There are several implications of Deutsche bank’s alleged accounting oversights as documented in the Financial Times today.
As our German editor points out, the $12bn of additional writedowns that the FT says should have taken place at the height of the credit crisis would likely have compelled Deutsche to seek a bailout from the German government. If so, Deutsche would have been legally compelled to restrict pay for members of its executive committee to €500k. In 2009 Anshu Jain earned total compensation of €8m and Josef Ackermann earned €9.6m, suggesting the €500k restriction would have come as quite a shock.
It’s equally likely that Deutsche would have come out of the crisis a very different institution to the one we see today. UBS wrote down $43bn during the crunch and cut 30% of its investment banking staff between 2007 and 2008. By comparison, Deutsche Bank’s writedowns were diminutive: by July 2008 the bank had written down just €7bn and was able to present itself as having come through the crisis relatively unscathed. As a likely result, Deutsche made very few investment banking redundancies: just 782 jobs were cut from the corporate and investment bank between the end of 2008 and the second quarter of 2012. Thousands of Deutsche investment bankers likely owe their continued employment to the alleged accounting shenanigans.
Deutsche’s alleged failings (the bank is wholly denying any wrongdoing) also make Goldman Sachs look like by far the more sensible and sedate of the two banks. The alleged inconsistencies at Deutsche were spotted by three people, including a former Goldman Sachs risk modeller. This man, Eric Ben-Artzi, was apparently shocked to find that Deutsche wasn’t making any effort to model the so-called ‘gap option’, helpfully explained by Felix Salmon here as the risk that hedges wouldn’t work and counterparties would simply walk away in the event of a serious crisis.
Goldman, needless to say, was modelling the gap option, and has been a very enthusiastic supporter of marking to market under all conditions. By comparison, Simon Maughan, head of sector strategy at Olivetree Securities, says Deutsche made the most of IFRS accounting rules allowing banks with commercial lending arms to market their assets to maturity. “Deutsche simply stopped marking trading assets to market and started marking them as if they were loans,” says Maughan. “That’s allowed under IFRS standards and there’s nothing wrong with it. However, Deutsche is to all intents and purposes an investment bank with a commercial bank attached to it, which is using the accounting standards of a commercial bank.”
If Deutsche had marked its assets in the style of Goldman, it might not be with us, says Maughan: “Very few banks could have withstood a $12bn writedown in 2008.”
James Chappell, a banking analyst at Berenberg, says it’s far too hypothetical to speculate what might have happened to Deutsche had the $12bn writedown happened. The FT’s allegations underscore the complexity and opacity of investment banks’ accounts. Banks aren’t really suited to being publicly listed companies, says Chappell. “Risk at a large bank is too complex to manage and control,” says Chappell. “You can only control it when banks’ employees have exposure to downside risk.”
Needless to say, employees used to be exposed to downside risk when Goldman Sachs was a partnership. Today Goldman is no longer a partnership and its employees are no longer exposed to the risk of losing their own capital. Nevertheless, Goldman’s risk management emerges from the FT’s allegations looking far more attentive than Deutsche’s.