Deutsche Bank Charged By Italy For Market Manipulation, Creating False Accounts

Tyler Durden's picture

For Deutsche Bank, when it rains, it pours, even when everyone tries to come to its rescue. 

One day after its stock soared from all time lows, following what so far appears to have been a fabricated report sourced by AFP which relied on Twitter as a source that the DOJ would reduce its RMBS settlement amount with Deutsche Bank from $14 billion to below $6 billion (and which neither the DOJ nor Deutsche Bank have confirmed for obvious reasons), moments ago Bloomberg reported that six current and former managers of Deutsche Bank, including Michele Faissola, Michele Foresti and Ivor Dunbar, were charged in Milan for colluding to falsify the accounts of Italy’s third-biggest bank, Monte Paschi (which itself is so insolvent it is currently scrambling to finalize a private sector bailout) and manipulate the market. Two former executives at Nomura Holdings Inc. and five at Banca Monte dei Paschi di Siena were also charged.

The news comes in a time of heated relations between Italy and Germany, when the former has been pushing to get German "permission" for a state bailout of its insolvent banks only to be met by stiff resistance by the latter as Merkel and Schauble have demanded a bail-in of private investors instead, even as - ironically - it has been Deutsche Bank's woeful financial state that has been in the Wall Street spotlight this past week.

The charges culminate a three-year investigation by prosecutors that showed Monte Paschi used the transactions to hide losses, leading to a misrepresentation of its accounts between 2008 and 2012. The deals came to light in January 2013, when Bloomberg News reported that Monte Paschi used derivatives to hide losses.

As BBG adds, "the charges deal another blow to Deutsche Bank, which is seeking to reassure investors and clients that it will be able to withstand pending U.S. penalties over the bank’s sale of mortgage-backed securities and its dealings with some Russian clients."

In what appears to be another case of Wells Fargo-esque scapegoating of junior employees to keep senior execs off the hook, just weeks after Milan prosecutors shelved a probe against Monte Paschi's former chairman and CEO for alleged market manipulation and false accounting as it "risked undermining investor sentiment", a judge approved a request by Milan prosecutors to try the bankers on charges involving two separate derivative transactions arranged with Nomura and Deutsche Bank, said a lawyer involved in the case who was in the courtroom Saturday as the decision was announced.

DB's Faissola, whose roles included overseeing rates and commodities, was put in charge of Deutsche Bank’s combined asset and wealth management division in 2012 when Anshu Jain and Juergen Fitschen took over as co-chief executive officers of the Frankfurt-based lender. Deutsche Bank last October said Faissola would leave after a transition period, and John Cryan has replaced Jain and Fitschen as CEO.

Just as importantly, the firms are also named as defendants in the indictment, as the Italian law provides for a direct liability of legal entities for certain crimes committed by their representatives. Which means even more legal charges, fines and settlements are looking likely in DB's future.

A trial is scheduled for Dec. 15.

Both DB and Nomura have denied any guilt:  “We will put forward our defense in court and have no further comment to make today,” Deutsche Bank said in an e-mailed statement. “I’m convinced that the debate will definitely show that Nomura has no responsibility over Monte Paschi’s false accounting,” said Guido Alleva, a lawyer for Nomura. A spokeswoman for the Japanese bank and a Paschi spokesman declined to comment.

As Bloomberg adds, Monte Paschi’s former executives Giuseppe Mussari, Antonio Vigni and Gianluca Baldassarri, and Nomura’s former bankers Sadeq Sayeed and Raffaele Ricci also will face trial for allegedly obstructing regulators after the investigation revealed that the 2009 deal, dubbed Alexandria, was designed to disguise losses from a previous investment.

The basis for the legal action are two deals conducted by Deutsche Bank and Nomura which took place at the height of the financial crisis, meant to mask Monte Paschi's financial woes. Prosecutors have been reconstructing how Monte Paschi’s former managers misrepresented the lender’s finances in the years through the two deals signed with Deutsche Bank in 2008 and Nomura in 2009.  The investigation revealed Monte Paschi arranged the transactions to hide billions in losses that led to false accounting between 2008 and 2012, according to a prosecutors’ statement released Jan. 14, when they completed the investigation.

