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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Catullus's picture

Mark to Bullshit.

lasvegaspersona's picture

DB stole $3k from me. They had an FX operation out of NY. They closed suddenly in 2010 and I could not get any response and still do not have my 3K. Something stinks....tick tock tick tock tick tock

newengland's picture

DB are the AshkeNAZI, the rootless cosmopolitans who have no loyalty to any nation or neighbor. Your lost 3K is the price of learning something important, and I trust that you are wise enough to lose no more.

Venerability's picture

While this sort of BOO'ing is getting more and more silly - since, I repeat, there is NOBODY left to BOO! . . .

There was a real and honest BOO! today that should have some of you Fellas quaking in your shoes: The Internet Police, broadly speaking, are finally taking a look at LOCATION programs - maybe even those for, say, IO or Weather.com - and their role in massive Internet hacking and malware schemes.

Of course, they should have understood all this ten years ago . . . but better late than never.

WHY exactly is this important?

After Messaging systems were cracked down upon, it is possible that a very large proportion of Market-based spying, particularly the crude kind practiced by the average Script Kiddie or their bumbling Daytrader network masters, uses some sort of Locator program as its basis.

Now if the Ninnies would also take a hard look at code hidden in advertising and news photos by slightly more ept Hackers - although I'd think that's also fairly easy at this point - and then on to the Biggie - translation programs, including Microsoft's own - maybe we would finally be getting somewhere.

Meanwhile, Tyler, this "revelation" looks like a scandal that took place a fair little while ago.

Ergo, why should it have much effect on the near-term market?

On the other hand, more potent ammunition for Peer Steinbrueck's campaign when it really gets going.

 

DollarDive's picture

No worries Here's what we have to look forward to next year : 

 

1. Higher Taxes for all

2. Less services

3. Listening to politicians drivel about how to bring down the deficit

4. More wars

5. Longer Hours to work for less pay

 

Sounds good huh ? 

QQQBall's picture

I smell a $100 million fine coming for DB without admitting guilt of course, and tar & feathers for the whistleblowers.

IridiumRebel's picture

Just another day in Mega Banking....move along....nothing to see here.

SIOP's picture

IridiumRebel wrote: "Just another day in Mega Banking....move along....nothing to see here."

+1

Thats exactly how I feel, the whole thing is just crazy, we see it everyday, why is this any different? Honestly I've grown so calloused to the fraud that I now expect it. I've seen so many things that I thought would "bring the system down" that haven't, one of these day's there will be a true black swan event and I wont even see it because I will think to myself..."Just another day in Mega Banking....move along....nothing to see here."

IridiumRebel's picture

Sad isn't it? They dont even hide it anymore. It's not like we will see any prosecutions. It will just fade into the 24 hour news supply as more numbing bullshit is softly fed to a dumbed down public concerned only with gadgetry and inane chatter for all their digital "friends" to see.

Pancho Villa's picture

Josef Ackermann:  "I never did mind about the little things."

the edge of chaos's picture

Banks lie and cheat????.....how the fuck is this news?

americanspirit's picture

I'm going to troll the Federal Election Commission to see where this motherfucker has been contributing tax-free dollars. And thanks to the listings of his holdings I'm going to see where they have been contributing. And thanks to his LinkedIn profile I'm going to look at what his family and relatives have been contributing, and to who. Stand by. Oh - please join me in the search. Let's all post together.

Dens's picture

Best read of the year. And that includes the comments!

ak_khanna's picture

Deutsche Bank, TOO BIG TO FAIL TILL TOO BIG TO BAIL BANK, will never be implicated in any criminal activity because the big banksters can get away with murder, fraud, coercian, harassment of the general public and any other illegal activity under the sun. They have a lot of influence on the political class, the rule makers and the rule enforcers due to their enormous purchasing power, so irrespective of the position in the government, everyone works for their benefit. 

The politicians around the world are nothing more than auction items which can be sold to the highest bidder. They will do whatever they can for the lobbyist paying them the maximum amount of money or votes, be it the unions, the banksters, the richest corporations or individuals. They are in the power seat to extract maximum advantage for themselves in the small time frame they occupy the seat of power.

