Introduction

In April 2006, a top trader at Deutsche Bank AG wrote an email that took a poke at some mortgage-backed investments his employer had helped peddle to investors around the world.

He said the securities, which were underpinned by home loans from subprime giant Ameriquest Mortgage, were, quite simply, “crap.”

For U.S. Senate investigators, the email is one example of internal communications and other newly uncovered evidence that indicate Deutsche Bank and other big financial firms knew they were bankrolling toxic mortgages and then offloading them into equally toxic investment deals.

A newly released 650-page report by the Senate’s Permanent Subcommittee on Investigations highlights the role that Germany’s largest bank played in fueling the mortgage investment frenzy that sparked the U.S. housing meltdown and led to a global financial crisis.

Additional data compiled by iWatch News from securities filings and other sources shows that Deutsche Bank was more than just a salesman of mortgage-related investments.

During the boom years, the bank was an important patron of the U.S. subprime industry, providing billions in working credit to on-the-ground lenders and helping them package nearly $100 billion in mortgage-backed securities.

Deutsche Bank was “hugely involved in the securitzation of garbage loans” from an array of lenders, Irv Ackelsberg, a Philadelphia-based consumer attorney who investigated Ameriquest and other subprime lenders, said.

As Deutsche Bank ramped up its role in the subprime market, its general counsel for U.S. operations was Robert Khuzami, who left in 2009 to become head of enforcement at the Securities and Exchange Commission. An SEC spokeswoman said Khuzami doesn’t participate in matters relating to his former employer. She added that the agency couldn’t comment on his previous work at Deutsche Bank.

A Deutsche Bank spokeswoman declined to comment on the company’s work with subprime lenders during the mortgage boom. As for the Senate report, the bank said that “there were divergent views within the bank about the U.S. housing market” and that these views were “fully communicated to the market through research reports, industry events, trading desk commentary and press coverage.”

Subprime allies

One of Deutsche Bank’s top allies in the subprime mortgage business was Ameriquest, a lender that critics called one of the nation’s worst subprime sharks.

Deutsche Bank provided one of the largest lines of working credit enjoyed by Ameriquest and its sister companies in 2005, according to confidential financial documents from Ameriquest’s parent company, ACC Capital Holdings, obtained by iWatch News.

Deutsche Bank provided a line of credit of $3 billion to Ameriquest and other lenders doing business under the ACC Capital banner, the documents show. The money – known as a “warehouse line” – provided the cash flow that allowed Ameriquest to make loans to homeowners.

Once the loans were signed by borrowers, Deutsche Bank also played a big part in packaging them into mortgage-backed securities and selling the securities to investors.

Deutsche Bank was more involved in Ameriquest’s securities-marketing process than any other bank, according to an iWatch News analysis of a sample of 20 investment deals backed by Ameriquest mortgages in 2004 and 2005.

Deutsche Bank had a hand in deals that produced more than $18 billion in mortgage-backed securities – well over two-thirds of the dollar volume of the 20 Ameriquest deals in the sample data culled from the company’s SEC filings.

Former employees said Ameriquest used “boiler room” sales tactics, forged borrowers’ signatures on key disclosure documents, and pushed borrowers into loans they couldn’t afford by misrepresenting their finances on official mortgage paperwork.

In early 2006, Ameriquest agreed to pay $325 million to settle a nationwide investigation by authorities in 49 states and the District of Columbia. Ameriquest denied any pattern of wrongdoing, attributing any problems to the work of “rogue” employees.

Ameriquest stopped making loans in 2007, and Citigroup acquired its loan-servicing unit and its sister company, Argent Mortgage.

Ameriquest wasn’t the only lender with a questionable pedigree that Deutsche Bank helped bankroll.

Deutsche Bank also helped package securities backed by mortgages from Countrywide Home Loans, which agreed to a multi-billion-dollar settlement with California, Illinois and other states that accused the lender of deception and fraud. Countrywide, which was purchased in 2008 by Bank of America Corp., denied any wrongdoing.

A Deutsche Bank spokeswoman said the firm had no comment on its relationships with Ameriquest and Countrywide.

‘Fingers crossed’

The Senate committee’s April 13 report focused not only on Deutsche Bank but also on a number of actors that helped produce the financial crisis, including bond-rating agencies. The report says that case studies of Deutsche Bank’s and Goldman Sachs’ efforts to create and sell mortgage-backed investments “illustrate a variety of troubling practices that raise conflicts of interest and other concerns.”

The report describes how one Deutsche Bank trader repeatedly warned his coworkers about the poor quality of the loans backing these deals, calling some of the securities “pigs.” At one point, the trader sneered at the marketability of one security but said he “would take it and try and dupe someone” into buying it.

In 2007, the report says, Deutsche Bank rushed to sell off mortgage-backed investments amid worries that the market for subprime loans was deteriorating.

“Keep your fingers crossed but I think we will price this just before the market falls off a cliff,” a Deutsche Bank manager wrote in February 2007 about a deal stocked with securities created from raw material produced by Ameriquest and other subprime lenders.

In a statement responding to the Senate report, the bank said that, despite “the bearish views held by some,” it was generally optimistic about the housing market “and endured significant losses” when the market crashed.

iWatch News intern Julian Hattem contributed research to this article.