How Deutsche Bank Covered Up $1.6 Billion Trading Loss

The Wall Street Journal published an excellent piece last week about YET ANOTHER scandal at Germany's largest bank.  Surprisingly, it got little play in the financial press in Germany - probably a sign of scandal fatigue with respect to Deutsche Bank.  This latest chapter in the saga of DB's slide into obscurity has to do with a complex municipal bond trade the bank made back in 2008.

Deutsche Bank AG DB +1.71% racked up a loss of $1.6 billion over nearly a decade on a complex municipal-bond investment that it bought in the runup to the 2008 financial crisis, and failed to confront head-on even as markets were upended and regulations tightened.The loss, which hasn’t previously been reported, represents one of Deutsche Bank’s largest ever from a single wager—roughly quadruple its entire 2018 profit—and ranks as one of the banking industry’s biggest soured bets in the last decade.

As the losses on the trade mounted, DB failed to mark the securities to market, even as the bank went again and again to the capital markets to issue shares in order to shore up its balance sheet:

Deutsche Bank resisted for years reducing the value of those bonds and related derivatives on its books to a level that markets suggested they were worth, and it brushed aside concerns raised by the bank’s financial auditors about how it was valuing the trade, according to internal bank documents and people involved in discussions about the investment.During that time period, the bank was telling investors its internal financial controls were sound, and it raised billions of dollars in the capital markets without any disclosure of the bond valuation issue. Behind the scenes, the badly timed bet exerted a sustained drag on the bank’s finances.

Even today, more than a decade after the disastrous trade, the bank has failed to come clean to investors on the scope of its loss.

Senior Deutsche Bank executives continued debating as recently as mid-2018 whether to restate past financial results tied to the municipal-bond trade, according to people briefed on the review. They decided not to, and the internal investigation closed.

Other than a short piece in Manager Magazin, the WSJ piece generated little interest in Germany, even though DB management consistently lied to investors as it sold $billions in shares.  Expect more class action lawsuits from investors, and expect another deluge of bad press as the details on DB's involvement with Donald Trump and Russian money-laundering are revealed in connection with the Mueller investigation. 

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This story was also covered by the SZ:

https://www.sueddeutsche.de/wirtschaft/deutsche-bank-investment-finanzkrise-1.4339952