Small Beer?

Small Beer?

Did Deutsche Bank engage in dirty accounting?

That’s what a prominent whistleblower is saying. In the depths of the financial crisis, Eric Ben-Artzi, a former Goldman Sachs banker, claims that Deutsche fudged the valuation of some highly complex securities by $4 billion or so. If his allegation is true, it could tarnish the image of one of Europe’s top financial institutions

Deutsche Bank is one of Europe’s largest banks and one of the few that didn’t need government help during the crisis. Like almost all big banks they’re deeply involved in selling bonds and bond derivatives. You simply can’t be a major player in today’s global financial marketplace without accessing the global pools of capital that are outside the banking system.

Some of these securities are so complex that you need a Ph.D. in math, like Mr. Ben-Artzi, in order to value them. But when he applied his formulas to many of the securities in question, he got a lower number–much lower. So he called his boss’s attention to the discrepancy, then his boss’s boss, and finally went to his company’s hot-line. In the end, after examining the matter, internal and external auditors approved of the bank’s valuation.

But Mr. Ben-Artzi had lost his job when his division was restructured, something that a lot of banks were doing at the time. So he claims that he is a victim of retaliation, which is also possible. Now the SEC is investigating, and if Deutsche did commit fraud, Ben-Artzi is entitled to a big portion of the fine—something that muddies the waters a bit.

In the end, though, these were potentially mark-to-market losses—something the markets later reversed. It shows how abstruse accounting can be: that a complex theoretical model could require real cash inflows. Did Deutsche fudge its numbers? In my opinion, no harm, no foul.

Douglas R. Tengdin, CFA

Chief Investment Officer

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