The fraud first came to light in January 2013, when Bloomberg News reported that Monte Paschi used the transaction with Deutsche Bank, dubbed Santorini, to mask losses from an earlier derivative contract. The world’s oldest bank restated its accounts and has since been forced to tap investors to replenish capital amid a slump in its shares. It’s now attempting to convince investors to buy billions of bad loans before a fresh stock sale.

Zero Hedge previously posted an in depth look of the incestuous relationship between Deutsche Bank and Monte Paschi represented by the"Santorini" deal, which we repost below for those unfamiliar with the nuances of the deal which will likely see renewed media interest in the coming days.

* * *

The Deutsche Bank, Monte Paschi Cover-Up: Tier 1 Capital and an Equity Swap

At Deutsche Bank, the job title “risk manager” might be more appropriately characterized as “campaign manager.” That is, Deutsche Bank is no more concerned with the active mitigation of risk than the unscrupulous politician is with actively avoiding extra marital affairs. Like campaign mangers then, risk managers at Deutsche Bank must accept the fact that occasionally (or perhaps quite often) messes will be made and spin campaigns will need to be devised and deployed in order to keep public opinion from turning sour and in order to keep the few regulators who aren’t on the payroll from stirring up any trouble. In short, risk management at the firm seems to be more reactive than proactive and the combination of pliable mathematical models, questionable ethical standards, and a clueless public makes it possible for the firm’s quant spin doctors to disappear vast amounts of risk from the books without anyone getting wise.

Apparently however, even the mainstream media has gotten wise to the act. Recently, CNBC’s John Carney and DealBreaker’s Matt Levine observed that Deutsche Bank was able to report a higher Tier 1 capital ratio in its most recent quarter not by reducing the loans on its books or by increasing its earnings, but by changing the way it calculates its risk weighted assets. In other words, it manipulated its mathematical models to achieve more favorable results.

It is ironic that these commentators should be the ones calling out Deutsche Bank for crimes against mathematics. After all, a little over a month ago, these same two journalists (and many of their peers) trivialized the whistleblower claim filed against Deutsche Bank by a Mr. Eric Ben-Artzi, a PhD mathematician from the most prestigious school of applied mathematics in the country, NYU’s Courant Institute.

In any case, on January 17, Bloomberg reported that “Deutsche Bank designed a derivative for Banca Monte dei Paschi di Siena SpA at the height of the financial crisis that obscured losses at the world’s oldest lender before it sought a taxpayer bailout.” The Bloomberg story set-off a wave of investigations which ultimately revealed that the world’s oldest bank made a series of bad derivatives bets that will ultimately cost it three quarters of a billion euros. The Bank of Italy has since approved a 3.9 billion euro taxpayer-sponsored bailout. The story has taken several decisive (albeit hilarious) turns for worst over the past two weeks and the whole thing now reads like a lost chapter of The Da Vinci Code, complete with treacherous characters, scandalous deal-making, and a secret contract locked away “in a concealed safe in a 14th century Tuscan palace.”

As intriguing as all of that is, it is the Deutsche Bank connection which is of particular interest. The firm’s role in helping Monet Paschi conceal losses speaks to the depravity of Deutsche’s corporate culture and to the firm’s willingness to share its expertise in the art of obfuscation with its clients. Here is Bloomberg’s description of what happened:

Monte Paschi was facing a 367 million-euro loss on a… Deutsche Bank derivative linked to its stake in Intesa Sanpaolo SpA (ISP), Italy’s second-biggest bank, according to two documents drafted by executives at the German lender in November and December 2008…
Monte Paschi, which originally took the stake in one of Intesa’s predecessor companies more than a decade earlier, had entered into a swap with the German bank in 2002 to raise cash from the holding to bolster capital while retaining exposure to Intesa’s stock-price moves, the documents show.

