Deutsche Bank’s double-dealing in the US mortgage crisis

The US Wall Street firm Goldman Sachs recently paid a $500 million  penalty to the Securities Exchange Commission (SEC) for its role in the packaging and selling toxic mortgage-backed securities that contributed to the global economic crisis. But Goldman's part may be much smaller here than that of Deutsche Bank.  Two reporters for the Wall Street Journal – Carrick Mollenkamp and Serena Ng – have written a very thorough article on Deutsche Bank's "dual role" in the crisis – that is, how the bank was recommending and selling mortgage-backed securities to its institutional clients even as it was betting on the collapse of the market through its own trading activities.

One firm that was a major player in mortgage securities, Deutsche Bank
AG, illustrates a pattern investigators are looking at. While creating
and selling mortgage securities to some of its clients, the big German
bank was not only advising other clients to bet the other way, but also
sometimes doing so itself.

A Deutsche trader helped create an
index that made it easy to bet against housing, and the bank itself
then used the index to do just that.

After the collapse of
mortgage securities led to a costly bailout of the firm that insured
many such securities—American International Group Inc.—some of the
federal cash that was sunk into AIG flowed to Deutsche, to cover
bearish bets by its hedge-fund clients.

Deutsche's actions are
a vivid example of potential conflicts on Wall Street—the way big
financial firms play both sides of the fence with investors.

The WSJ points out that in 2007 – the year of peak production in the mortgage securities market – Deutsche Bank arrange $42 billion in CDOs (Collateralized Debt Obligations) compare to only $25 billion by Goldman Sachs.

The WSJ piece describes Deutsche Bank's pivotal role in financing one of the worst offenders in the subprime mortgage market – NovaStar Bank in Kansas City.  DB packaged NovaStar's toxic assets and pushed them to unsuspecting European investors while the bank itself was "shorting" its exposure to the US housing market (i.e. betting on its collapse).

"Deutsche took the bearish side of these deals and sought to sell the bullish side of them to U.S. and European investors."

One of the sick ironies of the whole fiasco is that DB's double-dealing was signed off on by its in-house legal counsel – Robert Khuzami – who now heads up enforcement at the SEC.

The WSJ piece does not describe how DB also assumed the role of trustee for the $$billions in CDOs and in that capacity has foreclosed on tens of thousands of residential properties in the US – becoming America's Foreclosure King.