Deutsche Bank AG (USA) (DB): Some Big Scandals

2. Disregarding the intent behind stakeholder demands
Here’s another area where I think the company lacked candor. It claims it responded to client, regulator, and investor demands to strengthen its capital base by raising its Core Tier 1 ratio from below 6% at the end of 2011 to 8% by the end of 2012 under the Basel III rules.

This is all well and good, but what worries me is that management failed to affirm the intent behind the push for a stronger capital base, which I believe is to shield the bank from unmanageable losses by reducing its leverage and proportion of risky investments. However, it appears that Deutsche Bank may not have actually done much to address these issues. Instead, its claims about how it achieved the 8% suggest that the company used sophisticated financial engineering to help make its capital ratio look better.

The Frankfurt-based company clarified that it achieved its higher ratio by reducing its risk-weighted assets by around $105 billion “through a combination of portfolio optimization, de-risking activities, and enhancing our risk models and processes.” The first and last factors that worry me most, as they suggest to me that part of Deutsche Bank’s capital ratio improvements resulted from the use of financial alchemy and risk model adjustments that help them classify existing assets as less risky rather than making fundamental improvements to its risk profile.

I don’t believe this meets the spirit behind stakeholders’ requests to improve Deutsche Bank’s capital base, as the bank implied it did when it claimed, “We listened, and we delivered.”

The Foolish takeaway
One of my favorite nuggets of wisdom from the Oracle of Omaha, Warren Buffett, is this: “In looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if they don’t have the first, the other two will kill you.”

I believe this wisdom should also guide our investments, especially in banking, where trust is paramount. If a company’s management fails to show candor — especially in times of crisis — then it may signal trouble down the road in the form of hidden risks that remain unresolved.

And until Deutsche Bank AG (USA) (NYSE:DB) offers more transparency on how it intends to address its culture problem, I fear rats may still be lurking in the dark.

The article Shareholders Still Pay for Deutsche Bank’s Scandals originally appeared on Fool.com and is written by M. Joy, Hayes.

Motley Fool contributor M. Joy Hayes, Ph.D. is the Principal at ethics consulting firm Courageous Ethics. She has no position in any stocks mentioned. Follow @JoyofEthics on Twitter. The Motley Fool recommends Goldman Sachs.

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