Monday, April 3, 2017

Deutsche Bank Reaches Multibillion-Dollar Settlement Over RMBS Controversy (2017)

Case Controversy

Deutsche Bank was accused of misleading investors in the packaging, securitization, marketing, sale and issuance of residential mortgage-backed securities (RMBS) between 2006 and 2007. Deutsche knowingly securitized billions of dollars of defective mortgages and later made false representations to investors about the quality of the underlying loans. The bank also supported shoddy mortgage underwriting and negligent lending that caused borrowers to lose their homes because they couldn't pay their loans. This misconduct was controversial because it hurt our economy and threatened the banking system. Deutsche Bank is accountable for its illegal conduct and irresponsible lending practices, which caused serious and lasting damages to investors and the American public. Its controversial actions resulted in enormous losses to investors to whom the bank sold these defective RMBS securities. The US Department of Justice recently announced a $7.2 billion settlement with Deutsche Bank resolving these federal civil claims. This demonstrates the US Department of Justice's commitment to hold Deutsche Bank liable for the unethical behavior of deceiving its investors in pursuit of profits, as well as the direct contributions the bank's actions had on our nation's financial crisis in 2008 (US Department of Justice 2017).


According to Edward Freemen, “stakeholders are anyone affected by the decisions of the business” (Salazar, Chp2 ppt). The main stakeholders in this business ethics scandal include the investors and their families, the affected communities, the banking industry, associates, foreign markets, and the economy. Deutsche enhanced itself by paying reduced prices for risky loans while representing to investors valuation metrics based on appraisals the bank knew to be inflated. Investors who bought RMBS from the bank, and who suffered fatal losses as a result, included individuals and institutions that form the core of the community. These fraudulent business actions caused investors to lose their homes because they couldn’t pay their loans. The economy also took a big hit and faced a major international financial crisis in 2008 that posed a threat on the banking system. The controversy with Deutsche Bank represented one of the largest legal headaches the bank faced. Associates at the bank knew of the illegal business actions going on and attempted to warn senior traders at the bank’s subprime desk that a mortgage lender whose loans the bank was securitizing was becoming too lenient with its underwriting practices (Viswanatha 2017). Their concerns went unmet and they were put in a position where they had to keep quiet and act like nothing wrong was going on with the bank’s lending practices. This difficult position that Deutsche Bank put their associates in represents yet another important stakeholder affected by the company’s unethical business actions.


John Cryan
Deutsche Bank - Chief Executive Officer (CEO)
Milton Friedman's individualism theory states that "a business's main goal is to maximize profit for its owners and stockholders" (Salazar, Chp2 ppt). However, Friedman also states that although a business ought to maximize profits, they must do so within the limits of the law, and without fraud or deception. In the Deutsche Bank case, the bank intentionally securitized loans originated based on unsupported and fraudulent appraisals. Deutsche concealed its knowledge of pervasive and consistent appraisal fraud, instead representing to investors home valuation metrics based on appraisals it knew to be fraudulent. Ultimately, Deutsche attempted to maximize its profits by paying reduced prices for risky loans while deceiving investors on appraisals the bank knew to be inflated. Therefore, Friedman would consider these fraudulent and deceptive practices by Deutsche Bank to be extremely unethical because they go against his ethical principle of corporate social responsibility.


