Deutsche Bank and the ARS Scandal

Auction Rate Securities (ARS) are long-term bonds issued by municipalities and other tax-exempt institutions where the coupon is reset every month by the banks and the holders have the option of selling. These instruments have been marketed by banks and big investment houses as "cash equivalent" investments to their well-heeled clientele. The Swiss giant UBS pocketed millions in fees while it sold $$billions of these instruments to the same customers it was helping in its massive tax evasion schemes.  But UBS was hardly alone: Citibank, Goldman Sachs and everybody else was selling ARS as a highly liquid investment vehicle – until the recent credit crisis forced the ARS auctions to fail, and people were left holding long-term securities of varied credit quality.  For their deceptive sales practices in connection with ARS, UBS and Citi have been forced to repurchase the securities and pay huge – $100 million plus – fines:

UBS 21.15,
      +0.75,
      +3.7%)
   
will offer to buy back $8.3 billion in securities from private clients
for two years starting Jan. 1, 2009 and $10.3 billion from
institutional investors starting June 2010. The move is covered in a
settlement with the New York Attorney General, the Massachusetts
Securities Division and the Securities and Exchange Commission.

       
   
       

It also will
pay a fine of $150 million but it will not admit or deny allegations of
wrongdoing. The fine will be split equally between New York and
Massachusetts, according to Brian McNiff, spokesman for the
Massachusetts secretary of state’s office.

Morgan Stanley and Merrill Lynch have agreed to similar buybacks and fines. And now blogger Jochen Hoff of Duckhome asks: what about Deutsche Bank? Deutsche also sold $billions of these securities to institutional investors in the US and globally.  Now Deutsche is being sued under a class action filing by the law firm Girard Gibbs for deceptive sales practices:

It is alleged that the broker-dealers and issuers materially
misrepresented the liquidity and risks of the auction rate securities
to individual investors and corporations by labeling these securities
as “cash equivalents,” in press releases, monthly account statements,
individual communications with investors, and other investment guidance
material. In fact, the promised liquidity of the auction rate
securities was created through artificial intervention in the auctions
by the broker-dealers.

In the US, Deutsche Bank still manages to receive good press, despite its role as the biggest trustee in home foreclosures across the country.  Just last week the New York Times had a puff piece on the bank, where it praised bank chief Josef Ackermann for his "conservative" management of the bank.  Unfortunately, the  NYTimes failed to point out in the article that Deutsche Bank had, in fact, been a major player in the subprime mortgage mess.  It managed to unload these worthless securities to publicly-owned German institutions like the IKB Bank and the SachsenLB, leaving the German taxpayers to pay for the mess.  But now the Deutsche Bank will have a more transparent way to gamble away its capital: last week the bank foreclosed on the $3.5 billion Cosmopolitan Resort & Casino in Las Vegas, making it the sole owner of that property.  No word on how many of the banks capital markets bankers will be retrained to work the craps tables in Las Vegas.