Bombshell: Deutsche Bank Hid $12 Billion In Losses To Avoid A Government Bail-Out

Tyler Durden's picture

Forget the perfectly anticipated Greek (selective) default. This is the real deal. The FT just released a blockbuster that Europe's most important and significant bank, Deutsche Bank, hid $12 billion in losses during the financial crisis, helping the bank avoid a government bail-out, according to three former bank employees who filed complaints to US regulators. US regulators, whose chief of enforcement currently was none other than the General Counsel of Deutsche Bank at the time!

From the FT:

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.

Naturally, DB is defending itself in the only way it knows: "this is complicated stuff, and we know better than those guys." In other words, this is just a "tempest in a teapot." Where have we heard that before...

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.

SEC enforcement attorneys eh? Because this is where it gets really fun: the person who was in charge of DB's legal compliance at the time was none other than Robert Khuzami. The same Robert Khuzami who just happens to be the chief of enforcement at the SEC!

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.

Sadly, the "we are too sophisicated" defense may not be very effective this time.

Two of the former Deutsche employees have alleged they were pushed out of the bank as a result of reporting their concerns internally.
One of them, Eric Ben-Artzi, a risk manager at Deutsche, was fired three days after submitting a complaint to the SEC. In a separate complaint to the Department of Labor, he claims his dismissal was retaliation for his allegations.


Matthew Simpson, a senior trader at Deutsche, also left the company after submitting his own complaint to the SEC. Mr Simpson declined to comment. Deutsche Bank paid Mr Simpson $900,000 to settle his anti-retaliation lawsuit. Reuters reported in June 2011 that Mr Simpson had raised concerns about improper valuation of the derivatives portfolio.


The third complainant, who worked in risk management and has requested anonymity, raised his concerns to the SEC and voluntarily left the bank.

Or actually, since every bank in the world is forced to lie, cheat and mismark its own balance sheets every single day, not least of all the European Central Bank which as of moments ago has to accepted defaulted Greek bonds as collateral, this may just be completely ignored.

After all opening this particular Pandora's Box may well reveal that not only DB but the world's entire financial system is completely and totally insolvent.

* * *

And for those curious why the SEC's chief enforcer will never lift a finger against his own bank, all other considerations and recusals aside, here is what we wrote back in May 2010

Robert Khuzami Stands To Lose Up To $250,000 If He Pursues Action Against Deutsche Bank

When the SEC'a Robert Khuzami recently recused himself of pursuing an investigation against Deutsche Bank in regard to potential CDO malfeasance, a bank where it is common knowledge the CDOs flowed (and were shorted "where appropriate" by Mr. Lippmann and his henchmen) like manna from heaven, we were curious just how large the conflict of interest must be for him to not pursue his official duty. Luckily, we were able to answer this question when we recently encountered Mr. Khuzami's Public Financial Disclosure Report for Executive Branch Personnel. It appears that Mr. Khuzami, who from 2002 to 2009 worked at DB, most recently as General Counsel, might have directly profited quite handsomely from the very activity he is now prosecuting Goldman, and other banks very likely soon, for engaging in. How handsomely? His 2007 bonus, 2008 salary and bonus, and 2009 salary added up to $3,804,537. This works out to about $1.9 million in comp per year. And let's not forget that 2006/2007 was the peak years for DB's CDO issuance. It sure seems Mr. Khuzami benefited nicely as a participant in precisely the kind of CDO gimmickry that he is currently all over Goldman for. Yet most ironic, is that Robert is expecting to receive between $100,001 and $250,000 in vested deferred stock comp from Deutsche Bank in August 2010. Should he, or someone else at the SEC, commence an investigation into Khuzami's former employer, the SEC's Director of Enforcement is sure to lose a substantial amount of money tied into the absolute value of Deutsche Bank stock.

And it doesn't end there. Khuzami lists the following asset holdings as of June 2009:

  • Federated US Treasury Cash Reserves: $1,001-$15,000
  • US Treasury Cash Reserves: $1,000,001-$5,000,000
  • Fidelity Advisor New Insights Fund: $15,001-$50,000
  • Henderson Int'l Opportunities Fund: $15,001-$50,000
  • Deutsche Bank Cash Account Pension Plan: $100,001-$250,000
  • DB Stable Value Fund: $1,001-$15,000
  • Goldman Sachs Mid Cap Value Fund: $1,001-$15,000
  • Dodge and Cox Int'l Stock Fund: $50,001-$100,000
  • SSGA Money Market Fund: $15,001-$50,000
  • Delaware Emerging Markets: $50,001-$100,000
  • Gateway Fund (401k): $15,001-$50,000
  • Third Avenue Real Estate Fund (401k): $15,001-$50,000
  • Touchstone MidCap Growth Class A (401k): $15,001-$50,000
  • Wells Fargo Endeavor Select FD (401k): $15,001-$50,000
  • Yacktman Fund (401k): $15,001-$50,000
  • PIMCO Real Return Class A (401k): $50,001-$100,000
  • Principal Short-Term Fixed Income (401k): $1,001-$15,000
  • Personal Residence - New York (Gross Rental Income): $1,000,001-$5,000,000
  • Deutsche Bank Common Stock (Vested Amount Compensation): $100,001-$250,000
  • Vanguard 529 Moderate: $50,001-$100,000
  • Vanguard 529 Aggressive: $1,001-$15,000

