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Deutsche Bank’s Toxic Derivatives

I have a lovely little presentation entitled "All Bankers are Criminals". 

all about the dangers of weapons of financial destruction, in other
words Derivatives, and people tend to enjoy it … especially the part
about “Greed is good”.  It’s not that I’m against derivatives but, if you believe the stories in Frank Partnoy’s excellent book Infectious Greed,
I am against bankers ripping off their clients by preying on the
client’s naivety, innocence and trust, using incredibly complex
financial instruments.  This is the world of Parmalat, Enron and
Worldcom and worse.

You may say caveat emptor, buyers
beware, but I disagree when it comes to financial products where the
clients trust their advisor to do the right thing.  That’s the role of
a trusted advisor, and financial firms advocate this position as their
core reason for existence.  We exist on trust.

Now, I’ve written about Deutsche Bank a couple of times before. 

The first time was the anti-bank demonstration in the City
due to their support of Huntingdon Life Sciences, the vivisection
laboratory that cuts little beagle puppies to bits.  The second time
because they have the most innovative bank branch project I’ve seen in Europe, Q110.

Deutsche Bank: Good 1, Bad 1.

So here’s a third entry and it’s Deutsche Bank: Good 1, Bad 2. 

It turns out Deutsche Bank are one of three banks who are purposefully breaking their client’s trust, according to Webb-site.com, by creating and selling toxic convertible products.

convertibles are derivatives products where companies, generally small
and naive, give up their future ability to issue equities to their
investment bank.  The bank’s aim is to use this to tie in future
profits by converting the firm’s bonds on a continual basis at a deep
discount.  They then sell the resulting shares at a profit.

In other words, a value-destroying programme which is good for the bank and bad for the client. 

estimates that the banks average "a gross profit on the money raised of
about 31%, and the average stock price has fallen 30% since a toxic
convertible was launched".

Their in-depth report alleges that Deutsche Bank has used this trick on Sintronics Holdings Ltd, Spread Prospects Holdings Ltd  and First Natural Foods Holdings Ltd, three tiny little Fujian firms.   

all goes back to the ease with which complexity in the financial
markets allows banks to sell complete dross to the trusting client, and
harks back to my trust rant of the other week therefore.

No wonder demonstrators in the City were shouting "Deutsche Bank, shame on you".  Mind you, Webb-site.com also points out that Credit Suisse and Merrill Lynch were the first to use such products back in 2005 and 2004 respectively, so they’re not alone.

Ah well, it’s just same s**t, different day.


About Chris M Skinner

Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here…

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