WEBVTT - Bloomberg's Silver On Deutsche Bank Mismarking (Correct)(Audio)

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<v Speaker 1>You're listening to Taking Stock with Kathleen Hayes and Pim

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<v Speaker 1>Fox on Bloomberg Radio. Deutsche Bank. The shares of Deutsche

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<v Speaker 1>Bank have fallen by more than forty eight percent this year.

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<v Speaker 1>Many investors are concerned that the lender faces a hefty

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<v Speaker 1>fine from the US Justice Department. But could there be

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<v Speaker 1>more to worry about in Deutsche Bank. Vernon Silver is

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<v Speaker 1>our projects and investigations reporter for Bloomberg News and our

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<v Speaker 1>Rome Bureau, and he joins us now to tell us more.

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<v Speaker 1>Vernon tell us about miss marking deals and is thirty seven?

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<v Speaker 1>Is thirty seven deals? Is that considered to be well,

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<v Speaker 1>you go ahead and tell the story because this involves

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<v Speaker 1>a lot of money. Yeah, Here's here's what's interesting here

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<v Speaker 1>Here in Italy, there's a well known scandal, which is

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<v Speaker 1>how the oldest bank in the world, Montaski, allegedly used

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<v Speaker 1>a transaction to conceal hundreds of millions of losses. But

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<v Speaker 1>on the other end of that trade with Deutsche Bank,

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<v Speaker 1>and the investigations into that led to open a door

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<v Speaker 1>cannon worms into a whole bunch of other transactions in

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<v Speaker 1>the range of almost twelve billion dollars worth in which

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<v Speaker 1>the accounting by Deutsche Bank on its side of the

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<v Speaker 1>deal was similar to what they did with Monty Passkey.

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<v Speaker 1>Now there is no covering up of of losses the

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<v Speaker 1>way they did with Passkey. But what's interesting about Deutsche

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<v Speaker 1>Bank's own accounting is they they lent all this money out,

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<v Speaker 1>but they didn't put it on their balance sheet um.

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<v Speaker 1>And and that's where the the auditors found something of interest.

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<v Speaker 1>And that's where Deutsche Bank already has had to restate

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<v Speaker 1>the way that it accounts for these billions of loans um.

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<v Speaker 1>It's not material, it's not anything that more than a

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

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<v Speaker 1>tip the scales about their their financial health. But analysts

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<v Speaker 1>they're saying that this is indicative of the complexity behind

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

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<v Speaker 1>just just take us little bit further to really break

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<v Speaker 1>it down for us in terms of what they did

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<v Speaker 1>and why will they say, oh, we were it's a

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<v Speaker 1>complex transaction and we did exactly what we were supposed

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<v Speaker 1>to do with it. That's why it's not there. Will

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<v Speaker 1>this be a case will they'll eventually be charged with

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<v Speaker 1>and have to admit to out and out fraud. What

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<v Speaker 1>specifically is this going to turn on, because quite apart

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<v Speaker 1>from you know, losing money, there's a whole question of

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<v Speaker 1>credibility of behavior that it sounds like the crossed way

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<v Speaker 1>over the line. Absolutely, this is a question of reputational risk.

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<v Speaker 1>And this is what the auditors point out. There's nothing

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<v Speaker 1>in here to indicate that anybody committed any crime um

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<v Speaker 1>and there was a justification for the way that they

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<v Speaker 1>accounted for these loans without actually making them look like

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<v Speaker 1>there were loans on their balance sheet. So what happens

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<v Speaker 1>the accountant the auditors uh came in and said, now

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<v Speaker 1>if you can't, you can't do it this way. And

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<v Speaker 1>it wasn't a mistake. The papers that we've that about

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<v Speaker 1>the way that the Mounti Pasky deal was constructed showed

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<v Speaker 1>that it was really important that they account for these

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<v Speaker 1>off of the balance sheet because the more the more

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<v Speaker 1>of these deals you can do without it impacting uh,

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<v Speaker 1>you know, your own finances, the better. Is the way

