Tuesday, March 22, 2011

Deutsche (DB), BofA (BAC), (JPM) and Swap Risk

In a court ruling in Germany today, Deutsche Bank (NYSE:DB) was ordered to repay $769,356 to a small bathroom-supplies company that acquired swaps to save on interest-rate payments.

The court found that Deutsche failed to disclose the risk of the investments and had a “gross conflict of interest.”

JPMorgan (NYSE:JPM) and Bank of America Corp. (NYSE:BAC) have been sued by investors who lost a bundle as floating and fixed-rate bonds diverged. Among those claiming losses are non-profit agencies and hospitals.

The overall risk is in the courts ability to properly decide whether or not investors were aware of the risk of the swaps. How can that be decided when all an investor has to do is say they didn't understand - whether they did or not - in order to get their money back.

If this is handled wrongly by the courts, it could end up destroying the market.

As for Deutsche Bank, they face more lawsuits of the same nature in Germany.

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