… It Went Through the Mother of All Canadian Restructurings – Published on naked capitalism, by Yves Smith, December 11, 2012.
A default position among what passes for finance cognoscenti in the blogosphere is to argue that media stories pointing up bank improprieties are making a mountain out of a molehill. The form of the argument is usually, “If you only understood XYZ technical issue, this is not such a big deal.” Now that isn’t to say that position is wrong; we’ve more than occasionally made just that type of argument. But if you are going to go that route, it’s incumbent on you to take account of the relevant background; otherwise, whether you intend to or not, your argument can wind up being the equivalent of “Look, over there!”
We’ve seen this type of diversion-as-argumentation take place on the brewing Deutsche Bank scandal over losses that three separate whistleblowers allege that that bank hid from investors during the crisis. The debate has focuses on one position that accounted for the overwhelming majority of the misvaluation, involving so called leveraged super senior trades. In particular, Matt Levine of Dealbreaker and Felix Salmon have both contended that all the bank needed to do was wait and its positions would have worked out. Felix explicitly and Levine implicitly analogize a position carried in the bank’s trading books as a long-term bank asset. Um, trading book positions and loans are chalk and cheese, witness the old Wall Street saying: “an investment is a trade that didn’t work out.”*
There are two problems with that argument. First, it’s a classic example of hindsight bias. Tell me who during the crisis would have assigned a 100% probability to that view, because that’s what this amounts to. It runs afoul of Keynes’ observation: that markets can remain irrational longer than you can stay solvent.
Second, Levine and Salmon say, to use Levine’s turn of phrase, that all the German bank did was ignore the losses until they went away. That is a misrepresentation of what actually happened. Levine and Salmon airbrush out what has been called the biggest structured credit restructuring in history and the largest restructuring in Canadian history. If the restructuring had failed, Deutsche most assuredly would have had major losses on its hands, not just from being forced to unwind the trades at an unfavorable time, but also from litigation, which is not factored into the whistleblowers’ estimates.
And the restructuring failing was not a hypothetical risk. There was not assurance it would get done, and analysts with no dog in the fight were of the view at the time that it was not likely to be completed successfully.
A short overview: three former employees have charged the German bank with misvaluing various positions during the crisis, allegedly totaling $12 billion at the peak, when by comparison, the banks had roughly $45 billion of equity. The largest single misvaluation involves the biggest risk position in the bank’s trading book, that of a leveraged super senior trade, a type of synthetic CDO that was funded by Canadian commercial paper buyers … //
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Basel III: Dead on Arrival? on naked Capitalism, by Richard Smith, December 11, 2012;
Mismanagement and Losses: ThyssenKrupp Steels Itself for Radical, on Spiegel Online Ingternational, by Frank Dohmen and Fidelius Schmid, Dec. 12, 2012;
Most Greeks Look to Left for Solutions, but Far Right Gaining Strength, on The Real News Network TRNN, 3 videos, October to December 2012.