It appears Mr. Khuzami has done quite well while working in the private sector, undoubtedly defending his German employer from precisely the same actions he, or someone else at the SEC, may soon charge the firm was defrauding investors by. His total disclosed asset range from $2,525,000 to $11,375,000. It is also ironic that nearly half Mr. Khuzami's assets are contained in real estate, and not to mention that a substantial amount of his assets are also contained in Deutsche Bank plans as well as DB stock deferred comp. In fact, let's take a look at that deferred comp of $100,001-$250,000 a little closer.

It appears the SEC's Enforcement Director has between $100,001 and $250,000 in DB deferred stock compensation, which becomes payable in August 2010. Obviously this is not a trivial number. And while Khuzami may have recused himself from pursuing DB for CDO infarctions, that does not mean that some other SEC enforcer (surely, their $1 billion a year budget allows them at least more than one enforcement professional) would not be able to go after DB. The problem as we see it is that since the announcement of the SEC case against Goldman the firm has lost about 25% of its market cap. It is conceivable that DB, which dabbled far more in CDOs, and thus the SEC would have a much stronger case agaisnt the bank, would thus lose far more of its market cap should the SEC announce a case against the Germans. In fact, we could be looking at Mr. Khuzami's Vested Deferred Compensation value dropping from $100,001 - $250,000 to maybe even as low as $15,001-$50,000. Then again, this becomes irrelevant after August, when the former DB GC will have collected all his dues. Does this mean we should expect nothing from the SEC against Deutsche Bank for at least 4 more months? And is September 1 the day when the SEC formally announces charges against Deutsche? We would love to get the SEC's feedback on this.

Mr. Khuzami's potential conflicts of interest do not end with his open exposure to Deutsche Bank. His Schedule A appendix indicates that the man has open equity positions with firms such as Bank of America, Deutsche Bank, and JP Morgan. To wit:

Would this mean that Mr. Khuzami, and thus the entire SEC Enforcement Division, if judging by the Deutsche Bank case study, would recuse itself of investigating these three firms from an enforcement standpoint?

We certainly do not begrudge Khuzami's generous winnings as part of the private sector. If anything, any borderline criminal activity he may have helped cover up as GC of Deutsche (an act he was supposed to do so no ill-will there) should provide him with the knowledge to prosecute just such activity. However, when the head of the main US regulator's enofrcement body is so terminally ensnared in not just the Wall Street complex, but in the very fabric of Keynesianism (that up to $5,000,000 Treasury holding for example and not to mention his up to $5,000,000 rental property), the population should ask just how extremely biased this man can be when prosecuting the very system that allows him to have up to $11 million in assets currently tied in to the perpetuated status quo. Surely, should the Fed, and the market in general, be "surprisingly" uncovered to be the same ponzi construct as Madoff's pyramid scheme, Khuzami, and who knows how many other people, stand to lose virtually the bulk of their assets. This makes them very much conflicted in any real enforcement action, and certainly not independent or impartial. Perhaps Dodd, in his joke of a bill, can consider just how to establish a securities regulator which by its very nature is not constantly in bed with the very subject it is supposed to be investigating.

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bdc63's picture

the real BOMBSHELL here is that people actually quit their jobs over this "business as usual" event



optionsman's picture

plus 1. if one would only start asking questions about how "research" is done everywhere in the investment management industry to support their strategies (active, enhanced, risk controlled you name it) fund managers want to pursue. the picture for everyone would get so much clearer. it is largely BS in case you have not guessed it yet....But how it ties into the comment above: well a lot of analysts in such situation(s) want to quit their jobs but they have no where to go because this environment exists everywhere with slight variations. it gets even worse- a lot of analysts would rather change their career tracks away from financial industry but they cant. why? well that is another subject altogether.

knukles's picture

Ah yes, captives of the normalcy biases, propaganda espoused and required by the CFA Institute, FAF, whomever these days (I let all my memberships lapsed some time ago.)
Institutions so captured by Ellis' Philosophy, People, Process and Performance framework, and the consultant reinforcement, a veritable shill, entrapment within a framework of an industry way over paid for negative value added, leaving no room to deviate from the narrowly proscribed self defined belief systems which prove immobile with time.  Ozymandias himself incarcerated in a desert of foible and ego.

