Deutsche Bank's Failure: An Insider's Perspective

Last week I wrote about the outrage that US taxpayer bailout funds to AIG were used to make good on counterparty contracts with Deutsche Bank.  I wasn't the only one upset by this.  Now my friend Deepak Moorjani of Deutsche Bank Tokyo has gone public with an Open Letter to Deutsche Bank Shareholders on the Huffington Post super-blog. Deepak basically blows the whistle on Deutsche Bank's culture of recklessness that has destroyed $billions of sharelholder value:

"When speaking about the banking sector, many people mention a "subprime crisis" or a "financial crisis" as if recent write-downs and losses are caused by external events. Where some see coincidence, I see consequence. At Deutsche Bank, I consider our poor results to be a "management debacle," a natural outcome of unfettered risk-taking, poor incentive structures and the lack of a system of checks-and-balances. In my opinion, we took too much risk, failed to manage this risk, and broke too many laws and regulations.

For more than two years, I have been working internally to improve the inadequate governance structures and lax internal controls within Deutsche Bank AG. I joined the firm in 2006 in one of its foreign subsidiaries, and my due diligence revealed management failures and also inconsistencies between our internal actions and our external statements."

Deepak's reward for trying to end the reckless risk-taking at the bank was predicatable: management is taking legal action against him.  Unlike most employees at the giant bank, Deepak has decided to fight back an go public with his knowledge. Copies of his correspondence with DB  senior management can be found here. 

With respect to the AIG bailout money, Deepak puts his finger on the outrage:

As these losses have grown, taxpayers are being forced to absorb these losses. As an example, my firm recently received nearly $12 billion from AIG (which has effectively been nationalized with $180 billion in taxpayer funds). Essentially, every American household sent my firm a check for $105. The reason for this payment: my firm bought credit default swaps from AIG. In plain-speak, we bought unregulated "insurance" from AIG to cover losses from bad trades. What did taxpayers get in return? Nothing. Taxpayers simply paid an IOU triggered by our gambling losses. (Note: This $12 billion payment was more than 50% of our market capitalization at the time of its disclosure).

So why did US taxpayers shell out $12 billion to cover Deutsche Bank's "gambling losses"?  Good question. And now the US Congress wants to know the answer:

Lawmakers and New York Attorney General Andrew Cuomo are demanding to know why American International Group opted to use billions of taxpayer dollars to make counterparty payments to large banks. Rep. Elijah E. Cummings, D-Md., sent a letter signed by dozens of other representatives to Neil Barofsky, special inspector general for the government's Troubled Asset Relief Program, asking whether the payments were "in the best interests of the taxpayers who provided the funding." Meanwhile, Cuomo subpoenaed AIG for information regarding its derivatives portfolio.

Hopefully, through Congressional action, taxpayers can recoup at least some of the funds.