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Court cases worth millions of dollars is what he will inherit

Last updated on: May 29, 2012 13:12 IST

Court cases worth millions of dollars is what he will inherit

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K Mammen Mathew in Berlin

W
hen he takes over as Deutsche Bank's co-CEO on Thursday, Anshu Jain will inherit a myriad of court cases involving compensation claims running into millions of dollars and fraud charges against the lender for its role in the US sub-prime mortgage crisis, says a report.

The largest German bank is facing numerous charges of defrauding its customers and contributing to the US housing market bubble by marketing complex mortgage and financial products that concealed the risks involved.

Deutsche Bank under the leadership of its out-going Chairman Josef Ackermann was one of the driving forces behind the sub-prime mortgage lending, which led to a sharp growth in US home ownership between 2004 and 2006.

Several global financial institutions, including Deutsche Bank, lowered the lending standards and promoted the marketing of high-risk products well aware that their borrowers could not afford them and they could cause huge losses for investors in mortgage securities, according to a TV report.

How Deutsche Bank will deal with the compensation claims from its clients, who made heavy losses when the housing bubble burst in 2007, will be a major test for the bank's new leadership, it said.

Jain is expected to inform the bank's shareholders about its strategy when Ackermann formally hands over its leadership to him and his co-CEO Juergen Fitschen at the annual shareholders' meeting in Frankfurt on Thursday.

They will officially take charge on Friday.

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Image: Deutsche Bank co-CEO Anshu Jain
Photographs: Alex Domanski/Reuters

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Critics say Jain has a share of responsibility as major decisions on US sub-prime mortgage investments would have been taken in consultation with the London-based Corporate and Investment Banking division, which he headed until now.

So far, Deutsche Bank was convicted only in very few cases and most of the legal suits against the bank were settled by paying millions of dollars in out-of-court settlements, the report said.

A long list of petitioners ranged from the US Justice Department and two supervisory authorities to a number of insurances and pension funds, several German regional banks and hundreds of former home-owners who feel cheated by the bank.

The multi-billion-dollar sub-prime lending business was based on massive allocation of mortgage credits.

Risky and less risky mortgages were bundled together in large units and they were marketed as bonds around the world.

Many of these bonds were also bundled together in much larger units and sold as Collateralised Debt Obligations (CDOs) to investors for hundreds of millions of dollars.

Deutsche Bank was one of the major players in the CDO market. In 2006 and 2007 alone, several investment banks, including Deutsche Bank, placed CDOs worth more than a trillion dollars on the market, according to the report.

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Image: Deutsche Bank headquarters in Frankfurt.
Photographs: Ralph Orlowski /Reuters

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The German lender is also in the line of fire for betting on a drop in the value of the mortgage-backed securities it sold and making huge profits through the Credit Default Swaps (CDS), which covered the risks of these packets, it said.

The bank is reported to have developed a CDS business worth five billion euros within a period of two years.

The US Senate Permanent Select Committee on Investigations, which in 2011 analysed Deutsche Bank as a case study for investment banking involvement in the mortgage bubble, found that even as the CDO market was collapsing in 2007 and its top global CDO trade was shrinking, Deutsche Bank continued to churn out bad CDO products to its investors as new packets.

One of the packet investigated by the committee was ironically named Gemstone VII.

The investigators found that the CDO packet was comprised of mortgage credits the bank treated as "worthless".

The bank was aware that the value of the credits will drop, but still sold to its customers.

The committee charged that Deutsche Bank was deliberately transferring to customers financial risks of assets from its own possession.

Deutsche Bank is also accused of aggressively pursuing foreclosure -- taking possession of a property under its ownership when a buyer fails in timely mortgage payments.

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Photographs: Reuters

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It had earned the nickname "Slumlord" in Los Angeles after hundreds of home-owners were evicted from their houses, leaving several streets with rows of empty houses in different parts of the city.

The housing bubble, which peaked in mid-2006, began to burst after hundreds of heavily-indebted home owners defaulted on repaying their mortgages, triggering a sharp fall in house prices in 2007.

Mortgage-backed securities valued billions of dollars became worthless and this unleashed a chain-reaction, which brought down a number of investment banks, including Lehman Brothers and precipitated the global financial crisis in 2008.

Deutsche Bank emerged largely unscathed from the sub-prime crisis, especially because its New York-based investment banker Greg Lippmann had already in 2006 predicted a housing bubble burst and described a large part of the mortgage-based securities as "trash," the report said.

He also speculated on the sub-prime market crash and earned around 1.5 billion dollars for Deutsche Bank through CDS, according to the report.

However, Deutsche Bank is more deeply involved in the crisis than many other financial institutions as it figures in all stages of the chain of distribution.

This makes the bank very vulnerable to the charges against it, the report said.

Photographs: Brian Snyder/Reuters

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