Deutsche Bank's $5 Billion Subprime Short: "Duping CDO Fools"

[Magda Hassan]

Emails Show How Greg Lippmann Built Deutsche Bank's $5 Billion Subprime Short: "Duping CDO Fools" Courtney Comstock | Apr. 14, 2011, 10:05 AM | 2,257 | 12 A A A inShare 8 The Senate Committee assigned to report on the causes of the financial crisis used then-trader Greg Lippmann's emails in their 650-page report as an example of the view within Deutsche Bank that the subprime market was collapsing. The report was released today. Click here to download it. The committee is trying to establish that banks knew the market was souring as early as 2005, yet inflated the bubble anyway. Senator Levin, who led the committee, believes that banks knew what was going on, and misled clients so they they could ultimately reap the profits (which they did). Here are the examples the report uses from Lippmann's emails to show that bankers knowingly shorted the market while hawking the products to any dim-wits who would buy them. From the emails, a pattern emerges. First he found "crap" that "blows": "This bond blows" (regarding a subprime RMBS security issued by Long Beach) - 2/24/2006 "Yikes didn't see that. Half of these are crap and rest are ok... Crap-heat pchlt sail tmts." (The acronyms refer to "Home Equity Asset Trust" "People's Choice Home Loan Securities Trust," "Structured Asset Investment Loan," and "Terwin Mortgage Trust.") - 4/5/2006 "This is a good pool for you because it has a fair number of weak names but not so many that investors should balk (I wouldn't add more of these) and also has only a few names that are very good." (Advising Derek Kaufman at JPMorgan) - 6/23/2006 "You can certainly build a portfolio by picking only bad names and you have largely done that as Rascahl is considered bad as is Fremont (bsabs fr, fhlt, jpmac fre, sabr fr, nheli fm deals) ace, arsi and lbmlt." (The acronyms refer to the names of lenders. Lippmann called "ACE," "bad" even though it was a Deutsche Bank-created asset.) - 8/4/2006 "I was going to reject this [long purchase of a synthetic CDO] because it seems to be a pig CDO position dump 60^ but then I noticed winchester [DB affiliated hedge fund] is the portfolio selector..... any idea???" (Email to Michael Lamont and Richard D'Albert, DB's CDO Co-head and Global head of securitized products) - 8/4/2006 "u have picked some crap right away so u have it figured out." (To Mark Lee at Contrarian Capital) - 12/4/2006 Then he shorted it, or "covered the short" by "duping" "CDO fools" and told clients to do the same: "That said I can probably short this name to some CDO fool." (To Bradley Wickens at Spinnaker Capital) - 8/30/2006 "This kind of stuff rarely trades in the synthetic market and will be tough for us to cover ie short to a CDO fool. that said if u gave us an order at 260 we would take it and try to dupe someone." (To Bradley Wickens at Spinnaker Capital) - 9/1/2006 And there's more. At times during 2006 and 2007, he referred to CDO underwriting by investment banks as the workings of a "CDO machine" or "ponzi scheme." "I don't care what some trained seal bull market research person says this stuff has a real chance of massively blowing up." Eventually, the committee's report says, Deutsche Bank built a $5 billion short against the subprime market (Lippmann says he had to fight to get them to do it). A trader who worked for Deutsche Bank even wrote a song about it. It's called "CDO Oh Baby," and it's set to the Vanilla Ice song. Lippmanns defense for "duping" and writing the above is this: He was "grasping at things" to prove he was right in his short position. Because his trade was so successful, Lippmann doesn't work at Deutsche Bank anymore. He left to start a hedge fund, Libre Max, which launched in the fall. Read more: http://www.businessinsider.com/deutsche-...z1JbOSnwAA

[Magda Hassan]