"Utilitarianism tells us that we can determine the ethical significance of any action by looking to the consequences of that act" (DesJardins 29). Furthermore, a utilitarian believes that "business actions should aim to maximize the happiness in the long run for all conscious beings that are affected by the business action" (Salazar 17). According to John Stuart Mill, the fundamental rule of utilitarianism "commits us to arranging society in such a way that we maximize the happiness for the greatest number of people" (DesJardins 32). A utilitarian would view the case with Deutsche Bank as unethical because of the consequences surrounding the bank's illegal conduct and the lack of awareness for all of its stakeholders. 
Deutsche Bank claimed to demonstrate the ethical theory of egoism; they acted only out of self-interest as the foundation of morality. Deutsche executed illegal behavior and irresponsible lending practices to maximize profits, and the level of high risk they took showed that they were ignorantly trying to acquire something of value (money) that would only bring happiness to themselves. Despite maximizing their own happiness, they were simultaneously decreasing the happiness of their stakeholders, particularly investors. 
A utilitarian would "avoid short-sighted thinking that often boosts profits momentarily but leads to a quick demise" (Salazar 20). Deutsche Bank put their investors at high risk only to quickly increase the happiness of themselves and maximize its profits. The bank didn't take the time to think about the consequences of their business actions and the long-term financial position they were putting their investors in. Since Deutsche focused their business activities around achieving happiness for themselves instead of achieving maximize happiness for the greatest number of people, Mill's would have considered their actions to be selfish and unethical. 


Kant ethics illustrates the idea that an action or decision is deemed ethical if its principles are motivated by Good Will. Furthermore, Kantianism states that "an ethical behavior, action, or decision is one that is rational, allow and help people to make rational decisions, and respects all individuals' needs and differences" (Salazar, Chp4 ppt). Kantianism deems the Deutsche Bank case unethical because they were not operating behind any kind of Good Will. Deutsche was motivated by their egoism view as the foundation of morality. They manipulated their investors in order to maximize their profits. Their borrowers made investment decisions without knowing accurate and critical information regarding the loans the bank securitized. Therefore, Deutsche Bank's investors were put into a position where they were unable to make a rational decision. These unethical business actions showed that Deutsche Bank had no respect for the stakeholders in which they deceived. 
The Kantian theory states that "our fundamental ethical duty is to treat people with respect, and to treat them as equally capable of living an autonomous life" (DesJardins 38). As Deutsche Bank's loan originator, you can sell the mortgage loans if you can do so while respecting people. One way you could respect people's autonomy is by empowering people to make rational decisions about the loans they were investing in. Deutsche Bank failed to do this. The bank knew that mortgage originators were "giving appraisers the value they wanted" and expecting the resulting appraisals to meet the originators' desired value, regardless of the actual value of the property (US Department of Justice 2017). Ultimately, Kant would consider the controversy with Deutsche Bank to be unethical because the company's actions were not motivated by Good Will. 
According to Kant, the Formula of Humanity claims that ethics require us to "act in such a way that we treat humanity, whether in our own person or in the person of another, always at the same time as an end and never simply as a means" (Salazar, Chp4 ppt). In the Deutsche Bank case, although the bank allowed its stakeholders to think and choose for themselves, nevertheless Deutsche still failed to represent the Formula of Humanity because they manipulated their investors by repeatedly making false representations and withholding essential information about the quality of the loans it securitized. Deutsche Bank was only focused on the ends for themselves. In other words, all they cared about was maximizing their profits and during the process, they were willing to take the high risk with their investors. Since the bank violated the Formula of Humanity along with the other two formulations of the categorical imperative, Kant would highly consider their business actions to be unethical. 

Virtue Theory

A virtue theorist would follow an approach similar to Kantianism but instead of focusing primarily on the ends, they would focus more on the means. The virtue theory emphasizes the "characteristics that allow things to function properly". In terms of business, the virtue theory focuses on an organization's character and how its actions reflect who it is as an organization. "Act so as to embody a variety of virtuous or good character traits and so as to avoid vicious or bad character traits" (Salazar 22). Deutsche Bank demonstrated irresponsibly poor character in a variety of ways, largely though, by manipulating investors in their investment decisions. Therefore, a virtue theorist would find the bank to be unethical in its lending practices.
Deutsche Bank and its associates are motivated by only selfish reasons in this case controversy. In the case, the bank violated numerous virtues that are used to judge one's character in business. The four virtues in business that Deutsche violated are courage, honesty, temperance, and justice. In regards to the virtue of courage, although Deutsche Bank took high risks, their ideas and actions are not only wrong but are also illegal. Therefore, the company does not represent the virtue of courage. The bank also failed to display any type honesty with its stakeholders. The Bank lied to and deceived their investors in pursuit of profit by assuring them that its RMBS were "safe investments", when in reality they weren't safe at all. As a result, this demonstrated that Deutsche Bank failed to show the virtue of honesty. In regards to the virtue of temperance, Deutsche Bank certainly lacked this virtue because they were trying to fulfill their own desire and self-interest to unethically maximize their profits. The bank enriched itself by paying reduced prices for risky loans while representing to investors valuation metrics based on appraisals the bank knew to be inflated (US Department of Justice 2017). To conclude with the last virtue of justice, Deutsche once again failed to represent any characteristics that go along with this virtue including hard work, quality products, and fair practices. Deutsche Bank cheated the banking system by overvaluing properties being sold to the bank for securitization. They did this by purchasing and securitizing fraudulent loans that it received favorable prices on. Since Deutsche Bank failed to display any of the characteristics of the four virtues in business, their business actions would be considered unethical under the guidelines of the virtue theory. 

