Step aside Goldman "Shitty Deal" Sachs and JP Morgan MBS settlements. Enter Deutsche Bank. After the two biggest American hedge funds already settled with the SEC over their transgressions of selling MBS to clients even as they were betting actively against such securities, now it is Deustche Bank's turn, and more specifically head Deutsche bank MBS trader Greg "I Am Short Your House" Lippman. And unlike Goldman and JP Morgan which actually are profitable, and could afford the settlement, life for DB may not be just as simple. Reuters reports: "Bernstein Litowitz Berger & Grossman filed a scorcher of a suit against Deutsche Bank Wednesday, claiming that the bank sold financial services group Dexia more than $1 billion in mortgage-backed securities at the same time Deutsche Bank bet $10 billion that those notes would fail. The 175-page (!) New York state supreme court complaint is Bernstein Litowitz's second major new MBS filing in a week, coming on the heels of Allstate's suit against Morgan Stanley. The Deutsche complaint is filled with eye-popping allegations. Bernstein claims, for instance, that senior traders at the bank described the securities they were peddling to clients like Dexia as "crap," "pigs," and "generally horrible." One trader, Greg Lippman, allegedly wrote, "DOESN'T THIS DEAL BLOW" in an e-mail to a colleague about an offering Dexia sank $23 million into. In another e-mail the complaint cites, this one to a hedge fund investor, Lippman allegedly disclosed a $1 billion short position on mortgage-backed securities that was going to make him "oceans of money." And courtesy of said oceans, Greg will be more than happy to afford the drop that will be imminent settlement he wil have to pay as nothing ever changes.
As in Allstate's Morgan Stanley suit, Bernstein Litowitz found confidential witnesses to back its claims. For instance, the complaint quotes a witness from the mortgage-loan packager Lydian Trust Securities saying that 80 percent of the mortgage loans he reviewed in connection with Deutsche Bank offerings contained underwriting deficiencies. Deutsche Bank "really didn't care," the witness said, according to Dexia's complaint. In fact, almost 35 percent of the loans underlying Deutsche Bank mortgage-backed certificates are in default or close to it, the complaint says.
"The complaint sets forth strongly compelling facts that Deutsche Bank knew that the representations it was making to clients like Dexia were false at the time the statements were being made," said Dexia counsel Gerald Silk of Bernstein. "Deutsche Bank secretly placed a wager with its own money based on its own knowledge that these securities were toxic and would fail."
A Deutsche Bank spokeswomantold Tom Hals of Reuters that the Dexia suit is without merit and the bank intends to defend itself vigorously.
So, as if you needed any more reasons to buy those Deutsche Bank CDS. And just like MBIA, this could be a case where litigation recoveries help a company on the brink. Perhaps a long DB Sub - short Dexia Sub CDS trade here would not be the worst one...
h/t There is No Spoon