The Latest Deutsche Bank Scandal Reeks On Enron: 103 "Enhanced Repo" Deals To Make Loans "Disappear"

Tyler Durden's picture

Nearly four years after it was first revealed that Deutsche Bank had engaged in various shady deals at the height of the financial crisis designed to mask Monte Paschi's financial woes, on October 1 Italy finally charged the German lender and 6 of its current and former managers, including the infamous Michele Faissola (much more on him soon), Michele Foresti and Ivor Dunbar, for colluding to falsify the accounts of Italy’s third-biggest bank, Monte Paschi, and manipulate the market. Two former executives at Nomura Holdings Inc. and five at Banca Monte dei Paschi di Siena were also charged.

As Bloomberg reported, 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.

To be sure, Deutsche Bank's intimate relationship with Monte Paschi is not new, and had been public knowledge ever since it first emerged in January 2013 that the German bank, as part of its long-standing relationship with the just as scandalous insolvent Italian bank, had used a complex transaction, 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.

However, in a new development in the neverending saga chronicling Deutsche Bank's illicit activities, earlier today Bloomberg reported that Deutsche Bank, indicted for colluding with Monte dei Paschi to conceal the Italian lender’s losses, "mismarked the transaction and dozens of others on its own books, according to an audit commissioned by Germany’s regulator."

In total, Deutsche Bankers arranged 103 similar deals with a total value of 10.5 billion euros ($11.8 billion) for 30 clients, according to the audit, Bloomberg writes citing the audit. In an attempt to "clean up balance sheets", the Frankfurt-based lender, Germany’s largest, adjusted the accounting of 37 of those trades in 2013, in addition to Monte Paschi’s, changing them from loans that had been kept off the books to derivatives.

According to Bloomberg, "the widespread use of a transaction that’s now the subject of a criminal case highlights the lender’s appetite for complexity at a time when the bank was expanding its fixed-income empire. While Deutsche Bank has since cut risky assets and eliminated thousands of jobs to bolster capital, mounting legal costs have become a source of increasing concern to investors, driving shares to a record low." The chronic recidivism may also explain the DOJ's surprising high-ball ask in the ongoing RMBS settlement negotiation, which at $14 billion was about two times greater than DB's litigation reserves. 

According to the German audit, while Monte Paschi was the only client that used a transaction to “window dress” its books, Deutsche Bank didn’t correctly account for similar deals with banks from Italy to Indonesia made between 2008 and 2010. The report also said senior executives didn’t properly authorize the Monte Paschi trade, dubbed Santorini, or more importantly, adequately review the transaction after receiving a subpoena from the U.S. Federal Reserve in 2012.

In a flashback to Lehman Brother's infamous "Repo 105" designed to make the Lehman balance sheet appear healthier than it was for quarter end purposes, often times by tens of billions of dollars, the deals structued by Deutsche Bank were known internally as "enhanced repos", which had two components.

On one hand, the enhanced repos allowed clients to avoid using mark-to-market accounting, which would have forced them to immediately recognize changes in value, according to the audit. Instead, the deals were structured to be eligible for accrual accounting, allowing counterparties to book gains or losses as they occurred over a longer period of time.

On the other, the repos kept the loans off Deutsche Bank’s balance sheet by canceling them out with separate liabilities created in the transactions, according to deal documents reviewed by Bloomberg. Effectively, this mean that Deutsche Bank investors were unaware of the implicit risks carried on the bank's books courtesy of off balance sheet transactions.

Deutsche Bank sold collateral the borrower had provided, such as government bonds, creating a new obligation for the bank to eventually return the bonds. In the original accounting, the loan was offset by that obligation, making it essentially disappear. A smaller balance sheet would make Deutsche Bank look healthier by boosting its capital ratios. Changing the repos to derivatives meant that the bank’s assets more accurately reflected the size of the deals.

It also brings up fond memories of Enron's own Special Purpose Vehicle "accounting practices."

Cited by Bloomberg, Mint's Bill Blain said that “this is the kind of thing that banks used to do - complex investment banking where the more complex, the higher the fees. The world has changed. Successful banks are the ones that have adapted - at Deutsche Bank, we’ve seen very little buy-in.”