Those who've profited handsomely in the past, remember it fondly.


Seer's picture


Those whose very lives depend on the system will defend it to the death.

Very few have the balls to stand up and walk away, naked (taking nothing with them).  Everyone has been programmed to grab and then TRY to RUN.  It's quicksand, running doesn't work.

johnnymustardseed's picture

I don't get it, As a primary dealer they line up everyday for another bailout

Robot Traders Mom's picture

I don't either. This may be a "bombshell" for the quacks at FT, but this is just business-as-usual reporting for ZH...

Mr Lennon Hendrix's picture

I thought this type of info was suppossed to come out over the weekend?  Tomorrow is going to be a doozie. 

Your turn dollar bulls!

fonzannoon's picture

Doozie? I think you mean a snoozie. What are they going to do? Make them retroactively get bailed out? Clawback bonuses? Can they claw back coke and hookers? They avoided getting bailed out and avoided going insolvent. That's about as good bank management as I have seen in 4 years. Bravo DB. Pay your petty fine and lets all move along.

As for that guys portfolio.....not too shabby.

It just goes on and on and on.

Mr Lennon Hendrix's picture

Look, I know it all looks like bullshit.  That is because it is all bullshit.  But the fact of the matter is this is one more domino in a long line and as each one falls we get closer to the end. 

Watching the dominoes fall will make one dizzy, but it is fun to watch.  If you'd rather you don't have to watch.  Go join a Zen Temple and meditate on "Ohm".  We will come get you after we are done with the games.

fonzannoon's picture

They avoided a (german) taxpayer bailout and then actually held on and did not go belly up. Granted they lied to avoid it. But the losses were obviously not big enough to take then down.  As far as banks go it seems they almost took the moral high ground here.


Mr Lennon Hendrix's picture

Lying is never taking the moral high ground.  And if they lied who knows what the losses would have done to them?  Would the ECB have been able to bail them out too?  What would that have implied for the German economy?  The only economy thought to be solvent in Europe?

And if they lied who else is lying?  What about the US banks and other creditors of DB?  What if that $12B had suffered a margin call and DB would have been corzined?  Or what if they had set in motion the same collapse as Lehman and Bear?

No one knows what would have happened but just because they lied to avoid this does not make it noble.  In fact, in the long run all of this lying will make matters much worse.

wisefool's picture

Correct. It is like pardoning the wheel man in a bank heist. "I just drove the car"..... "Well then okay, you can go" ... "But that means I still have the loot, do I have to give it back?" ... "Ehh dont worry about it, cant you tell I am trying to get out of doing paperwork here? I need a two hour lunch today"

SilverIsKing's picture

You are correct and I don't even buy that they lied to avoid a bail out.  They obviously didn't need a bailout.  They lied because they didn't want to expose their losses and now their excuse is that they did it to avoid a bailout.

kliguy38's picture

Chump change for banksters. The real losses ten times that if MTM was truly allowed. They had that bitch so pumped up that it was squirting out of every orifice. Those three douchebags were going to be thrown to the wolves and jumped out of the merry go round before they had their pins pulled. NONE of this is what it go get a MCD cheese burger and turn on some Dancing With the Stars like every other good peep

fonzannoon's picture

Of course it is not taking the moral high ground and of course we will never know how it would have played out. But we know now that they did it. We also know nothing will come of it. That to me makes matters much worse. You are right  with what you said above, I need to go meditate. Please come get me when the house is on fire.

Mr Lennon Hendrix's picture

foz, I enjoy your posts.  I was telling another FC member so earlier today. 

When we talk about nothing coming of it....sure, their equity will go down a few percent, then up a few percent, they will be slapped on the wrist with a $500M fine, and then it will be Christmas.

Rome wasn't built in a day and neither was it destroyed in such fashion.  Everyone of this happenings is adding up.  The leverage can only increase to a certain point.  And when it goes there will be blame.  We must be educated enough to put blame where it is meant to be.  This is our destiny.

fonzannoon's picture

I hear you Mr. L. You have got a lot of people stacking on here. Keep talking, we are listening.

Winston Churchill's picture

Rome wasn't  built on derivatives.

Also it took six months to communicate ,in a very limited way,across its Empire.

I don't fall in the camp of a slow debilitating collapse.This sucker will be quick,

maybe over one year max.Confidence in the system is gone.Panic is next.

We shall soon see.

illyia's picture

Mr L Hendrix, do you not wonder at the "consumer confidence" number in all of this?

I am baffled by it. Is it even possible? More and more reports of individual business owners claiming that they will shutter after the holidays so as to not traumatize their families just now. More and more disgusting stupid on the part of false leaders. Just the stupid, alone, is enough to make one sick.

