As soon as I read that one of the major suckers victims of Goldman Sachs' CDO scam was Germany's IKB Deutsche Industriebank AG I knew that this would be coming sooner or later:
Angela Merkel’s gov’t is considering taking legal action against Goldman Sachs relating to the CDOs itself to a German bank.
“Buyers included German bank IKB Deutsche Industriebank AG — an early victim of the financial crisis that was rescued by the state-owned KfW development bank among others.
The Welt am Sonntag newspaper quoted Chancellor Angela Merkel’s spokesman, UIrich Wilhelm, as saying that German regulator BaFin will ask the U.S. Securities and Exchange Commission for information.
“After a careful evaluation of the documents, we will examine legal steps,” he said, according to the report.
Is worth pointing out that Merkel already has hostility towards Goldman Sachs due to the firm’s apparent role in Greek efforts to conceal the size of the country’s deficit in order to gain membership status into the EU as Greece struggled to comply with European Union limits.
From the reports I've read so far, it appears that IKB took a loss of $150 million on the junk securities it purchased through Goldman. That is a sizable loss, but not enough to make the bank insolvent. The German taxpayers had to put in about US$ 10 billion to keep IKB afloat, so where did the other losses come from? This great piece of investigative reporting from ProPublica provides some clues. In 2006, a hedge fund operating under the name of Magnetar teamed up with Deutsche Bank to create a CDO comprised of the very riskiest of subprime mortgage obligations. They named the security Orion:
Magnetar and Deutsche were deeply involved in creating Orion. "We want to make sure we control the deal," a banker who worked on it recalls them emphasizing.
One person involved in Orion recalls Deutsche's point person, Michael Henriques, and Magnetar's Prusko pressuring the CDO manager, a division of the Dutch bank NIBC, to include specific lists of bonds in the deal.
Prusko and Henriques told this person that the investors "needed more spread in the portfolio." More "spread" means more return and more risk.
Once Orion was created, Deutsche and Magnetar needed to find a sucker investor. Who would be an easy target for such a risky security?
One investor in Orion was a fund affiliated with IKB, a small German bank. Eventually, it invested in at least four more Magnetar deals. In mid-2007, because of the disastrous investments in subprime securities, the German government was forced to bail out IKB. The failure of the bank was an early warning sign of the global financial crisis.
At this time, I don't have any information on the total amount of fraudulent securities that Deutsche Bank sold to the IKB fund, but I am willing to bet the sum dwarfs the amount that Goldman sold. Let's see if Angela Merkel has the will and the courage to go after her good friend Joe Ackermann.
UPDATE: Better late than never; DER SPIEGEL is on the case: Skandal bei Goldman? Schaut auf die Deutsche Bank.
Comments