Deutsche Bank has agreed to pay a $55m (£35.8m) penalty to settle charges with US regulator the Securities and Exchange Commission, which found the bank had mis-stated financial reports during the height of the crisis that failed to reflect count risk for billions of dollars in losses.
An SEC investigation found that Deutsche Bank overvalued a portfolio of derivatives consisting of leveraged ‘super senior’ trades, through which the bank purchased protection against credit default losses.
Because the trades were leveraged, the collateral posted for these positions by the sellers was only a fraction - about 9 per cent - of the $98bn (£63.8bn) total in purchased protection.
This leverage created a “gap risk” that the market value of Deutsche Bank’s protection could at some point exceed the available collateral and the sellers could decide to unwind the trade rather than post additional collateral.
When the credit markets started to deteriorate in 2008, Deutsche Bank steadily altered its methodologies for measuring the gap risk, gradually reducing the value assigned to the gap risk until it eventually stopped adjusting altogether, the SEC found.
For financial reporting purposes, Deutsche Bank essentially measured its gap risk at $0 and improperly valued its positions as though the market value of its protection was fully collateralised.
According to internal calculations not for the purpose of financial reporting, the bank estimated that it was exposed to a gap risk ranging from $1.5bn (£97m) to $3.3bn (£2.1bn) during that time period.
Andrew J. Ceresney, director of the SEC’s division of enforcement, stated that at the height of the financial crisis, Deutsche Bank’s financial statements did not reflect the significant risk in these large, complex illiquid positions.
He said: “Deutsche Bank failed to make reasonable judgments when valuing its positions and lacked robust internal controls over financial reporting.”
In addition to the $55m penalty, the SEC’s order requires Deutsche Bank to cease and desist from committing or causing any violations or future violations of relevant sections of the Securities Exchange Act. Deutsche Bank neither admits nor denies the SEC’s findings in the order.
The SEC’s investigation was assisted of the German Federal Financial Supervisory Authority and the UK Financial Conduct Authority.
In late April the FCA handed Deutsche Bank a £227m fine for manipulating its submissions used to establish the European interbank lending rate across all major currencies between January 2005 and December 2010.
peter.walker@ft.com