Intesa shares fell more than 50 percent in the 11 months through November 2008, and the decline would have forced Monte Paschi to post a fair-value loss on the swap at the end of the quarter, threatening the bank’s capital and earnings, the derivatives specialists who examined the documents said.

“Monte Paschi was facing a loss on its equity position and may have needed to find a way around it,” Satyajit Das, a former Citigroup Inc. (C) banker and author of half a dozen books on risk management and derivatives, said after reviewing the files.

This is the first part of what would eventually become a multi-legged trade that spanned the better part of a decade. Although the mainstream media has done a decent job of describing the mechanics of the transaction, I wanted to know the details, so I contacted Bloomberg to see if they would be interested in sharing the 70 some odd pages of documents on which they based their original story. Not surprisingly, they informed me that they are not currently able to share the evidence. While they promised that I would be the first to know if the situation changed, I thought I might take a stab at explaining, in detail, what exactly went on between Deutsche and Monte Paschi in lieu of Bloomberg’s top-secret document stash.

I cannot, of course, be sure that this is entirely accurate without access to primary sources, but this should serve as a decent outline for those interested in learning how the largest bank in the world conspired with the oldest bank in the world to effectively hide hundreds of millions in losses from shareholders.

For our purposes, the story begins on page 310 of Monte Paschi’s 2002 annual report. Under “Acquisitions, Incorporations, and Sales,” the following passage appears:

Sale to Deutsche Bank AG London Branch of a 4.99-percent holding in San Paolo-IMI S.p.A. Along with this sale, the Bank invested EUR 329 million to purchase a 49-percent interest in the newly incorporated Santorini Investment Ltd. Partnership, a Scottish company that is 51- percent owned by Deutsche Bank AG. The aggregate price of the sale was EUR 785.4 million; the difference (EUR 425.3 million) between the sale price and the carrying value (EUR 1,210.7 million) was charged to the revaluation reserve set up in accordance with Law 342/2000. The residual amount was allocated to shareholders' equity through a bonus share capital increase authorized by a resolution of the extraordinary shareholders' meeting of 30 November 2002. (emphasis mine)

This is the genesis of the Deutsche Bank deal and while it may sound convoluted, the bank’s motives seem relatively clear in retrospect. First, consider the effect the transaction above had on Monte Paschi’s statement of shareholders’ equity:

First, the bank had to account for the 425 million-euro difference between the carrying value of its stake in San Paolo bank and the amount Deutsche Bank paid for those shares. This was effectively a loss, and as it turned out, Monte Paschi had held what it called an “extraordinary meeting” on November 30 of 2002 to get shareholder approval to use its entire 715 million-euro revaluation reserve (green arrow above) for an increase in the par value of the ordinary and savings shares and to absorb the loss on the sale of the San Paolo stake to Deutsche Bank (this is outlined on page 383 of the 2002 annual report).

Because revaluation reserves didn’t generally count towards Tier 1 capital, the bank was able to absorb the loss on the sale without affecting the area it was really concerned about: core capital. As an added benefit, Monte Paschi was able to use the remainder of the revaluation reserve (the 209 million left over after it absorbed the loss on the sale of the shares) to raise the par value of its own shares, resulting in an increase in its share capital (yellow arrow above). This of course, led to a concurrent increase in the bank’s Tier 1 capital ratio. Effectively then, Monte Paschi turned a 425 million euro loss on the sale of an equity stake into a .2% increase in its Tier 1 capital ratio (there were other components which contributed to the increase, but the point stands).  This is likely what Bloomberg was referring to when it said Monte Paschi was seeking “to bolster capital” by using its equity stake in San Paolo.

As noted above, Monte Paschi and Deutsche set up “Santorini Investment Ltd” after the completion of the equity sale. This is where the “equity swap” referenced by Bloomberg comes into play. From what I can tell, this was some derivation of a “total return equity swap.” Here, the deal began with the sale of the San Paolo stake to Deutsche Bank. “Santorini Investment Ltd” (the ”partnership” Deutsche and Monte Paschi set up after the sale) was essentially a special purpose vehicle (SPV) through which the swap was effectuated.

