“Deutsche Bank didn’t fully disclose all the risks attached to the CDOs,” Bettina Gusenbauer, an OeBB spokeswoman, said in a phone interview from Vienna.
The derivatives and the risks were fully reviewed with OeBB, a Deutsche Bank spokesman, who declined to be identified, said in an e-mail. OeBB initiated the transaction, not Deutsche Bank, the e-mail said.
Taxpayers shouldn’t “have to pick up the bill for speculative investments,” said Susanne Enk, a spokeswoman for Austria’s Federal Ministry of Transport, when asked about OeBB’s investment.
Municipal authorities across Europe are reporting losses from derivatives since credit markets unraveled in the slump triggered by the collapse of the U.S. subprime mortgage market in August 2007.
Milan Seizure
Milan’s financial police seized 476 million euros of assets from UBS AG, Deutsche Bank, JPMorgan and Depfa Bank Plc this week in an investigation into alleged fraud linked to the sale of interest-rate swaps, which are designed to protect buyers against losses caused by fluctuations in borrowing costs.
The city is suing the banks after losses on derivatives purchased in 2005, and alleges the lenders misled municipal officials on the advantages of the derivatives. Officials at the banks declined to comment, as did a spokesman for Milan’s city council.
In Germany, the Wuerzburg Regional Court ordered Deutsche Bank in March 2008 to cover a third of the 2.6 million euros city utilities lost in interest-rate swaps bought from the lender. A court reduced a loss claim against Frankfurt-based Deutsche Bank in July by the city of Hagen, Germany, to 1 million euros, from 47 million euros. Both decisions are being appealed.
A Deutsche Bank spokesman said the bank disclosed all risks and informed the municipalities “comprehensively” when selling derivatives in Germany.
“Swaps are like anything else where there’s a sophisticated seller and a simple-minded client,” said Anthony Neuberger, Professor of Finance at Warwick Business School in Warwick, England. “Anything complex can have effects that are different from those anticipated.”
French Authorities
French local authorities are susceptible to buying derivatives because the country’s rules are lax, according to a July report by Fitch.
“The French rules, which do not limit the risk taken by local authorities using structured debt, favored the growth” of derivatives, the ratings company said.
About 25 percent of the 132 billion euros of debt owed by local public administrations in France was tied to derivatives as of January, according to Christophe Parisot, a Fitch analyst in Paris.
French Budget Minister Eric Woerth said in February that structured finance holdings don’t pose “a systemic financial and budgetary threat.”
“Structured credits are proposed only to certain clients with siginificant borrowings and with teams capable of following them,” Dexia SA, which received a 6.4 billion-euro bailout last year by France, Belgium and Luxembourg and which is the biggest lender to local governments, said in a January report to clients.
Ban on Derivatives
Losses on derivatives led some European governments to ban local authorities or state-owned companies from investing in derivatives.
The U.K. High Court ruled that about 3.2 billion pounds ($4.7 billion) of swap contracts entered into by Hammersmith and Fulham Council were unenforceable. The 1997 Local Government (Contracts) Act banned investment in the derivatives, according to a spokeswoman at the Department for Communities and Local Government.
Polish municipalities can’t use derivatives, according to local-government Web site bazagmin.pl, which cites the Finance Ministry’s May 2008 interpretation of the Law on Public Finances.
In Finland, “city fathers learned it the hard way -- there’s no speculation” in the derivatives market because, “in the previous recession, some municipalities speculated on currencies” and lost, said Reijo Vuorento, planning manager at the Association of Finnish Local and Regional Authorities.
State owned Austrian RR gambles and loses big on deriviatives
Originally Posted by Simon Cashmere
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