The rest of the population is least of their concerns. The only activity they do is pacify the majority of the population using false statistics and promises of a better future so that they do not lynch them and their masters while they are robbing the taxpayers.

http://www.marketoracle.co.uk/Article35345.html
www.letstalkmoney2012.in

williambanzai7's picture

And yes, Mary Schapiro has indeed restored trust in the SEC...

drivenZ's picture

ehh, they shouldn't have been overlevered like that but who wasn't? In reality, marking illiquid credit to market is a tough job and spreads were probably enormous. Any bank that was doing even traditional lending and had to mark to market would get crushed in a fat tail scenario. Hence all the regional bank failures. It happens.  They probably didn't actually lose much if any money on these trades assuming they rode them out.   

All in all, it's not really surprising considering the LIBOR scandal, and how no one wanted to admit what the real interbank lending market looked like during the crisis. I would imagine the regulators let alot slide. Who would want to to add flame to the fire?  

 

blindman's picture

John Cale - Hallelujah
http://www.youtube.com/watch?v=DinEKqtCDkg
.
.." it's not a cry you can hear at night
it's not some one who's seen the light
it's a cold and it's a broken ...."
.
there is nothing more beautiful than thee
and the drop of the piano sustain peddle
at the end of the piece
. there is freedom, opportunity and
brief peace , underlying everything.
tell me if i owe you any money.

newengland's picture

'There's no place like home for the holidays.'  A great American popular classic.

Socialism, communism, globalisation, collectivism, corporatism - all these things are the ways of hateful rootless cosmopolitans who despise anyone with loyalty to home, community, neighbors.

Shizzmoney's picture

"Quick, CTRL-P!" - Ben Bernanke

blindman's picture

‘George Osborne should be arrested!’
.
http://maxkeiser.com/2012/12/05/recession-robbery-george-osborne-should-...
.
artist taxi driver .....

newengland's picture

TSK.

Gordon Brown and Blair are war criminals, avowed warmongers and pets of the biggest banks, and Trilateral Commission.

A short rope and long drop is too good for them.

Cheers.

newengland's picture

TSK.

Gordon Brown and Blair are war criminals, avowed warmongers and pets of the biggest banks, and Trilateral Commission.

A short rope and long drop is too good for them.

Max Keiser? Oh, do grow up, pet of politics.

Cheers.

newengland's picture

DB,

'You're a mean one, Mr Grinch. You're a foul one, Mr Grinch. Your soul is full of gunk.

The three words that best describe you:

Stink. Spank. Skunk.

Your soul is a dump heap.'

And that goes for Goldman Sacks, JP Morgue and their Trilateral Commission masters too.

Happy Christmas, munchkins! Ridicule Mr Grinch :-D

We shall overcome...

Savvy's picture

Long tungsten!

newengland's picture

Short ropes.

The financial alchemists fear the debt slaves. Switzerland is too small and uncaring to house all the rootless cosmopolitans.

Good.

 

Never take your own revenge, beloved, but leave room for the wrath of God, for it is written: “ Vengeance is Mine, I will repay,” says the Lord.

The liars are going to turn upon each other, and bury each other under litigation. That is their venal way.



 

Amagnonx's picture

I think its a bit late for bombshells - most people are settling in for the nuclear winter.

 

After having their eyes burned out, ears blown off and their faces melted by a long series of Fed, Corzine, LIBOR, CRIMEX and associated nuclear blasts - it would take something a little more jarring to stir the corpse of credulity.

resurger's picture

+5

They have to maintain the Status Quo

Disenchanted's picture

 

 

Which gov't bailout did they avoid?

 

March 15 - AIG discloses that several U.S. and European banks were beneficiaries of the taxpayer bailout of the insurer and said that more than $90 billion had been paid to various banks between the September bailout and the end of the year. The banks include Goldman Sachs, Societe Generale, Deutsche Bank, Barclays, Merrill Lynch and Bank of America.

 

from: http://uk.reuters.com/article/2009/04/17/us-zurich-aig-timeline-idUKTRE5...

 

btw...

Deutsche Bank/Alex Brown/Bankers Trust, lots of interesting connections...

http://www.historycommons.org/entity.jsp?entity=deutsche_bank

earnulf's picture

This is not surprising.   Deutsche Bank has been throwing good money after bad for sometime.    There's a property near me that was bought on foreclosure less than a year ago for 25K that DB executed a loan for 70K and is has now foreclosed on that loan (just announced the foreclosure this week, so 2nd time in year for this property).    The property is estimated to be work about 50K and after looking over the property, it's more like the original 25K    Someone just walked off with 50K and the bank is left holding the bag.