Santorini was majority owned (51%) by Deutsche Bank – Monte Paschi controlled 49%. A portion of the cash from the original sale of the San Paolo stake to Deutsche was effectively used to finance Monte Paschi’s stake in Santorini. Through the SPV, Monte Paschi was able to retain exposure to the share price fluctuations of its San Paolo stake. Typically in such a deal, there is either a floating rate or a fixed rate of interest paid over the life of the swap to the entity to which the shares were sold (in this case Deutsche) based on the notional amount of the shares traded (so 785 million euros here). When the swap matures, the original seller of the shares (Monte Paschi here) will receive the difference between the price of the shares when the swap was originated and the price of the shares at maturity.

Obviously, if the shares rise over time the original seller makes a profit on the swap (minus any interest payments made along the way). Of course the stock could go up or down over the life of the transaction so there is a very real possibility that the original seller of the shares will have to make a payment at maturity in addition to the interest payments made along the way. Note also that if the stock drops over the course of the deal, the original seller may be forced to post collateral to the buyer of the shares. Through Santorini then, Monte Paschi appears to have entered into a total return equity swap with Deutsche Bank referencing the 4.99% stake in San Paolo. Monte Paschi paid Deutsche interest on the deal and was on the hook for margin calls in the event the value of San Paolo’s shares dropped. The following graphic is a simplified diagram of the swap based on an unrelated total return swap diagram originally posted on Sober Look:

It is important to remember that one of the pitfalls of entering into such an agreement is that the seller of the shares may initially have to recognize a capital loss on the sale.  By using its revaluation reserve, Monte Paschi was able not only to effectively avoid this for the purposes of core capital, but was in fact able to boost its Tier 1 capital ratio while retaining exposure to the share price movements of the sold San Paolo stake through the swap deal with Deutsche.

The original term of the deal was 3 years but according to Monte Paschi’s 2004 annual report, the swap was extended to 2009:

“…with reference to the investments held in Santorini Investment Limited Partnership, the capital loss, due to the compliance with several accounting principle, is not deemed to be permanent in view of the assets underlying the financial contracts, which anyway increased in value in the last period; moreover, the contract was renewed for further 4 years (new expiry: 31 May 2009) while keeping the advance redemption right.”

On January 1 2007, San Paolo merged with Banka Intesa hence the following passage from the Bloomberg piece:

“Monte Paschi,… originally took the stake in one of Intesa’s predecessor companies… [and] entered into a swap with the [Deutsche] in 2002 to raise cash from [that]…while retaining exposure to Intesa’s stock-price moves.”

It appears then, that Monte Paschi effectively gained exposure to Intesa’s stock by default. Whatever the case, the collapse in the price of Intesa’s shares in 2008 resulted in a 367 million euro impairment to Monte Paschi’s Santorini investment. Desperate, the bank asked Deutsche Bank what could be done. Ultimately, it was determined that Deutsche and Monte Paschi would restructure Santorini and devise a replacement swap that would allow Monte Paschi to hide the losses on its original position.

The replacement swap will be the topic of a follow up piece. For now, consider that Deutsche Bank and Monte Paschi were able, via a stock purchase and a subsequent equity swap, to boost Monte Paschi’s 2002 Tier 1 capital (even though the stock purchase resulted in a nearly half billion euro capital loss for Monte Paschi), while ensuring that Monte Paschi retained exposure to the underlying shares. At the time, it undoubtedly seemed like a good idea – perhaps even a win-win situation. Of course, the near collapse of the worldwide financial system in 2008 would turn the deal into a nightmare for Monte Paschi, but as the Italian bank learned, when Deutsche Bank’s risk management department is involved, “losses” are just an illusion.

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BaBaBouy's picture

DB $50 Trill Way too Big To Fail ~~~

DogeCoin's picture

Naw dawg, they're too big to bail.

