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DB Repo Structure

Matt Levine, DealBreaker, Deutsche Bank Did Some Accounting Stuff, here.

“They cleverly found a way to exploit the law and followed the rules to the letter,” said Barry Epstein, a principal of forensic accounting and litigation consulting at Chicago-based Cendrowski Corporate Advisors, who reviewed deal documents.

Like Barry Epstein I’m inclined to award points for cleverness though unlike him I haven’t reviewed the deal documents4 so I’m not quite sure how many points to award. It’s Deutsche Bank, though, so I’minclined to think it’s pretty good.

Is this against the intent of the rules? I … I mean, I’m not a metaphysician, what do I know. Like here, you’re Dexia or whatever, one of the customers who did or thought about doing these trades with Deutsche:

  • You want to get 5-year financing against some government bonds.
  • You hire Deutsche Bank to sell them.
  • Now you have money.
  • You enter into a mark-to-market 5-year swap, with Schmeutsche Bank, on some different bonds of the same government, with like a similar blended duration etc. to the ones you sold.
  • Now you have the exposure you wanted.
  • Deutsche Bank has nothing.
  • Schmeutsche Bank has a mark-to-market swap which, initially, doesn’t do much to its balance sheet.5
  • Nobody has a loan.
  • In five years, the swap settles.
  • You take the money you got day one, and the settlement you get on the swap, and hire Deutsche Bank to buy back your original bonds.
  • I submit to you that, with minor slippage, you have recreated a 5-year loan against your bonds.
  • But nobody’s ever given you a loan.

This trade is basically that, only it replaces Schmeutsche Bank with Deutsche Bank, meaning that they do both the selling of the bonds and the swapping of the oh-so-slightly-different thing back to you. Does that transform a trade where no one gave you a loan to a trade where Deutsche Bank gave you a loan? Meh, sure, maybe. But the spirit that is or is not being violated here is a little beyond me.

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