Deutsche Bank Loses $1.6 Billion on Bonds

February 21, 2019
Investment Banking Course

 

Deutsche Bank is amidst the world’s top 50 financial institutions with its investments in BNP Paribas, Allianz, AXA, China Construction Bank and Berkshire Hathaway.  The loss faced by Deutsche Bank in its complex municipal bond investment which amounts to $1.6 Billion is one of the historical losses in the banking industry to date. Embattled banking institute Deutsche bank had to face a rough path in its investment on bonds of insurance of Warren Buffet’s Berkshire Hathaway.  

The story started in 2017 as a giant investment deal

These losses are a result of $7.8 Billion municipal bonds bought back in 2007 by the leading global investment German Deutsche Bank. According to The Wall Street Journal, the German lender had bought default protection on the bonds which led to paying $140 Million in the following year for a transaction. This scandal about Deutsche Bank hogged the limelight after The Wall Street Journal came up with this breaking news. It is to be noted that the German lender had previously refused to accept the depreciating rates of these bonds for years which the markets had suggested brushing aside the concerns of financial agents. 

Arising conflicts within the German bank executives

Though it has been a decade after a disastrous investment like this, the Deutsche Bank has not come out clean with regard to its scope of loses on the municipal bonds. The piling of the loss may probably be due to the negligence of the Deutsche bank in recognizing the loses earlier and the conflicts between the executives of the bank regarding the decision to invest in Berkshire Hathaway.

Financial auditors had raised doubt regarding the capabilities of the Deutsche bank to withstand the future loses due to such municipal bond investments earlier. However, the German lender had ignored such concerns about those related derivatives. Finally, after almost a decade the Deutsche Bank decided to offload these municipal bonds. Since the senior executives refuse to restate the happenings regarding the bonds the internal investigations had come to a halt. 

Ultimately Deutsche bank had decided to sell the municipal bonds for Berkshire insurance for a loss of $1.6 Billion in 2016. The debate among bank executives included whether they should have explained clearly about the wrong-path in this investment. But, later chose not to restate it.

This story has not come to an end

The Deutsche Bank spokesperson explained that this investment was unwinded in 2016 as part of winding up non-core operations. After the interrogation of auditors and external lawyers about the municipal bonds, it was clear that it accounted in line with the rules and regulations. However other journals predict that this deal may have to face interrogations from the investors and the people concerned and that the Deutsche Bank can expect another storm any time soon. Deutsche Bank is also in the news for rumours about its Russian money laundering. The bad decision behind the investment led to the Deutsche Bank dragging the decision to finally sell it off at huge losses. 

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