Deutsche Bank shows us the financial crisis was even worse than we thought

Their tough times were tougher than anyone knew.
Their tough times were tougher than anyone knew.
Image: Reuters/Kai Pfaffenbach
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Deutsche Bank agreed Tuesday (May 26) to pay a $55 million fine to settle charges in the US that the company downplayed just how badly it was doing during the worst part of the financial crisis.

While the fine seems relatively small in the context of the ongoing flood of crisis-related payouts that now reach into the hundreds of billions of dollars, the settlement is important because it reveals that one of the world’s largest banks teetered closer to the brink of insolvency than anyone knew at the time, and that executives thought they could get around it by just covering up the bad behavior.

Instead of properly accounting for the billions of dollars of risk that came with a portfolio of highly illiquid trades—which would have made Deutsche Bank’s capital levels appear dangerously low to investors and regulators—the US Securities and Exchange Commission said the bank decided to ignore the risk altogether:

For financial reporting purposes, Deutsche Bank essentially measured its gap risk at $0 and improperly valued its Leveraged Super Senior positions as though the market value of its protection was fully collateralized. According to internal calculations not for the purpose of financial reporting, Deutsche Bank estimated that it was exposed to a gap risk ranging from $1.5 billion to $3.3 billion during that time period.

In other words, the bank’s executive weren’t quite sure how much these risky bets were worth, but suspected that whatever dollar amount it put on the exposure would be alarming to investors and regulators—so instead it decided to hide the risks in the very filings designed to keep companies honest and markets transparent.

Deutsche Bank has neither admitted to nor denied the allegations. It said it has cooperated with regulators and that the settlement won’t impact previous financial filings.

The settlement may, however, make investors wonder just how credible those filings really are.