(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own)
By George Hay
LONDON, Dec 6 (Reuters Breakingviews) - Deutsche Bank
(DBKGn.DE) is battling to move on from 2008 and the heart of the
financial crisis. Former employees of the German bank allege it
hid $12 bln of losses as the credit crunch hit. It reopens the
debate over whether marking shaky assets to model was actually
marking to myth – and whether it mattered.
The assets in question were complex synthetic collateralised
debt obligations in Deutsche’s so-called “correlation book”.
Instead of just using underlying assets, pointy-headed
investment bankers also deployed credit default swaps to model
portfolios. Like other trading assets, these were valued by
looking at prevailing prices: marking to market, in other words.
When the crisis hit, liquidity in most structured credit
assets collapsed. Banks then had a fallback: using their own
valuation models. But that still required some kind of
observable inputs. The debate between Deutsche, which denies the
allegations, and its old employees is whether these models were
appropriate, or fiddled with in order to hide the scale of the
It’s not clear whether Deutsche went too far or not. It had
an obvious incentive to avoid booking losses that could have led
the German government to take a stake in the bank and shrunk the
bonus pool. Yet the U.S. Securities and Exchange Commission,
which has worked on the case since 2010, has not, as yet, come
to any conclusion.
The wider question remains whether marking assets to market
is an absolute good or a relative method. Had global accounting
bodies not allowed investment banks to move large chunks of
trading assets to their banking books in 2008 to avoid marking
them to market, taxpayers might have had to stump up even more
capital. Meanwhile, in the UK, the Bank of England is worried
that lenders may be under-reporting their capital positions by
not marking their loan assets to market. But restorative
measures might involve shrinking loan books, hurting the
An SEC ruling against Deutsche would clearly be a big blow.
Although the bank had wound down most of the original
correlation book with minimal losses, it is still seen as
relatively undercapitalised under new “Basel III” reforms. It
would also leave Anshu Jain, the Deutsche co-chief executive who
used to run its investment bank, facing awkward questions about
ill-gotten bonuses, including his own. But if Deutsche is found
guilty, other mark-to-market refusenik banks may find themselves
in similar hot water.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- Three former Deutsche Bank employees have filed complaints
with the U.S. securities regulators claiming the bank failed to
recognise up to $12 billion of unrealised losses during the
financial crisis, the Financial Times reported on Dec. 5.
- Complaints to regulators including the U.S. Securities and
Exchange Commission (SEC) said that Deutsche misvalued a large
position in derivatives structures known as leveraged super
senior trades, the newspaper reported, citing people familiar
with the submissions.
- The report said this improper accounting allowed the bank
to misrepresent its capital position and avoid a government
- “The allegations of financial misstatements, which are
more than two and one-half years old and were publicly reported
in June 2011, have been the subject of a careful and thorough
investigation, and they are wholly unfounded," Renee Calabro, a
spokeswoman at Deutsche Bank, told Reuters in an email.
- Reuters: Ex-Deutsche Bank employees say bank hid $12 bln
in losses-FT [ID:nL5E8N5EN2]
- For previous columns by the author, Reuters customers can
click on [HAY/]
(Editing by Pierre Briançon and David Evans)
Keywords: BREAKINGVIEWS DEUTSCHE/
(C) Reuters 2012. All rights reserved. Republication or redistribution of
Reuters content, including by caching, framing, or similar means, is
expressly prohibited without the prior written consent of Reuters. Reuters
and the Reuters sphere logo are registered trademarks and trademarks of
the Reuters group of companies around the world.