DeadFred's picture

DB will be a canary in the coal mine. If DOJ doesn't cut the fine and Italy doesn't settle for pennies and other cases are added on... well, then you know the end game is here. What are the odds that after saying that prosecuting bankers would cause systemic risk they didn't know the risk of a $14 B fine to a bank holding $40 trillion in derivatives? They either drop the fine much lower or we know they have decided it's time for the crash.

Truther's picture

DB: "Italy is Racissss and Sexissss".

Motasaurus's picture

Everyone Germany has hurt is going to find a way to go after DB in the coming months. The EU has spent the last ten years embroiled in a financial war. Germany is going to get hit by counter attack after counter attack.

WordSmith2013's picture

Clearly, the very controlled demolition of DB has begun.


The Controlled Demolition of Deutsche Bank And Financial Collapse Of Europe
VinceFostersGhost's picture



For Market Manipulation, Creating False Accounts


Yeah....we do that here in America too....

nibiru's picture

Will it be? After they have so much good going for them from DOJ, maybe even Merkel will accept helicopter money from Draghi to get this off her back. Since it could be launched as a help for Italy and France (banks) primarily, they could also silently help DB. 


Everyone is happy. No one is sad (apart from people realising in 5 years they are even poorer than before). Europe may be done after this one ladies and gentlemen.

And it took more than only the biggest, unprecedented immigration crisis. Merkel is a tough one. All according to the plan.

Huckleberry Pie's picture

Fabricated report of a bailout that relied on Twitter as messenger. Then add this...yup.

eforce's picture

It was a good bank, DB dindu nuffin!

lance-a-lot's picture
lance-a-lot (not verified) eforce Oct 1, 2016 8:35 PM

LIES GALORE, not just in banking...

Yukon Cornholius's picture

Helicopter money quickly folowed by a 100% bail-in. BOOM! Problems solved.

capital_one's picture
capital_one (not verified) Yukon Cornholius Oct 1, 2016 11:26 AM

My last pay check was $9500 working 12 hours a week online. My sisters friend has been averaging 15k for months now and she works about 20 hours a week. I can't believe how easy it was once I tried it out. This is what I do...

Mr. Universe's picture

So what, you pimp out your whore sister and her ho-bag friends. Only scum of the earth live off the work of others, are you by any chance a lawyer/politician/specialsnowflake? 

USofAzzDownWeGo's picture

Markets are closed in Germany on Monday for some holiday. 

HardlyZero's picture

This is probably how it goes.

DB and EU have been bubbling around for years, but now may be the time.

DOJ is just kicking it over and getting Germany/EU to man-up and 'make' the largest banks 'good'.

Japan did it 30 years ago.

US did it in 2008 collapse, now it is EU's turn to do the same or similar.

Not sure if it will work out, no one is sure what happens next.


The Europeans have been doing this for a few thousand years and they maintain their bail-in structure to the end.

rccalhoun's picture

hillary and her "for the children" bull shit.  hey, hillary, if you really were "for the children", you wouldn't enslave every unborn child with your generations debt.  

what the current generations are doing to future generations is the ultimate scum. i'm ashamed.  all of us fuckers over consuming and passing the bill on to the unborn.  we are fucked up.

its beyond fixable.  war is inevitable.

Supafly's picture

It's Hitler Day.  They don't really broadcast it.

Dugald's picture


Back up on Tuesday.......

Folkvar's picture

Nothing I love more than EU nations at war with each other, all of this will hasten the demise of that nasty EU dictatorship. 

Dugald's picture


Germans Hurting........Music to  my ears..!

new game's picture

yeah, they have been ass raping for quite a run here. turnabout and bend over tyme has arrived.

not to mention the real rapping of the germans by the virgin seekers. what a fucking joke.

doesn't anybody have the balls to pull a trigger anympoar?

shovelhead's picture

Oh yeah,

The shitmah guys. Spooky Kabbalah Bible codes and Apocalyso music.

Witchy women and the Voodoo you do.

I feel a rapture coming on.

I probably should change my underwear just in case.

bob_bichen's picture
bob_bichen (not verified) shovelhead Oct 1, 2016 10:47 AM

There is a dude who drives around town with a bumper sticker that reads:

"In case of rapture, I will leave my keys in  the car!"


