What, Me Worry?

The uninitiated might have thought that Deutsche Bank was facing a huge financial loss in the current subprime mortgage meltdown as its name is quite ubiquitous as a plaintiff in so many of the mortgage foreclosures in South Florida. In fact, the Miami Review reports that Deutsche Bank has filed over 2,100 foreclosure actions in South Florida year to date (mid-2007) in an attempt to pursue $507 million in mortgage loans. Deutsche Bank's foreclosures represent about 17% of pending foreclosures.

One need not cry for Deutsche Bank and the many other banks who are similar players. It is reported that Deutsche Bank is merely the trustee or custodian of the mortgage loans and most have been securitized and sold on the bond market to investors. It is the investors who face the losses.

Deutsche Bank has apparently found another way to profit from the subprime mortgage meltdown. The Financial Times recently reported that Deutsche Bank's fixed income desk entered into short positions in late 2006 in the ABX index which is a derivative based on high-risk mortgages and home equity loans. The ABX index represents a basket of credit default swaps on high-risk mortgages and home equity loans and provides a type of insurance against default of a specific security. By doing so, the bank bet that the US mortgage market would weaken. Upon the subprime mortgage market correction and near collapse in March, 2007, Deutche Bank profited handsomely. In contrast to some of its peers, the German bank reported record first-quarter earnings in this sector.