Deutsche Bank AG agreed Monday to pay a $55 million penalty to settle charges by the Securities and Exchange Commission that it filed 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.
The agency states that 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%) of the $98 billion total in purchased protection,” the SEC states.
“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.”
The SEC states that Deutsche Bank was protected “only up to the collateral level and not for the full market value of its credit protection,” and that “Deutsche Bank initially took the gap risk into account in its financial statements by adjusting down the value of the LSS positions.”