The German central bank Bundesbank has opened an investigation into claims that Deutsche Bank hid losses of up to $12bn by misvaluing credit derivatives during the financial crisis to avoid a government bailout.
As part of an inquiry into allegations, Bundesbank investigators are scheduled to visit New York in the second week of April to consult former employees who have knowledge of Deutsche Bank’s dealings in complex credit derivatives between 2006 and 2009, reported the Financial Times.
Deutsche 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”.
Deutsche Bank, in a statement, said: “Moreover, the investigation revealed that these allegations stem from people without responsibility for, or personal knowledge of, key facts and information. We have and will continue to co-operate fully with our regulators on this matter.”
The bank’ three former employees, including Eric Ben-Artzi and Matthew Simpson, approached the US Securities and Exchange Commission (SEC) independently with allegations that Deutsche Bank misvalued a giant derivatives position, worth $130bn on a notional basis. They alleged that the bank’s traders avoided recording mark-to-market losses during the turmoil in credit markets in 2007-09.
The employees further alleged that the losses for the whole portfolio would have surpassed $4bn and could have increased to as much as $12bn had the proper valuations been made on the positions during the turbulent period.
In their submission to regulators, the former employees alleged 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, reported FT.
The complex credit derivatives, also known as leveraged super senior trades, were designed to resemble the top, or super senior, tranche of a collateralised debt obligation.