But perhaps what is more interesting is how the review of the transactions led to no consequences for DB: the audit said that Fed scrutiny of Deutsche Bank’s Monte Paschi deal in late 2011 led to a subpoena a few months later. Bafin expressed concerns to Deutsche Bank about “balance-sheet cosmetics” soon afterward. It appears that both concerns subsequently faded or were swept under the rug even though the review said that Deutsche Bank’s “risk management regarding the MPS/Santorini transaction as a complex structured financing transaction was materially inappropriate and ineffective,” given the reputational risks involved, according to the review. In retrospect, considering DB's reputation as of this moment, the conclusion was spot on.

As expected, the bank itself found nothing wrong with the deals:

“Deutsche Bank reclassified how it accounted for a number of so-called enhanced repo transactions in September 2013, which had no impact on Deutsche Bank’s reported profit,” Adrian Cox, a London-based spokesman for the lender, said in an e-mail. “The fact that these transactions were enhanced repos does not justify inferring a connection between them and the particular case of Monte Paschi.”

And indeed, from DB's standpoint nothing wrong happened: the bank was paid handsomely for the "complex services" it had provided - a consenting deal between two sophisticated financial entities -  and as Bill Blain correctly summarized, "this is the kind of thing that banks used to do - complex investment banking where the more complex, the higher the fees."

Indeed, and as long as the market was rising and risks remained hidden, DB's clients did not mind either, and in fact were quite delighted. However, once the bottom fell out, and such DB clients as Monte Paschi imploded, what until then was a welcome ruse to fool investors that the bank was healthier than it looked, immediately became fair game for seeking monetary damages, and perhaps criminal charges. DB learned that the hard way this weekend.

But while both DB and its clients can be excused for engaging in such a transaction, it was the regulators' job to make sure such procyclical deals did not take place. And in the particular case they were criminally absent; in fact some may ask if it was Mario Draghi's prerogative, formerly the head of the Bank of Italy when these deals were being arranged, to keep the "enhanced repos" brried as long as possible.

To be sure, it would all unwind in due course: in the July stress tests, the European Central Bank - which previously sternly ignored the DB deals - found Monte Paschi to be the weakest capitalized euro-region lender. The Siena-based bank, the world’s oldest, is now seeking to sell bad loans and raise fresh capital after tapping investors twice before. The bank, whose shares have lost 99 percent of their value since 2008, restated its accounts to change a repo to a derivative on a similar deal with Nomura Holdings Inc. in 2015. The Deutsche Bank trade was settled in December 2013.

Deutsche Bank in February said Bafin completed inquiries into multiple cases including Monte Paschi, pointing to changes already implemented and further measures it planned to take. An overhaul of the management board and the departure of some senior executives contributed to the regulator’s assessment that the company’s remedial actions were sufficient, a person with knowledge of the matter said at the time.

In short, everyone knew what was going on, and everyone kept their mouth shut. Just like in the case of Lehman's infamous Repo 105, a financial instrument which successfully masked the bank's woeful finances until it ultimately imploded, very much the same was as Monte Paschi has not once but three times.

As for Deutsche Bank and its other 102 such deals, we eagerly look forward to the discovery phase, and especially what a certain Michele Faissola, the architect behind all these deals, will say.

* * *

We conclude with an excerpt from today's letter by the above-quoted Bill Blain, who writes the following:

I am shocked, shocked, absolutely shocked, to read on Bloomberg this morning that Deutsche Bank has been indicted for colluding with Monte di Busti for concealing losses, mismarking books and the rest. And guess what? Germany’s premier bank has been doing much the same for a raft of other clients – arranging over 100 deals for 30 clients that allowed them to pass off loans as derivatives. In view of the questions around DB’s own derivatives book.. nope I won’t go there.


Are we surprised? Frankly we are not.

Those who wish to learn more about the underlying accounting can read the following 2013 article: "The Deutsche Bank, Monte Paschi Cover-Up: Tier 1 Capital and an Equity Swap"

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Haus-Targaryen's picture

So DB is a bastardized amalgamation of ENRON, Lehman and Bear.  Sound sustainable.  Good thing it isn't system relevant. 

SomethingSomethingDarkSide's picture

Don't worry though, becuase they're laying off 1,000 of their core employees, which should help procure/manage further business

nibiru's picture

They will find their way into SEC, politics and other clubs we can't afford the ticket.


Maybe it will be enough to at least hurt everybody - for the sake of learning something about economics.

What is bankrupt - can go bust

philipat's picture

But fear not, the EU is about to introduce new legislation which will allow TBTF Banks Derivative positions to be bailed out using public funds. You can't make this stuff up. Even GhordEUs might have a problem explaining this one.

