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Deutsche Bank and the Financial Meltdown

[1]

Dave Emory’s entire life­time of work is avail­able on a flash dri­ve that can be obtained here. [2] (The flash dri­ve includes the anti-fas­cist books avail­able on this site.)

Joseph Goebbels, Hitler’s pro­pa­ganda chief, once said [3]: ‘In 50 years’ time nobody will think of nation states.’ 

COMMENT: In the wake of the shock waves and anx­i­ety cours­ing through the invest­ment and busi­ness com­mu­ni­ty after the “troika’s” capri­cious han­dling of the Cyprus bank­ing cri­sis, it is impor­tant to under­stand that Ger­man banks are any­thing but blame­less [4] in the Euro­pean finan­cial cri­sis.

Although the vast major­i­ty of Ger­mans aren’t aware of this (due to the selec­tive cov­er­age of the euro­zone cri­sis by their media), Ger­man banks are two and a half times as lever­aged as their U.S. and British coun­ter­parts. Ger­man banks have been said to have “poured the drinks” for the par­ty that trou­bled South­ern Euro­pean economies held.

In fact, the bailouts are being used to shore up lever­aged Ger­man banks [5].

Exam­i­na­tion of the prac­tices of Deutsche Bank lead­ing up to, and dur­ing, the finan­cial melt­down are instruc­tive.

Inex­tri­ca­bly linked with the Under­ground Reich, Deutsche Bank was the finan­cial insti­tu­tion of choice for Reich­sleit­er Mar­tin Bor­man­n’s per­son­al ser­vices. (Sup­pos­ed­ly killed in the clos­ing days of the war, Bor­mann not only escaped but presided over the flight cap­i­tal pro­gram that made the Fed­er­al Repub­lic the eco­nom­ic pow­er that it is today. Ger­many con­tin­ues to cling to the fic­tion that Bor­mann is dead, much as the Unit­ed States clings fer­vent­ly to its nation­al polit­i­cal mythology–Lee Har­vard Oswald was a lone nut who killed Pres­i­dent Kennedy and oth­er con­ve­nient, insti­tu­tion­al­ized fic­tions.)

In assess­ing the Ger­man claim to achiev­ing bank­ing supe­ri­or­i­ty, a num­ber of things should be borne in mind with regard to Deutsche Bank:

As the self-right­eous pro­nounce­ments about Cyprus, Greece and the oth­er trou­bled euro­zone coun­tries issue forth from Ger­man politi­cians and bankers, it is impor­tant to remem­ber how the Fed­er­al Repub­lic’s largest bank behaved.

One should remem­ber that the cri­sis ben­e­fits Ger­many, with a weak euro stim­u­lat­ing Ger­man exports and the finan­cial insta­bil­i­ty in Europe dri­ving cap­i­tal into Ger­man finan­cial instru­ments and insti­tu­tions because of their per­ceived safe­ty.

Mar­tin Bor­mann: Nazi in Exile by Paul Man­ning; Lyle Stu­art [HC]; Copy­right Paul Man­ning 1981; ISBN‑0–8184-0309; p. 205. [9]

EXCERPT: . . . The [FBI] file revealed that he had been bank­ing under his own name from his office in Ger­many in Deutsche Bank of Buenos Aires since 1941; that he held one joint account with the Argen­tin­ian dic­ta­tor Juan Per­on, and on August 4, 5 and 14, 1967, had writ­ten checks on demand accounts in first Nation­al City Bank (Over­seas Divi­sion) of New York, The Chase Man­hat­tan Bank, and Man­u­fac­tur­ers Hanover Trust Co., all cleared through Deutsche Bank of Buenos Aires. . . .

Ger­man Bank­ing Supe­ri­or­i­ty Is A Lie (2); Ger­many Watch; 12/6/2012. [10]

EXCERPT: Ger­many’s attempts to man­age the finan­cial cri­sis in Europe to their ben­e­fit, by reg­u­lat­ing every sin­gle finan­cial product/bank/action, and claim­ing their bank­ing supe­ri­or­i­ty as a rea­son and exam­ple, is look­ing more and more like a sick joke...

Josef Ack­er­mann was bull­ish. Even as the glob­al finan­cial indus­try was reel­ing, the Deutsche Bank chief exec­u­tive began 2009 by bold­ly declar­ing that his bank had plen­ty of cap­i­tal and would return to prof­it that year.

In an investor call that Feb­ru­ary, Mr Ack­er­mann said he would pro­vide “as much clar­i­ty as we can on all the posi­tions” to refute the sug­ges­tion that banks such as his had “hid­den loss­es, and one day that will pop up, and then ... we need more cap­i­tal and the only way to go – to ask for cap­i­tal – is to see the gov­ern­ments”.

Dur­ing the pub­lic rela­tions cam­paign waged by Deutsche, its share price recov­ered from €16 in Jan­u­ary to €39 at the end of April 2009, when it report­ed pre-tax prof­it of €1.8bn for the first quar­ter.