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<v Speaker 1>that that the endless who are trying to understand that

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<v Speaker 1>they're saying, vernon do we also need to be concerned

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<v Speaker 1>about derivatives because in the twenty fifteen annual report, Deutsche

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<v Speaker 1>Banks said that it's exposure to derivatives was nearly forty

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<v Speaker 1>seven trillion dollars. Now I understand, I know this is

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<v Speaker 1>the notional value. So uh, it's not as if it's

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<v Speaker 1>gonna oversee all of their counterparty transactions and clearings. But

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<v Speaker 1>forty seven trillion dollars to put to put this in

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<v Speaker 1>context as a political issue, because like we're in Europe

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<v Speaker 1>and there's you know, put the politics are swarming all

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<v Speaker 1>around this. Here in Rome, the Prime minists to Renzy

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<v Speaker 1>when asked, you know, hey, aren't you going to clean

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<v Speaker 1>up the Italian banks and Monty Pasky? Are you gonna

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<v Speaker 1>have to bail them out? One of his biggest and

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<v Speaker 1>strongest responses is to say, you know what, me, worry

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<v Speaker 1>look at Deutsche Bank and the derivatives. They've got a

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<v Speaker 1>look at the German banks. Um. So that's that's part

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<v Speaker 1>of what you brought up. Is exactly what the Italian

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<v Speaker 1>political response to this is. And it will be interesting

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<v Speaker 1>to see as both Deutsche Bank and Monty Pasky coincidentally

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<v Speaker 1>or not the two banks involved in in the deal

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<v Speaker 1>that sparked all this, If either of them gets closer

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<v Speaker 1>to the brink um if it becomes a political issue,

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<v Speaker 1>if you know, will clean up ours if you clean

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<v Speaker 1>up yours? You know. Also, this seems to be the

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<v Speaker 1>potential perallel of UH to the two thousand, two thousand

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<v Speaker 1>nine banking crisis in the United States. Ben Bernaki said

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<v Speaker 1>he hated beating out those banks, right, but he had

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<v Speaker 1>to to support the financial system. Now, if I'm Nzy,

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<v Speaker 1>if I'm the Italian regulators and government, maybe I say, look,

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<v Speaker 1>uh we can maybe I could. They could kick out managers,

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<v Speaker 1>they can take that f d I C like kind

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<v Speaker 1>of step. But they might say, no, we cannot let

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<v Speaker 1>big institutions like this go down. Yeah. Absolutely, I mean

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<v Speaker 1>that's the case with multi Passky, which you know, some

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<v Speaker 1>of the you know, the investors have and and even

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<v Speaker 1>political figures have pointed out as possible spark of some

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<v Speaker 1>kind of systemic risk. Um. That's why there is such

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<v Speaker 1>an urgent need on the part of the Italian government

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<v Speaker 1>to make sure that it sells off its bad loans

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<v Speaker 1>and that it gets UH new new investors. But what

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<v Speaker 1>we're seeing with with the Stoutsche Bank transaction and the

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<v Speaker 1>fact that there was there was accounting around the world

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<v Speaker 1>that was that was constructed to not show exactly the

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<v Speaker 1>way things really were. Is the question of this is

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

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<v Speaker 1>do we really know what the risks are and are

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<v Speaker 1>there incentives or disincentive for for this kind of financial engineering?

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<v Speaker 1>Burnon Silver Triffic Reporting, Thank you so very much for

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<v Speaker 1>joining us. He is Bloomberg News Investigations reporter in Rome.

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<v Speaker 1>His story today Deutsche Bank miss mark thirty seven deals

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<v Speaker 1>like Pesky's. The audit says, very important story, very important

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<v Speaker 1>development for European banks and the European financial system. I'm

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<v Speaker 1>Kathleen Hayes along with P M. Fox. We're gonna be

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<v Speaker 1>turning our attention to financial advisors. Is one of the

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<v Speaker 1>top women advisors in the country. This is Bloomberg