A Reputation in Ruin: Deutsche Bank Slides into a Swamp of Scandal

Part 3: Anshu Jain's Toxic Legacies

Photo Gallery: Deutsche Bank Under Fire Photos
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Though Fitschen is the target of the current investigation, he had nothing to do with the past deals. They fell within the jurisdiction of his current co-CEO Anshu Jain, like so many toxic legacies from the recent past.

Jain, a native of India, expanded Deutsche Bank's investment banking arm in London, turning it into an institution in the world of fast money. He was determined to make Deutsche Bank a key player in the industry's big leagues. And he succeeded, but at what price?

In its investigative report on the causes of the financial crisis, the United States Senate singles out only two banks whose dealings with toxic securities it believes played a "key role in the financial crisis": Goldman Sachs and Deutsche Bank.

These questionable transactions are increasingly coming home to roost. The Frankfurt bank faces multiple lawsuits in the United States, brought by a Dutch pension fund, insurances companies and other banks. Some want their invested money back, while others are suing for damages. Here too the bank could be looking at billions in liabilities.

The charges are always the same, and the word "fraud" appears almost everywhere: The bank stands accused of lying, swindling and cheating in conjunction with billions in real estate loan transactions. It is said to have cheated its customers while lining its own pockets. And it stands accused of having gambled more recklessly and exhibited less moral responsibility than many other financial institutions.

More and more new lawsuits are being filed against the Frankfurt bank, including those brought by many US citizens who lost their homes. A number of district attorneys, as well as the Securities and Exchange Commission (SEC), have launched investigations.

Considerable Share of the Blame

This summer, a company headquartered in Ireland filed a lawsuit against Deutsche Bank in a court in New York. The company, Sealink Funding, accuses the bank of fraud. The case is especially interesting, because the eastern German state of Saxony is ultimately behind the lawsuit. German taxpayer money is at stake, as is one of the biggest German scandals in the financial crisis: the near bankruptcy of Sachsen LB, the savings bank partly owned by Saxony. According to the complaint, Deutsche Bank bears a considerable share of the blame for the disaster.

In the years before the financial crisis, Sachsen LB, hoping to become a big player in the market for mortgage-backed securities, established a subsidiary in Ireland. The consequences were catastrophic, and in the end the bank lost billions, bank executives were sued and politicians were driven out of office. In late 2007, Sachsen LB had to be rescued through an emergency sale to another state-owned bank, Landesbank Baden-Württemberg. But the toxic securities that had triggered the drama in the first place were excluded from the deal and spun off into a company for which the government is now liable: Sealink.

The state of Saxony is still liable for up to €2.75 billion. So far more than €400 million in guarantee payments have come due. In the first nine months of 2012 alone, the state had to reimburse Sealink for €150 million in losses.

Sealink's complaint now discloses the source of a substantial portion of the securities that brought down Sachsen LB: Deutsche Bank. The Frankfurt bank sold Sachsen LB's special-purpose vehicles about €960 million in residential mortgage-backed securities in 2006 and 2007 alone. The decision to invest in the securities was "made to a substantial degree because of the role of Deutsche Bank," according to the bank. In other words, the investors were confident that the securities were sound, because Germany's largest bank was involved.

In reality, the securities were "of poor quality, and Deutsche Bank knew it." Even worse, it intentionally "created a false impression." The bank's behavior was "blatant fraud."

A Disgruntled Former Employee

These are some of the detailed accusations in the roughly 140-page complaint, which describes how Deutsche Bank allegedly cheated investors at Sachsen LB. According to the document, all of the securities are nothing but "junk" today, the losses are "substantial" and the culprits are a number of major banks, which are also being sued, along with Deutsche Bank.

For these reasons, the complaint continues, the transactions should now be "reversed," meaning that Deutsche Bank should pay back hundreds of millions of dollars. The lender rejects the accusations. "Deutsche Bank considers the complaint to be unfounded and will defend itself with all legal means at its disposal," the bank said in a statement.

As similar cases and new accusations continue to surface, it appears that the past is catching up. A few days ago, former employee Eric Ben-Artzi publicly accused the bank of having improperly accounted for complex derivative transactions during the financial crisis, thereby avoiding or covering up losses of at least $4 billion.

The case has been before the SEC for two years now, but the financial regulator has yet to comment on it. If a penalty is imposed on Deutsche Bank, Ben-Artzi stands to receive a substantial reward as a whistleblower. Deutsche Bank energetically rejects the accusations and has hired an outside law firm and accounting firm to look into the matter. The bank also points out that BaFin, the German financial regulator, had no objections to its accounting practices.

But Ben-Artzi is sticking to his guns. He has proposed that he present his arguments and calculations to the Deutsche Bank supervisory board at its next meeting. "Dr. Ben-Artzi believes that the member of the supervisory board have not yet received an accurate and complete overview of all facts and legal aspect," says Ben-Artzi's attorney, Jordan Thomas.

Huge LIBOR Fine

Opinions differ within the supervisory board on Ben-Artzi's offer. But insiders say that Supervisory Board Chairman Achleitner has no intention of once again giving Ben-Artzi a platform for his accusations, which he feels are unfounded.

Much depends on the supervisory board at the moment. Achleitner was the CFO at insurance giant Allianz, and before that he headed the German branch of Goldman Sachs. He knows the industry, and yet he is untainted by the questionable deals of the past. His job is to determine what exactly the bank and its leadership have done wrong.

In the LIBOR case, Achleitner, with a view toward the role of management, has already drawn his conclusions. Worldwide financial transactions worth trillions of dollars hinge on the LIBOR interest rates, which are compiled using information provided by large commercial banks to the British Bankers' Association. A cartel of traders from a large number of banks, including Deutsche Bank, allegedly manipulated these interest rates for their own benefit. The EURIBOR interest rates, the counterpart to LIBOR in the euro zone, were also reportedly the subject of manipulation attempts.

If Deutsche Bank is slapped with fines similar to those imposed on its competitors, it will be expensive. This summer, Barclays paid $468 million to settle its dispute with British and American authorities. And the major Swiss bank UBS was fined $1.5 billion on Wednesday for its role, even though it cooperated with authorities at a very early juncture and, in return, was afforded something of a star-witness status by some regulators.

Deutsche Bank enjoys a similar status with the European Commission, and yet both US and British financial regulators are investigating the Frankfurt bank. BaFin is nearing the end of a special audit and expects to analyze its results this spring.

It remains unclear whether Jain or another member of top management will come away from the scandal unscathed. The LIBOR rates were determined in the global markets division, which Jain formerly headed. Achleitner has stated that current and former executive board members were not involved. BaFin hasn't stated its position yet.

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