But three of the bank’s for­mer employ­ees say the show of strength was based on a fic­tion. In a series of com­plaints to US reg­u­la­tors, two risk man­agers and one trad­er have told offi­cials that Deutsche had in effect hid­den bil­lions of dol­lars of loss­es.

“By doing so, the bank was able to main­tain its care­ful­ly craft­ed image that it was weath­er­ing the cri­sis bet­ter than its com­peti­tors, many of which required gov­ern­ment bailouts and expe­ri­enced sig­nif­i­cant dete­ri­o­ra­tion in their stock prices,” says Jor­dan Thomas, a for­mer US Secu­ri­ties and Exchange Com­mis­sion enforce­ment lawyer, who rep­re­sents Eric Ben-Artzi, one of the com­plainants.

Also unknown to the pub­lic until now is the assis­tance – entire­ly prop­er – pro­vid­ed to Deutsche by bil­lion­aire investor War­ren Buffett’s Berk­shire Hath­away group.

In com­plaints to the SEC made in 2010-11, the employ­ees allege that the main source of over­state­ment was in a $130 bn port­fo­lio of “lever­aged super senior” trades.

In 2005 these were seen as the next big thing in the rapid­ly evolv­ing world of cred­it deriv­a­tives. They were designed to behave like the most senior tranche of a typ­i­cal col­lat­er­alised debt oblig­a­tion, where assets such as mort­gages or cred­it default swaps are pooled to give investors vary­ing degrees of risk expo­sure.

Deutsche became the biggest oper­a­tor in this mar­ket, which involved banks buy­ing insur­ance against the pos­si­bil­i­ty of default by some of the safest com­pa­nies.

Work­ing with Deutsche, investors – many of them Cana­di­an pen­sion funds in search of yield – sold insur­ance to the bank, post­ing a small amount of col­lat­er­al. In return, they received a stream of income from Deutsche as an insur­ance pre­mi­um. On a typ­i­cal deal with a notion­al val­ue of $1bn, the investors would post just $100m in col­lat­er­al – a frac­tion of what would nor­mal­ly be post­ed by an investor writ­ing an insur­ance con­tract.

The small amount of col­lat­er­al did not mat­ter, the product’s cre­ators said. The chance of sev­er­al safe com­pa­nies, such as Dow Chem­i­cal or Wal­mart, all going bank­rupt at the same time was infin­i­tes­i­mal­ly small. It might require a nuclear war. The chance of the investors hav­ing to pay out on the insur­ance appeared impos­si­bly remote. The chance of their col­lat­er­al being used up was incon­se­quen­tial.

Hav­ing bought pro­tec­tion from Cana­di­an investors, Deutsche went out and sold pro­tec­tion to oth­er investors in the US via the bench­mark cred­it index known as CDX. It would earn a spread of a few basis points between the two posi­tions, per­haps 0.03 per cent.

That does not sound like much. But as it amassed ever greater posi­tions, even­tu­al­ly rep­re­sent­ing 65 per cent of all lever­aged super senior trades, it accu­mu­lat­ed a port­fo­lio of $130bn in notion­al val­ue. Over the sev­en-year life of the trade, the few basis points were worth about $270m.

There was a prob­lem, though, which traders either did not fore­see or did not care about when they booked hun­dreds of mil­lions of dol­lars of upfront prof­its. A severe finan­cial shock, well short of nuclear war­fare, could also pro­duce dis­as­trous results. . . .

. . . . “If Lehman Broth­ers didn’t have to mark its books for six months it might still be in busi­ness,” says one of the men. “And if Deutsche had marked its books it might have been in the same posi­tion as Lehman.”

“The Bank Run We Knew So Lit­tle About” by Gretchen Mor­gen­son; The New York Times; 4/2/2011. [11]

EXCERPT: In August 2007, as world finan­cial mar­kets were seiz­ing up, domes­tic and for­eign banks began lin­ing up for cash from the Fed­eral Reserve Bank of New York.

That Aug. 20, Com­merzbank of Ger­many bor­rowed $350 mil­lion at the Fed’s dis­count win­dow. Two days lat­er, Cit­i­group, JPMor­gan Chase, Bank of Amer­ica and the Wachovia Cor­po­ra­tion each received $500 mil­lion. As col­lat­eral for all these loans, the banks put up a total of $213 bil­lion in asset-backed secu­ri­ties, com­mer­cial loans and res­i­den­tial mort­gages, includ­ing sec­ond liens.

Thus began the bank run that set off the finan­cial cri­sis of 2008. But unlike oth­er bank runs, this one was invis­i­ble to most Amer­i­cans.

Until last week, that is, when the Fed pulled back the cur­tain. Respond­ing to a court rul­ing, it made pub­lic thou­sands of pages of con­fi­den­tial lend­ing doc­u­ments from the cri­sis.

