The Warren Buffett Role in the Financial Crisis Problems at Deutsche Bank

What did Warren Buffett know and when did he know it?

FT is reporting on three former Deutsche Bank employees who have told US regulators that some DB poorly designed pre-crisis trading positions were valued during the crisis in a way that hid billions in losses. DB used a Warren Buffett's Berkshire Hathaway transaction in the cover-up.

There is no indication that Buffett or anyone at Berkshire was aware of how DB falsely reported the transaction, but Berkshire Hathway's role is still noteworthy. FT explains:

Also unknown to the public until now is the assistance – entirely proper – provided to Deutsche by billionaire investor Warren Buffett’s Berkshire Hathaway group...

But with market volatility during the crisis, the bank realised it had to do more.

Eventually, Deutsche reached for a saviour that had helped many institutions during the financial crisis: Mr Buffett. While his support for Goldman and Bank of America was announced during the crisis, his intervention in Deutsche has not been widely known until now.

Berkshire wrote insurance on the quanto risk for Deutsche at a cost of $75m in 2009. Deutsche then accounted for this as full protection on the risk. But the contract agreeing the trade, reviewed by the FT, caps the payout in the event of losses at $3bn, while Deutsche was claiming protection on tens of billions of dollars. Once again, the former employees allege, the bank was accounting as if it had fully insured itself against loss while in reality insuring itself against only a small portion.

If nothing else, it shows again that Buffett was very bullish in the early stages of the financial crisis. Maybe the question that should be asked is "What did Warren Buffett know and when did he know it, in relation to Federal Reserve plans to prop up the stock market and key global banks?"

(ht William Bergman)