaly where the the market deemed DB as less risky than the Canadian pension funds. DB created a revenue stream for itself without really creating any new risk, since if you have to pay out on the one contract, you are getting paid on the other. In other words, the $12 billion in losses at the time were not really losses at all.
It’s pretty clear that the world is a better place for Deutsche Bank not having taken a gratuitous writedown on the grounds that even though it had billions of dollars of collateral from the Canadians, that might not be enough to cover what they owed if the crisis got even worse. I remember those crisis days vividly; they were characterized by policymakers on every continent doing everything they possibly could to boost the liquidity and confidence in the financial system.
So in this case we can be grateful that US taxpayers were not forced to bail out DB the way they were forced bail out Citi, Bank of America, and others. Still, DB practices at the time resulted in German taxpayers bailing out IKB Bank to the tune of 9 billion euros - and that sorry chapter has never been fully investigated.