The data dump arose from a law­suit ini­ti­ated by Mark Pittman, a reporter at Bloomberg News, who died in Novem­ber 2009. Upon receiv­ing his request for details on the cen­tral bank’s lend­ing, the Fed argued that the pub­lic had no right to know. The courts dis­agreed.

The Fed doc­u­ments, like much of the infor­ma­tion about the cri­sis that has been pried out of reluc­tant gov­ern­ment agen­cies, reveal what was going on behind the scenes as the finan­cial storm gath­ered. For instance, they show how dire the bank­ing cri­sis was becom­ing dur­ing the sum­mer of 2007. Wash­ing­ton pol­icy mak­ers, mean­while, were say­ing that the sub­prime cri­sis would sub­side with lit­tle impact on the broad econ­omy and that world mar­kets were high­ly liq­uid. . . .

. . . . With­in about a month’s time, how­ever, for­eign banks began throng­ing to the Fed’s dis­count win­dow — its mech­a­nism for short-term lend­ing to banks. Over four days in late August and ear­ly Sep­tem­ber, for­eign insti­tu­tions, through their New York branch­es, received a total of almost $1.7 bil­lion in Fed loans.

As the glob­al run pro­gressed, banks increased their bor­row­ings, the doc­u­ments show. For exam­ple, on Sept. 12, 2007, Citibank drove up to the New York Fed’s win­dow. It extract­ed $3.375 bil­lion of cash in exchange for $23 bil­lion worth of assets, includ­ing com­mer­cial mort­gage-backed secu­ri­ties, res­i­den­tial mort­gages and com­mer­cial loans. . . .

. . . . Per­haps the biggest rev­e­la­tion in the Fed doc­u­ments is the extent to which the cen­tral bank was will­ing to lend to for­eign insti­tu­tions. On Nov. 8, 2007, Deutsche Bank took out a $2.4 bil­lion overnight loan secured by $4 bil­lion in col­lat­eral. And on Dec. 5, 2007, Caly­on of France bor­rowed $2 bil­lion, pro­vid­ing $16 bil­lion in col­lat­er­al. . . .

“A.I.G. Lists Banks It Paid With U.S. Bailout Funds” by Mary Williams Walsh; The New York Times; 3/16/2013. [12]

EXCERPT: Amid ris­ing pres­sure from Con­gress and tax­pay­ers, the Amer­i­can Inter­na­tion­al Group on Sun­day released the names of dozens of finan­cial insti­tu­tions that ben­e­fit­ed from the Fed­er­al Reserve’s deci­sion last fall to save the giant insur­er from col­lapse with a huge res­cue loan.

Finan­cial com­pa­nies that received multi­bil­lion-dol­lar pay­ments owed by A.I.G. include Gold­man Sachs ($12.9 bil­lion), Mer­rill Lynch ($6.8 bil­lion), Bank of Amer­i­ca ($5.2 bil­lion), Cit­i­group ($2.3 bil­lion) and Wachovia ($1.5 bil­lion).

Big for­eign banks also received large sums from the res­cue, includ­ing Société Générale of France and Deutsche Bank of Ger­many, which each received near­ly $12 bil­lion; Bar­clays of Britain ($8.5 bil­lion); and UBS of Switzer­land ($5 bil­lion). . . .

“U.S. Sues Deutsche Bank over Mort­gage Approvals” by Nathaniel Pop­per; Los Ange­les Times; 5/3/2011. [13]

EXCERPT: The fed­er­al gov­ern­ment is seek­ing more than $1 bil­lion from Deutsche Bank in a fraud law­suit that could open a new front in a cam­paign to pun­ish com­pa­nies that churned out the low-qual­i­ty mort­gages blamed for spark­ing the finan­cial cri­sis.

The law­suit filed Tues­day in Man­hat­tan fed­er­al court says the Ger­man finan­cial giant’s New York-based home lender, Mort­gageIT, reck­less­ly approved 39,000 mort­gages for gov­ern­ment insur­ance from 1999 to 2009 “in bla­tant dis­re­gard” of whether bor­row­ers could make the required month­ly pay­ments.

The lender repeat­ed­ly lied to the gov­ern­ment about the qual­i­ty of the mort­gages and about efforts sup­pos­ed­ly under­tak­en to fix the prob­lems, accord­ing to the suit.

“Pru­dence was trumped by prof­its and good faith was trumped by good fees,” U.S. Atty. Preet Bharara said at news con­fer­ence announc­ing the lit­i­ga­tion.

The Fed­er­al Hous­ing Admin­is­tra­tion has paid $386 mil­lion in insur­ance claims on bad Mort­gageIT loans, a fig­ure the agency projects will rise to about $1.3 bil­lion. The gov­ern­ment is ask­ing the court to order Deutsche Bank to pay three times the FHA’s even­tu­al loss­es on the loans. The suit also seeks puni­tive dam­ages. . . .