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Speaker 1: You're listening to Taking Stock with Kathleen Hayes and Pim

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Speaker 1: Fox on Bloomberg Radio. Deutsche Bank. The shares of Deutsche

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Speaker 1: Bank have fallen by more than forty eight percent this year.

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Speaker 1: Many investors are concerned that the lender faces a hefty

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Speaker 1: fine from the US Justice Department. But could there be

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Speaker 1: more to worry about in Deutsche Bank. Vernon Silver is

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Speaker 1: our projects and investigations reporter for Bloomberg News and our

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Speaker 1: Rome Bureau, and he joins us now to tell us more.

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Speaker 1: Vernon tell us about miss marking deals and is thirty seven?

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Speaker 1: Is thirty seven deals? Is that considered to be well,

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Speaker 1: you go ahead and tell the story because this involves

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Speaker 1: a lot of money. Yeah, Here's here's what's interesting here

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Speaker 1: Here in Italy, there's a well known scandal, which is

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Speaker 1: how the oldest bank in the world, Montaski, allegedly used

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Speaker 1: a transaction to conceal hundreds of millions of losses. But

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Speaker 1: on the other end of that trade with Deutsche Bank,

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Speaker 1: and the investigations into that led to open a door

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Speaker 1: cannon worms into a whole bunch of other transactions in

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Speaker 1: the range of almost twelve billion dollars worth in which

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Speaker 1: the accounting by Deutsche Bank on its side of the

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Speaker 1: deal was similar to what they did with Monty Passkey.

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Speaker 1: Now there is no covering up of of losses the

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Speaker 1: way they did with Passkey. But what's interesting about Deutsche

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Speaker 1: Bank's own accounting is they they lent all this money out,

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Speaker 1: but they didn't put it on their balance sheet um.

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Speaker 1: And and that's where the the auditors found something of interest.

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Speaker 1: And that's where Deutsche Bank already has had to restate

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Speaker 1: the way that it accounts for these billions of loans um.

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Speaker 1: It's not material, it's not anything that more than a

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Speaker 1: trillion dollars an assets. You know, it's not going to

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Speaker 1: tip the scales about their their financial health. But analysts

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Speaker 1: they're saying that this is indicative of the complexity behind

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Speaker 1: the real numbers of Germany's largest banks. Well, let's just

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Speaker 1: just just take us little bit further to really break

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Speaker 1: it down for us in terms of what they did

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Speaker 1: and why will they say, oh, we were it's a

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Speaker 1: complex transaction and we did exactly what we were supposed

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Speaker 1: to do with it. That's why it's not there. Will

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Speaker 1: this be a case will they'll eventually be charged with

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Speaker 1: and have to admit to out and out fraud. What

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Speaker 1: specifically is this going to turn on, because quite apart

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Speaker 1: from you know, losing money, there's a whole question of

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Speaker 1: credibility of behavior that it sounds like the crossed way

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Speaker 1: over the line. Absolutely, this is a question of reputational risk.

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Speaker 1: And this is what the auditors point out. There's nothing

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Speaker 1: in here to indicate that anybody committed any crime um

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Speaker 1: and there was a justification for the way that they

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Speaker 1: accounted for these loans without actually making them look like

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Speaker 1: there were loans on their balance sheet. So what happens

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Speaker 1: the accountant the auditors uh came in and said, now

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Speaker 1: if you can't, you can't do it this way. And

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Speaker 1: it wasn't a mistake. The papers that we've that about

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Speaker 1: the way that the Mounti Pasky deal was constructed showed

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Speaker 1: that it was really important that they account for these

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Speaker 1: off of the balance sheet because the more the more

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Speaker 1: of these deals you can do without it impacting uh,

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Speaker 1: you know, your own finances, the better. Is the way

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Speaker 1: that that the endless who are trying to understand that

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Speaker 1: they're saying, vernon do we also need to be concerned

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Speaker 1: about derivatives because in the twenty fifteen annual report, Deutsche

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Speaker 1: Banks said that it's exposure to derivatives was nearly forty

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Speaker 1: seven trillion dollars. Now I understand, I know this is

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Speaker 1: the notional value. So uh, it's not as if it's

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Speaker 1: gonna oversee all of their counterparty transactions and clearings. But

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Speaker 1: forty seven trillion dollars to put to put this in

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Speaker 1: context as a political issue, because like we're in Europe

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Speaker 1: and there's you know, put the politics are swarming all

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Speaker 1: around this. Here in Rome, the Prime minists to Renzy

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Speaker 1: when asked, you know, hey, aren't you going to clean

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Speaker 1: up the Italian banks and Monty Pasky? Are you gonna

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Speaker 1: have to bail them out? One of his biggest and

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Speaker 1: strongest responses is to say, you know what, me, worry

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Speaker 1: look at Deutsche Bank and the derivatives. They've got a

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Speaker 1: look at the German banks. Um. So that's that's part

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Speaker 1: of what you brought up. Is exactly what the Italian

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Speaker 1: political response to this is. And it will be interesting

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Speaker 1: to see as both Deutsche Bank and Monty Pasky coincidentally

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Speaker 1: or not the two banks involved in in the deal

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Speaker 1: that sparked all this, If either of them gets closer

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Speaker 1: to the brink um if it becomes a political issue,

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Speaker 1: if you know, will clean up ours if you clean

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Speaker 1: up yours? You know. Also, this seems to be the

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Speaker 1: potential perallel of UH to the two thousand, two thousand

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Speaker 1: nine banking crisis in the United States. Ben Bernaki said

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Speaker 1: he hated beating out those banks, right, but he had

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Speaker 1: to to support the financial system. Now, if I'm Nzy,

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Speaker 1: if I'm the Italian regulators and government, maybe I say, look,

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Speaker 1: uh we can maybe I could. They could kick out managers,

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Speaker 1: they can take that f d I C like kind

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Speaker 1: of step. But they might say, no, we cannot let

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Speaker 1: big institutions like this go down. Yeah. Absolutely, I mean

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Speaker 1: that's the case with multi Passky, which you know, some

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Speaker 1: of the you know, the investors have and and even

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Speaker 1: political figures have pointed out as possible spark of some

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Speaker 1: kind of systemic risk. Um. That's why there is such

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Speaker 1: an urgent need on the part of the Italian government

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Speaker 1: to make sure that it sells off its bad loans

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Speaker 1: and that it gets UH new new investors. But what

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Speaker 1: we're seeing with with the Stoutsche Bank transaction and the

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Speaker 1: fact that there was there was accounting around the world

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Speaker 1: that was that was constructed to not show exactly the

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Speaker 1: way things really were. Is the question of this is

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Speaker 1: a whole way that you do business have to be changed? Um,

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Speaker 1: do we really know what the risks are and are

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Speaker 1: there incentives or disincentive for for this kind of financial engineering?

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Speaker 1: Burnon Silver Triffic Reporting, Thank you so very much for

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Speaker 1: joining us. He is Bloomberg News Investigations reporter in Rome.

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Speaker 1: His story today Deutsche Bank miss mark thirty seven deals

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Speaker 1: like Pesky's. The audit says, very important story, very important

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Speaker 1: development for European banks and the European financial system. I'm

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Speaker 1: Kathleen Hayes along with P M. Fox. We're gonna be

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Speaker 1: turning our attention to financial advisors. Is one of the

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Speaker 1: top women advisors in the country. This is Bloomberg