More Derivatives Fallout: Deutsche Hid Up to $12bn Losses, Say Staff
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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 complaints.
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.
Instead, they allege, the bank’s traders - with the knowledge of senior executives - avoided recording “mark-to-market”, or paper, losses during the unprecedented turmoil in credit markets in 2007-2009.
Two of the former employees allege that Deutsche mismarked the value of insurance provided in 2009 by Warren Buffett’s Berkshire Hathaway on some of the positions. The existence of these arrangements has not been previously disclosed.
Deutsche said in a statement that the allegations were more than two and a half years old and were publicly reported in June 2011. It added that they had been the subject of “a careful and thorough investigation”, and were “wholly unfounded”.
The bank said the investigation revealed that the allegations “stem from people without personal knowledge of, or responsibility for, key facts and information”. Deutsche promised “to continue to co-operate fully with the SEC’s investigation of this matter”.
The complaints were made at different times in 2010 and 2011 independently of each other. All of the men spent hours with SEC enforcement attorneys and provided internal bank documents during multiple meetings, people familiar with the matter say.
Robert Khuzami, head of enforcement at the SEC, has recused himself from all Deutsche Bank investigations because he was Deutsche’s general counsel for the Americas from 2004 to 2009. Dick Walker, Deutsche’s general counsel, is a former head of enforcement at the SEC. The SEC declined to comment on the investigation.
Two of the former Deutsche employees have alleged they were pushed out of the bank as a result of reporting their concerns internally.