I have also seen:

"In case of you are raptured, can I have your stuff?"

New_Meat's picture

you'll have time to change it after...

auricle's picture

Aren't there laws against this bullying and micro agression behaviour? #safespaceforbanks

Soundgardener's picture

The fact they can't get Monday's fucking date right might give non-delusionals pause.

Nutters, however, fill your boots!

ArgentoFisico's picture

Mutterficker Maccaroni! /sarc

Europe was fine 20 years ago, nobody hated no one else ... now it's all a recrimination: greeks, Spaniish and italians against germans, brits fighting with germans and french and luxemburgeese ... well done folks in Bruxelles! Really WELL DONE


3Wishes's picture

And hungry for blood.

JackT's picture

I just don't see how reducing the 14B is going to stop anything. DB made its bed before the idea of 14B even existed.

HardlyZero's picture

DOJ is forcing Germany/EU to 'fix' or very soon.

DB is probably very unstable, so DOJ is kicking it over...what it looks like.

This is the DOJ's last act, but can was kicked for many years !

nibiru's picture

Plus, they are too big to jail now.


But the question still is there - who will print the money to pay their debts? Draghi? Merkel? Maybe some Chinese are going to take over the biggest bank in Europe? Now, that would be literal 'Enter the dragon'

Tom Green Swedish's picture

I believe the DOJ cut the fine for all the banks - as stated by Mr Cryan himself. However there is one major difference between EU and US banks.  The banks in the US are making money.  The EU are losing money.

The top 5 US banks made some 80 billion in profits.  Deutsche Bank lost 7 billion.  Not sure how the US banks are going to reduce exposure to this pig.

bob_bichen's picture
bob_bichen (not verified) nibiru Oct 1, 2016 10:52 AM

Since the real gold is gone and the vaults are empty, the banksters have turned those same vaults into "Bankers' Safe Spaces!"  (They have gold covered tungsten to play with, empty cash bags for pillows, and the reverse side of lots of fake account documents to draw and color on.  They also have that stale cookie stash from the public lobby.  Life is good.)

Bless their greedy, vile little hearts!

stocktivity's picture

It's all Bullshit!!!   Another day of a potential crash coming followed by another day of central banks buying the rigged casino.

khnum's picture

agreed somebody is making a motza with this good news/bad news cycle on this zombie

GreatUncle's picture

What is "to big to fail" and "to big to bail" actually called?

The god bank?


Hungman's picture

The FED and their masters want to pull the plug. They are using DB just like they used Lehman. 

back to basics's picture


If this rancid pieces of shit goes down, the entire financial system goes down, not just Europe. The FED knows that as good as anyone and that's why the coordinated central bank "see, everything is fine" buying DB farce that took place on Friday. 

Hungman's picture

Only way to usher in the single currency is to destory all of the others, especially the dollar. Lehman was an accident too right?

GreatUncle's picture

We cannot keep stacking up ever greater global debt just like Japan did so it has to start being removed.

As for the DB judgement of around $6 billion, I guess the FED won't have to CTRL-P $6 billion but is this the new game fine and penalise to earn your income?

US banks could quite easily be fined the same for many of their practices.

new game's picture

fined to death, death by fine. vw next? fascism on steroids.

someone fine my xwife, lol...

USofAzzDownWeGo's picture

I agree with you, not who you replied to. Do you really think that "they" want the whole fiat currency system to end???? FUCK NO because that's the end of them. There's a reason why they do QE, blow the markets up, blow up asset prices with digital fiat currency. They've taken over the entire world using fiat currency. Why in the fuck would they want to give that up? Giving that up means giving up their power. Anyone who thinks they want this is a fucking idiot. 

GRDguy's picture

Once TPTB has TITLE, it's done.  This happens when no one can pay back their debt. It's all legal-like, especially creating the money to loan out of thin-air.

new game's picture



Twox2's picture

"Are you not entertained?"