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Subprime scrutiny

August 5, 2010

US regulators are reportedly examining the dual role Deutsche Bank played in the collapse of the housing market. The bank allegedly encouraged investors to bet against the same mortgages it was financing.

Deutsche Bank building in Frankfurt
Deutsche Bank is being investigated by the SECImage: bilderbox

Deutsche Bank has found itself under scrutiny by the US Securities Exchange Commission (SEC), just one month after Goldman Sachs settled fraud allegations for $550 million (417 million euros), and one week after Citigroup agreed to pay a $75 million settlement.

The Wall Street Journal reported Tuesday that Deutsche Bank is one of several financial institutions being examined by the SEC amid allegations it encouraged investment in the housing market while betting on its imminent collapse.

A Deutsche Bank trader created an index in 2006 to make betting against subprime home loans easier, and actively encouraged clients to do so. At the same time, the bank was financing subprime lenders on the brink of collapse, such as the now-defunct NovaStar Financial.

Own money used

The bank also used its own money to make tens of millions of dollars from short bets in the housing market. However, it told the Wall Street Journal that it "maintained a net long position in the housing market and ultimately suffered billions in losses, even after factoring in our hedges and offsetting positions."

Federal money was later used bail out the American International Group (AIG), which had insured volatile Deutsche Bank mortgage securities.

Deutsche Bank recently agreed to pay $7.5 million to the Financial Industry Regulatory Authority, but neither admitted nor denied any wrongdoing. It is also fighting a fraud-and-misrepresentation lawsuit against M&T Bank in a New York state court. M&T lost 98 percent of an $82 million investment in a Deutsche Bank deal over a period of 10 months.

Author: Gerhard Schneibel
Editor: Sam Edmonds

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