Did Deutsche Bank Hide $12 Billion in Losses?

Anyone who follows this blog knows that I have covered extensively the role played by Deutsche Bank – especially its US operation – in the 2008 financial crisis, as well as its illegal forceclosure practices which have thrown thousands of American homeowners out of their residences.  So I was not surprised at all when the Financial Times reported this week on accusations brought forth by former Deutsche Bank American employees that the bank hid $12 billion in losses from regulators to avoid a government bailout:

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. 

Felix Salmon at Reuters studied the senior super leveraged trades and concludes: 

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.