Meanwhile, I have a better idea: Wipe out the Shareholders and Bond Holders of these banks in trouble, bail out the Depositors and let them go BK. Then re-introduce Glass-Stiegel like Regulation and start again, this time allowing the Free Markets to operate.

BuddyEffed's picture

Was the attempt to reclassify them as derivates an attempt to be able to cash out on them in case of collapse where the taxpayers foot the bill per recent changes in first in line rights? Aren't those changes already in place on the American side of the pond? And now they look to implement them in the EU too?

philipat's picture

In the US, Congress, in its infinite wisdom, passed legislation (As usual slipped into another funding Bill at the last moment so that nobody would notice; such is American Democracy) to allow the TBTF Banks Derivative losses not only to be covered by FDIC but at the head of the line for claims against FDIC. That is, however, somewhat academic because FDIC is already HUGELY underfunded, especially in relation to potential Derivatives losses in the Hundreds of Trillions.

BurningFuld's picture

These guys come up with a kitchen sink full of ideas to shuffle loans and deposits around in order to generate FEES where no FEES should exist. It is called robbing the Bank in broad daylight.

Sandmann's picture

Not sure that is possible since only banks know Derivatives actually exist. They are in Dark Pools aren't they ? Noone outside the Banks believes in Derivatives. they are a bit like leptons

philipat's picture

Probably more like Black Holes? And I'm not referring to bankers assholes...although bankers ARE assholes of course...

GRDguy's picture

Rats, roaches and snakes prefer dark places. That explains dark pools (finance) and dark money (politics.)

Haus-Targaryen's picture

I can tell you first hand working with DB on a daily basis, other large banks are now no longer wanting to accept DB counter-party risk and are encouraging clients to go with other lenders, due exclusivly to counter-party risk.  

Who wants to pay some $500k for a financial guarantee from DB which could be worth zero in the next few months, when you can pay the same and get one from Commerz, BNP or Berenberg?

Just as an example.  

SomethingSomethingDarkSide's picture

Oh, just Cryan me a river already!

MillionDollarBonus_'s picture

This further demonstrates why we need a global central bank that imposes a set of regulations preventing this kind of accounting trickery. Because the operations of these banks are global, regulating them can be a nightmare. We cannot continue to regulate banks locally, when they are inherently global. Furthermore, a global cashless currency would make all transactions visible to the global central bank, allowing regulators to automatically detect any accounting errors.

Why Democracy in the Middle East is Worth Fighting For

hedgefunddartthrower's picture

Yes you are right - and Hillary and Bill are just the people to help pick the ones who will do the job best! Just send a few $$$ to their "Foundation" in Canada, and let them go to work choosing the best person(s) for the office... Quid pro quo, agent Starling....

SomethingSomethingDarkSide's picture

You are assuming that nations in different climates, with differing natural resources, and varying access to transportation all operate under the same business cycle. Witness the failure of this idealism, on display since 1971. Without technological progression, globalisation would have impoverished the entire globe by now. Tard. Thx for the opportunity to shit on you this morning!

Jtrillian's picture

Like I said before, you drank the whole damn jug of Kool-Aid.

Clearly, you do not realize who the tricksters are.  You may want to study the history of the FED and the ECB before you pretend to be knowledgeable.  Stating your opinion doesn't make it true. 

I would recommend, as a start, "America - Freedom to Fascism". 

JohnGaltUk's picture

 "America - Freedom to Fascism". The Road To Serfdom predicts it.

BorisTheBlade's picture

Global bank is not enough. For all the crap that's been generated by the financial industry ever since TARP and first bailouts and now exceeds by orders magnitude global GDP, a new interplanetary and better yet Intergalactic Central Bank needs to be set up, headquartered in biggest known Black Hole to suck all excessive liquidity and bad debt. Think bigger, change nickname - Million Dollar soon won't be a bonus, but a price to buy a loaf of bread. 

Sandmann's picture

Robert Rubin stop posting here !

Cloud9.5's picture

You sir are an idiot.  Consider the tiny bubbles in the surf.  They are born, grow up, grow old and die.  Billions of them are running their life cycles independent of each other. The end result is a froth that washes up on the beach.  Then imagine some magician coming along and consolidating all of those billions of bubbles into one gargantuan monster bubble.  Like all of its tiny brothers and sisters it is still a bubble. This bubble though because of its size and complexity is massive.  Even though it is massive, it is still susceptible to the same life cycle as its kindred. When it pops, there goes the beach.

