Tales of Smash, Grab, Contempt and Ru(i)n
While cashless Cypriots show their disgust for Germany and other southern sun-belters reel at a contemptuous smash and grab effort by European authorities, despotic bankers carry on as audaciously as ever.
As ProPublica reveals below Germany’s prestigious Deutsche Bank — just fined 17.5 million dollars by US regulators — is merely the latest global financial institution to have been brought to book — some might say lightly rapped over the knuckles given no one was jailed — over dubious deals that helped ensure the banker-driven global wipe-out of 2007/08 was even more devastating.
ProPublica is continuing its long-running reporting on efforts by regulators and politicians to obtain some redress for damage wrought by careening, reckless financial monsters.
“As the housing market started to fade, bankers and hedge funds scrambled for ways to maintain the lavish bonuses and profits they had become so accustomed to, repackaging mortgages in complex securities called collateralized debt obligations. The booming CDO market masked how weak the housing market was, and exacerbated its collapse.
by Cora Currier ProPublica, March 14, 2013, 5:45 p.m.
Deutsche Bank is the latest financial institution to be fined for not warning investors about the role of the hedge fund Magnetar in creating complex mortgage-backed deals that later failed.
As we detailed in 2010 with This American Life and NPR’s Planet Money, Magnetar helped create $40 billion worth of deals. The hedge fund, meanwhile, had taken positions that allowed it to profit when many of those same deals collapsed. Since ProPublica reported on Magnetar’s dealings three years ago, there’s been a long line of investigations and settlements related to the firm.
A Massachusetts financial regulator fined Deutsche Bank $17.5 million Wednesday, saying that the bank did not disclose the role of a securities unit or Magnetar in structuring one such deal 2013 a collateralized debt obligation known as Carina CDO Ltd.
In marketing the deal to investors, Deutsche Bank also did not reveal that Magnetar planned to bet against some of the assets in Carina.
“There is not a single reference in Carina’s sales and marketing materials relating to conflicts of interest,” wrote Massachusetts Secretary of the Commonwealth William Galvin in an order released yesterday.
In reaching the settlement, Deutsche Bank did not admit or deny the charges against it. That’s also been the case in other settlements related to Magnetar deals. Such settlements now total more than $300 million. A spokeswoman for Deutsche Bank said, “We are pleased to have reached this settlement and put this matter behind us.”
Magnetar has never been charged with any wrongdoing related to the creation of the deals and has always maintained it did not select the assets that went into its CDOs and that it was “market neutral,” meaning it would make money whether housing rose or fell. Magnetar has not responded to our latest request for comment.
and place bets against similar assets:
The emails also show that the bank was anxious about potential investors knowing about Magnetar’s role in Carina 2014 naming a hypothetical “random Asian investor.” (“Constellation deals” refers to Magnetar’s habit of calling CDOs after constellations.)
One investor “[did] not like” that Magnetar was shorting assets in Carina. That prompted Deutsche Bank to ask how the investor knew about it:
Another investment firm involved, State Street Global Advisors, was uncomfortable with Magnetar betting against assets in Carina. As the manager of the deal, State Street was tasked with looking out for investors’ financial interest. In one email exchange, a State Street executive wrote:
As we reported in 2010, some at State Street were concerned about “reputational risk” from being involved with Magnetar. Indeed, last year, Massachusetts slapped State Street with its own $5 million fine for its involvement in Carina. (State Street also did not admit or deny any wrongdoing.)
Massachusetts has been more assertive in bringing cases stemming from the financial crisis than other regulatory bodies. Galvin, the Secretary of the Commonwealth, told ProPublica he is motivated “not just to get some justice but to have these cases serve as cautionary tales” for the industry.
According to the Wall Street Journal, Deutsche Bank’s handling of CDO sales has been under investigation by the Securities and Exchange Commission, and also referred to the Justice Department for review. Deutsche Bank declined to comment on any investigations.The bank’s securities unit and Magnetar co-invested in six deals totaling more than $10 billion, according to the Massachusetts order.
The SEC is also reportedly investigating Magnetar itself.
The firm disclosed Wednesday that it had raised $370 million to invest in new mortgage deals.
- Reprinted with thanks to and by permission of ProPublica.
- Magnetar Capital Raises $370 Million to Invest in Mortgage Debt (bloomberg.com)
- JPMorgan Magnetar Deal Under SEC Investigation (ritholtz.com)
- The Magnetar Trade: How One Hedge Fund Helped Keep the Bubble Going (ritholtz.com)
- Ask Cypriots: Are Banks Criminal Enterprises?
- Cyprus: European Economic Heart Attack Ahead?
- There’s a Hole in my Bbbuc…ank, Keep Bailing
- Yellow Brick Road and the Power of Plutocrats
- The European Stabilization Mechanism, Or How Goldman SachsCaptured Europe
- David Dayen: Out of Control – New Report Exposes JPMorgan Chase as Mostly a Criminal Enterprise