Bundesbank investigating Deutsche Bank derivatives trade

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 $12 billion (€9.34 billion) 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 US Securities and Exchange Commission is among the regulators investigating the claims.

Deutsche has denied the allegations. Yesterday the bank reiterated that the allegations were “more than 2½ 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 $130 billion 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 to 2009.

The complainants, who include risk manager Eric Ben-Artzi and senior trader Matthew Simpson, 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 $4 billion and could have risen to as much as $12 billion. – (Copyright The Financial Times Limited 2013)