DingleBarryObummer's picture

MDB, can you please make a youtube channel?  All you have to do is read your ZH comments out loud.  I want to see if you can do it without giggling.  Thank you.

hedgefunddartthrower's picture

You had me until the name Commerzbank... That Bank has its own shitstorm brewing..

Haus-Targaryen's picture

You have two identical twins.  One slept with the entire football and baseball team; the other the whole chess club.  

Which one would you rather becomes acquainted with? 

GRDguy's picture

There's a merger in the works. Rotten gets bigger.  

Mustafa Kemal's picture


A german friend of mine told me that he doesnt think the german people are interested in bailing out DB. In fact he said they are tired of that bank. Moreover, he said, that unilike in the USA, under bailins, the depostors accounts are actually insured to a reasonable amount, just like many people in the USA think that they are insured by FDIC, but are not.

Is it correct that depositors are protected under a bailout for DB?

hedgefunddartthrower's picture

Yes, if you think that an IOU from the German Government is worth anything more than the piece of paper it's printed on.  Germany's promise to cover all bank customer losses is only as good as the USA's. If/when the bottom drops out and the economy goes into a tailspin, no one will be bailing anyone out...

UnschooledAustrianEconomist's picture

If they are pretty, both of them same time!

But that's just a dirty old bastard speaking....

BorisTheBlade's picture

But Deutsche is contained, right? Riiight?!! Because that derivative mountain topples Everest like by a factor of 1000x.

Nobody For President's picture

HT, I'm not sure you would want to pay $500k to Commerz either...

nibiru's picture

At least you pulled your money from them before SHTF.


GunnerySgtHartman's picture

So DB is a bastardized amalgamation of ENRON, Lehman and Bear.

Yep - only intensified.  I say let it burn to the ground.

detached.amusement's picture

wheres the next building 7, so the records can be 'contained'

CPL's picture

In the grifters circles what they are doing is called a shell game.  They move the debt problem around to other banking outfits under it's umbrella to 'hide' debt.  In this case it's a feign to distract from an even worse math (debt) problem somewhere else.  A hint:  it's a large trust with one of the oldest financial institutions on the planet.  While distracted by DB, this other much older financial trust implodes and more than likely takes out all the francises that it spawned over 1800 years.

RiverRoad's picture

Not the first bank to "short" their clients.  How's that workin' out for ya DB? 

Santorini is a beautiful place; not so Deutsche Bank.

CPL's picture

I think the communists running things call it capital turn over, most normal people call it state authorized theft.

junction's picture

Someone should do an audit of the Federal Reserve Bank, they would find thousands of Santorinis there.

Sandmann's picture

Skilling at Enron was a former Houston banker 

Lugnut's picture

"the repos kept the loans off Deutsche Bank’s balance sheet by canceling them out with separate liabilities created in the transactions, according to deal documents reviewed by Bloomberg. Effectively, this mean that Deutsche Bank investors were unaware of the implicit risks carried on the bank's books courtesy of off balance sheet transactions"

I'm sure this is just merely a happy co-incidence. No other implied motivation for doing this. Nope. No siree.

jcaz's picture

LOL-  Derivatives for Dummies 101.

Let them burn.

Pieter Bruegel the Elder's picture

Fout years? that's a lot of years :p.

ebworthen's picture

Debt?  What debt?

Glad I don't have to pay my debts either...oh wait...

silverer's picture

These banks would go down hard and fast if people pulled out their "zeroes and ones" and turned it into real money: gold and silver. It would stop the criminality instantly.

ejmoosa's picture

You are correct.  This is actually something the people can fix by doing just what you suggest, and not waiting on the "governments" to take some action.

The governments, however, fear that the people will actually wake up and do this, castrating the government power structures once and for all.

So people, what are you gonna do?

Mustafa Kemal's picture

"So people, what are you gonna do?"


clink, clink

Fireman's picture

The €uropeons are ready to be milked, skinned and butchered by the Pedophile Politburo in Natostan sewer BrUSsel$ for their reptilian bankster owners.

Onward to the great tsunami of toxic derivative muck and the co££ap$€ of the Redshield fiat filth ponzi.

brada1013567's picture

DB should buy Twitter


Think of it Twitter Douche

buzzsaw99's picture

So you were just trying to help out a friend...

there was no evil intended, no malice...

you don't want nothing bad to happen, because it'll never happen again, it's an isolated incident, it's a one shot deal-

[/Louis Tully, Ghostbusters 2]