https://www.sec.gov/news/pressrelease/2015-99.html
The Securities and Exchange Commission today charged Deutsche Bank AG
with filing misstated financial reports during the height of the
financial crisis that failed to take into account a material risk for
potential losses estimated to be in the billions of dollars.
Deutsche Bank agreed to pay a $55 million penalty to settle the charges.
An SEC investigation found that Deutsche Bank overvalued a portfolio of
derivatives consisting of “Leveraged Super Senior” (LSS) trades through
which the bank purchased protection against credit default losses.
Because the trades were leveraged, the collateral posted for these
positions by the sellers was only a fraction (approximately 9 percent)
of the $98 billion total in purchased protection. This leverage created
a “gap risk” that the market value of Deutsche Bank’s protection could
at some point exceed the available collateral, and the sellers could
decide to unwind the trade rather than post additional collateral in
that scenario. Therefore, Deutsche Bank was protected only up to the
collateral level and not for the full market value of its credit
protection. Deutsche Bank initially took the gap risk into account in
its financial statements by adjusting down the value of the LSS
positions.
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