Deutsche Bank Forfeits 221 Million Euros From Monte Paschi Deal

By Elisa Martinuzzi and Sonia Sirletti Dec 20, 2013 10:00 AM ET

Deutsche Bank AG (DBK) is forfeiting 221 million euros ($302 million) to end a derivative contract with Banca Monte dei Paschi di Siena SpA as regulators in Germany and Italy probe the transaction.
The German bank, which was poised to earn 746 million euros, will instead receive 525 million euros from Monte Paschi to terminate the contract 17 years early, the Siena, Italy-lender bank said in a statement yesterday.
The transaction dubbed Santorini came to light in January, when Bloomberg News disclosed how the contract masked losses, setting off a scandal that affected the outcome of national elections and prompted regulators to investigate. Santorini masked a 430 million-euro loss from an older contract with Deutsche Bank, according to Monte Paschi. The Italian bank lost money on the deals because it made a money-losing bet on the country's government bonds.
"It's highly unusual after a transaction that there would be a discount," said Mark Williams, a former bank examiner for the Federal Reserve and now a lecturer at Boston University's School of Management, who reviewed the original transaction. "This money is going back to Italian taxpayers and the bank has a duty to shareholders to explain why they are paying for it."
Photographer: Alessia Pierdomenico/Bloomberg Pedestrians pass in front the headquarters of Banca Monte dei Paschi di Siena SpA in... Read More

Officials at Deutsche Bank declined to comment on the details of the settlement. Monte Paschi gained 4.5 percent to 16.15 cents. The stock has fallen 28 percent this year, leaving it with a market value of 1.9 billion euros.
Reduces Uncertainty'

"We see this transaction positively" for Monte Paschi, said Anna Maria Benassi, a Milan-based analyst at Kepler Cheuvreux. "It reduces uncertainty and improves the risk profile of the bank, particularly considering the reduction of its excessive portfolio of Italian government bonds."
Monte Paschi cut its Italian government bond holdings by 2 billion euros with the accord. The lender's common equity ratio under Basel 3 rules, a key gauge of financial strength, will increase 25 basis points, it said.
Santorini is part of a series of transactions used by former managers to hide losses at the bank, forcing the lender to restate its accounts in February. Prosecutors in Siena are scrutinizing the deals, and Monte Paschi had sued Deutsche Bank in Florence to recover its losses on the 2 billion-euro deal. In that month's national elections, the Democratic Party saw its lead eroded because of its ties to Monte Paschi, according to SWG Institute, a polling company.
Restores' Relationship

"This mutual agreement concludes the litigation related to these transactions and restores the relationship between Deutsche Bank and Banca Monte dei Paschi di Siena," Deutsche Bank said in an e-mailed statement.
Deutsche Bank in October said it is cooperating with regulatory agencies and Siena prosecutors. Deutsche Bank kept the Monte Paschi deal and others off its balance sheet in a practice that German regulators are reviewing, two people familiar with the deals said in August. Officials at Bafin declined to comment yesterday.
"I'd like to see more transparency at Deutsche Bank," said Philipp Haessler, an analyst with Equinet Bank AG in Frankfurt, who has a hold recommendation on Deutsche Bank shares. "Still, transparency is tough when it comes to litigation. There may be some banks that entered into similar deals as Monte Paschi that would make a decision on whether to sue depending on how much they stand to gain."
Facing Nationalization?
Three former executives of Monte Paschi are being tried for allegedly obstructing regulators in a case related to another transaction, dubbed Alexandria, arranged with Nomura Holdings Inc. in 2009. The Nomura and Deutsche Bank arrangements, which were bets on Italian government bonds, have backfired for Monte Paschi, forcing new management to seek additional state aid.
Monte Paschi may be nationalized if it's unable to meet European regulator demands that it tap private investors to repay part of the bailout next year. Chief Executive Officer Fabrizio Viola and Chairman Alessandro Profumo, appointed last year to turn around the bank, plan to sell 3 billion euros of new shares to partially reimburse 4.1 billion euros of state aid.
The bank has called an extraordinary shareholders' meeting for Dec. 27 to gain approval for a stock sale in the first quarter. Fondazione Monte dei Paschi di Siena, which owns a 33.5 percent stake, wants to delay the sale until after the first quarter to gain more time to repair its own finances. Monte Paschi's management prefers to raise the capital in January to get ahead of other Italian banks that might need to raise capital as the European Central Bank reviews lenders' balance sheets.
Foundation Clash

After the relatively good news on the unwinding of Santorini, "the main issue now remains the clash between the foundation and the management about the timing of the rights issue," said Fabrizio Bernardi, an analyst at Fidentiis Equities in Milan.
The bank pays 9 percent annual interest on the bonds it sold to the government in the bailout and must swap the debt for stock if it doesn't have the cash for the annual coupon.
Monte Paschi also plans to cut its sovereign-debt holdings and trading activities and reduce its consumer credit and leasing portfolios. The bank will reduce the assets on its balance sheet to 181 billion euros by the end of 2017 from about 207 billion euros on Sept. 30. The company had a sixth straight quarterly loss on state-aid costs and provisions for bad loans in the third quarter.