Deutsche Bank alleged to have hid losses in 2007-09. Good?

The effects of what's being alleged are far from simple.

The German central bank has opened an investigation into whether Deutsche Bank failed to correctly mark credit derivatives to market during the financial crisis. The allegations, which the FT reports were made independently by three whistleblowers from inside the bank, suggest that the bank did so to avoid officially recording losses which may have prompted a government bailout.

The proper reaction to the case is more complex than it might first appear, because this is one of the first allegations of massive misevaluation which deals, not with the the run up to the financial crisis, but the response to it. And it is massive: the derivatives position under investigation was worth $130bn.

But interestingly enough, if mispricing did occur, it may have been for the best. Marking to market is the practice of repricing your portfolio, not according to what you paid for it, but what it's worth at current market prices. So the allegation is that Deutsche Bank had a $130bn position, which had dropped to – let's say – $60bn on the open market; but were apparently recording it as worth $72bn in their books, so as to avoid looking insolvent.

In normal times, that would be pretty clearly a negative. But the days after the collapse of Lehman Brothers were anything but normal. To say markets were panicky is an understatement, and so it's pretty likely that the reaction if Deutsche Bank had revealed those losses would have been terminal. As it was, the bank muddled through, and came out the other side more-or-less intact.

Now, that doesn't mean that if there was wrongdoing it should be ignored. After all, if Deutsche Bank hid losses and collapsed despite that, then the hit that creditors would have taken would have been even bigger. But if, as seems to be the case, DB was considered a healthy bank based on what was reported, and would have been considered unhealthy if it had reported those larger losses, then the world might be better off for it. After all, the last thing the winter of 2008 needed was another bust bank.

It's worth noting as well that these allegations aren't new. As DB says, they are “more than two and a half years old” and have already been investigated by an external law firm which found them “wholly unfounded”. But just be wary of chalking this one up in the "bad behaviour from banks hurts us all" column; the real affects of what's alleged are far from simple.

Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Photo: Getty Images
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There are risks as well as opportunities ahead for George Osborne

The Chancellor is in a tight spot, but expect his political wiles to be on full display, says Spencer Thompson.

The most significant fiscal event of this parliament will take place in late November, when the Chancellor presents the spending review setting out his plans for funding government departments over the next four years. This week, across Whitehall and up and down the country, ministers, lobbyists, advocacy groups and town halls are busily finalising their pitches ahead of Friday’s deadline for submissions to the review

It is difficult to overstate the challenge faced by the Chancellor. Under his current spending forecast and planned protections for the NHS, schools, defence and international aid spending, other areas of government will need to be cut by 16.4 per cent in real terms between 2015/16 and 2019/20. Focusing on services spending outside of protected areas, the cumulative cut will reach 26.5 per cent. Despite this, the Chancellor nonetheless has significant room for manoeuvre.

Firstly, under plans unveiled at the budget, the government intends to expand capital investment significantly in both 2018-19 and 2019-20. Over the last parliament capital spending was cut by around a quarter, but between now and 2019-20 it will grow by almost 20 per cent. How this growth in spending should be distributed across departments and between investment projects should be at the heart of the spending review.

In a paper published on Monday, we highlighted three urgent priorities for any additional capital spending: re-balancing transport investment away from London and the greater South East towards the North of England, a £2bn per year boost in public spending on housebuilding, and £1bn of extra investment per year in energy efficiency improvements for fuel-poor households.

Secondly, despite the tough fiscal environment, the Chancellor has the scope to fund a range of areas of policy in dire need of extra resources. These include social care, where rising costs at a time of falling resources are set to generate a severe funding squeeze for local government, 16-19 education, where many 6th-form and FE colleges are at risk of great financial difficulty, and funding a guaranteed paid job for young people in long-term unemployment. Our paper suggests a range of options for how to put these and other areas of policy on a sustainable funding footing.

There is a political angle to this as well. The Conservatives are keen to be seen as a party representing all working people, as shown by the "blue-collar Conservatism" agenda. In addition, the spending review offers the Conservative party the opportunity to return to ‘Compassionate Conservatism’ as a going concern.  If they are truly serious about being seen in this light, this should be reflected in a social investment agenda pursued through the spending review that promotes employment and secures a future for public services outside the NHS and schools.

This will come at a cost, however. In our paper, we show how the Chancellor could fund our package of proposed policies without increasing the pain on other areas of government, while remaining consistent with the government’s fiscal rules that require him to reach a surplus on overall government borrowing by 2019-20. We do not agree that the Government needs to reach a surplus in that year. But given this target wont be scrapped ahead of the spending review, we suggest that he should target a slightly lower surplus in 2019/20 of £7bn, with the deficit the year before being £2bn higher. In addition, we propose several revenue-raising measures in line with recent government tax policy that together would unlock an additional £5bn of resource for government departments.

Make no mistake, this will be a tough settlement for government departments and for public services. But the Chancellor does have a range of options open as he plans the upcoming spending review. Expect his reputation as a highly political Chancellor to be on full display.

Spencer Thompson is economic analyst at IPPR