Almost too much stupid to watch.


Mr Lennon Hendrix's picture

We are waiting for hard news like the above, like the Greek SD, we are not looking at the BS numbers from the BLS.  We know that the reporting is false in the case of UE, we know that banks aren't reporting real numbers.  What we are waiting for is evidence of those defaults.

Yet we have to hustle while we wait.  Neo-Keynsian economics is actually doing those of us lucky enough to be able to afford silver monthly by keeping this thing going.  Our hearts should go out to those who are clueless as well as those broke and we should do what we can for them.  But at the end of the day if we can't help ourselves we can't help anyone else.

So we buy silver and keep stacking.

Seer's picture

Yup... since it's ALL about "confidence" it's becoming increasingly more laughable/unbelievable that there is the slightest shred of reason for anyone to have ANY confidence in the system.

I was thinking that LIBOR was going to be "It," though perhaps it'll be found to have big gnarled teeth stuck to one of these other big chunks.

Maybe best to view it as detonation cords torching off.  Critical mass and then BOOM!

The ONLY positive course of action is to walk away and not look back.

Urban Redneck's picture

On Sunday 9/7/08 when Freddie & Fannie were nationalized- the US financial system and by extension the global financial system would have been bankrupted that very day if the debt and equity of the GSEs had been marked to market (as a nationalization (receivership) is actually different that a bailout, for which there were no appropraited funds to back the implicit guarantee of trillions of debt at the time much less the perferred equity that banks had piled their regulatory capital and god knows what else into in a chase for yield, FASB 157 wasn't even revoked until several months later).

Then Hank went on TV and baffled them with bullshit...


S&P +2.5%

DOW +2.6%

NASDAQ -0.3%

Nothing to see here, move along. 

Until all the gains were given up the next day.

Until Lehman died at less than a week later.

Seer's picture

Private debts transfered to the public domain.  Maybe they're thinking along the lines of "revolving doors?"  Slosh the debt to and fro, keeping everyone on the edge trying to figure out what's going to happen...

That which cannot continue forever won't.  Growth, and with it the world's economic system, collapses.  All this shit becomes instantly meaningless (as everyone scrambles for food).

smart girl's picture

Exactly. Why let the story now? Is this the easiest way of telling everyone they are insolvent?

darteaus's picture

It's the fault of a rogue trader!

Ness.'s picture

They should check the 88888 (5 eights) account.

Seer's picture

Where they'll find the number is?  42?

OneTinSoldier66's picture

Can someone please remind me again, what's a dollar?

SpykerSpeed's picture

It's something you need a lot of, if you don't want to go to jail.

BurningFuld's picture

A dollar is defined as: Backed by the full faith and none existent credit of the USA. How could you forget?

Seer's picture

Seems like ALL the big sucker games comes down to: "only believers will be saved."  Just believe and everything will be fine.  If you're not found in the Church of Fiat praying for the almighty USD you'll be subjected to Hell!

pods's picture

It is composed of 371.25 grains of fine silver.  Same as the Spanish milled dollar as it was based on.

Now, an FRN, that is a claim to a piece of our collective asses.


WallowaMountainMan's picture

 "Can someone please remind me again, what's a dollar?"

it is what a penny for your thoughts used to buy.

Ancona's picture

Did anyone actually think these guys know......telling the truth?

I thought not.

Bay of Pigs's picture

Deutsche Bank, the poster child of fraud and corruption.

Oh wait....I mean the SEC....

Mr Lennon Hendrix's picture

DB the new Lehman?  It would make sense since for whatever reason the Germans are the whipping post for the global cabal.

Seer's picture

It's the fault of the swirling devil that's named "the revolving door."

stormsailor's picture

and you think 3 independent whistle-blowers are going to pull the sec away from their midget tranny porn?

Seer's picture

It's their (SEC heads') JOB to ensure that their buddies/co-workers (revolving door makes it impossible to tell who one really works for) stay out of jail.

Mr Lennon Hendrix's picture

Less assets here, no gold on reserve there....

DB looks broke as a joke!

Rainman's picture

this is what they get for fukking around with those leveraged super senior trades...go figure what's in that basket of shit !

bank guy in Brussels's picture

Alfred Herrhausen, at the time head of Deutsche Bank, was killed by a car bomb in Frankfurt on 30 November 1989.

A couple of years ago, then Deutsche Bank head Josef Ackermann was asked about a possible 'debt jubilee' of haircuts to wipe out a lot of the bad debt in Europe, and Ackermann responded by 'joking' that if he came out publicly in favour of such debt write-offs, he might suffer the same fate as Herrhausen.

Even for the bankers, it is sometimes a life and death game

Rich and powerful, they yet face the question... Which is the deadlier risk

Too much corruption ... or too much 'truthiness' ?