The Bundesbank has launched an investigation into claims that Deutsche Bank hid billions of dollars of losses on credit derivatives during the financial crisis, according to people familiar with the situation. Investigators from Germany’s central bank are scheduled to fly to New York next week as part of an inquiry into allegations that misvaluing credit derivatives allowed Deutsche to hide up to $12bn in losses, helping it avoid a government bailout. They intend to interview people, including former employees, who have knowledge of Deutsche’s dealings in complex credit derivatives – known as leveraged super senior trades – between 2006 and 2009. The Bundesbank inquiry opens a new front in the investigation. The Securities and Exchange
Commission is among the regulators investigating the claims, reported in the Financial Times in December. Deutsche has denied the allegations. On Wednesday the bank reiterated that the allegations were “more than two and a half years old” and had been the “subject of a careful and thorough” investigation by a law firm, which found them “wholly unfounded”. “Moreover, the investigation revealed that these allegations stem from people without responsibility for, or personal knowledge of, key facts and information,” Deutsche said. “We have and will continue to co-operate fully with our regulators on this matter.” Three employees approached the SEC independently with allegations that the bank misvalued a giant derivatives position, worth $130bn on a notional basis. They alleged that the bank’s traders – with the knowledge of senior executives – avoided recording “mark-to-market” losses during the unprecedented turmoil in credit markets in 2007-2009. The complainants, who include Eric Ben-Artzi, a risk manager, and Matthew Simpson, a senior trader, alleged that the bank misvalued the positions by failing to account for losses it faced when the market worsened. Had the proper valuations been made on the positions during the tumultuous period, they alleged, the losses for the whole portfolio would have exceeded $4bn and could have risen to as much as $12bn. The leveraged super senior trades were designed to resemble the top, or super senior, tranche of a collateralised debt obligation. Deutsche’s counterparties would sell credit protection against a pool of high-quality companies. Deutsche would pay a few basis points for this protection. The trade was “leveraged” because on a deal of $1bn the investors would provide only $100m in collateral and had the right to walk away without posting more. The former employees’ submissions to regulators contained different complaints. The common theme was an allegation that Deutsche booked profits on positive moves in the trade but avoided booking losses owing to the increasing risk that its counterparties would opt to walk away rather than pay out on the insurance. This risk is known as the “gap
option”. The Bundesbank declined o comment.