Justified Ethics Evaluation

In my opinion, Deutsche Bank's conduct and lending practices were unprofessional, irresponsible, and outright unethical. Deutsche's egocentric actions did not only have a negative impact on its investors and American consumers, but it also contributed directly to an international financial crisis, which in turn lead to a downfall in our economy. As the leading global universal bank for many years now, Deutsche was well aware of the loan process and the legal regulations that go along with it. They know about the RMBS securities investments better than their investors. Instead of being honest with investors as they go through their investment decision process, Deutsche Bank mislead them and withheld important information about the loans. Throughout this period of time, the bank put their investors at financial risk just to maximize the company's profits. Negligence of these defective RMBS securities showed that Deutsche Bank did not respect its investors purchasing decision process, and that their greed and obsession for maximizing profits got the best of them and took over the company's business actions. 
There was no escape route for Deutsche Bank out of their illegal actions. The $7.2 billion settlement agreement represents the largest RMBS resolution for the conduct of a single entity. Deutsche Bank's pursuit of profit plan from the beginning was designed around their own self-interest and had an outcome that was only beneficial to them and not their stakeholders. Deutsche Bank did not do what someone with proper ethical values would do in this case. They lied to and deceived their investors with false information about the loans the Bank securitized. Deutsche put their investors at extremely high risk in their greedy pursuit to maximize profits. Overall, the bank had unethical motivations and that skewed their decision making and business strategies into the wrong direction, leading to long-term consequences with its stakeholders. It's impossible to make ethical decisions by being egoistic.We can only hope that Deutsche Bank will learn from this $7.2 billion settlement and move forward in a more ethical, responsible way with its investment practices.


DesJardins, Joseph. An Introduction to Business Ethics. New York: McGraw-Hill Companies, 2011. Print.

"Deutsche Bank Pays $7.2 Billion for Misleading Investors in Residential Mortgage-Backed Securities." The United States Department of Justice. Office of Public Affairs, 17 Jan. 2017. Web. 19 Feb. 2017.

"Deutsche Bank." Deutsche Bank. N.p., 2017. Web. 03 Apr. 2017.

"Deutsche Bank History: Chronicle - From 1870 until Today." (n.d.): n. pag. Deutsche Bank. Deutsche Bank, 2016. Web. 3 Apr. 2017.

Eisinger, Jesse. "Deutsche Bank Remains Trump's Biggest Conflict of Interest Despite Settlements." Business Ethics RSS. N.p., 09 Feb. 2017. Web. 19 Feb. 2017.

Ewing, Jack. "Deutsche Bank Vows to Focus on Clients With a New Culture of Ethics." The New York Times. The New York Times, 19 May 2014. Web. 19 Feb. 2017.

Dr. Salazar, Heather (2016). The Business Ethics Case Manual

Strasburg, Jenny, Max Colchester, and Devlin Barrett. "Deutsche Bank, Credit Suisse Reach Multibillion Settlements Over Toxic Securities." The Wall Street Journal. Dow Jones & Company, 23 Dec. 2016. Web. 03 Apr. 2017.

Viswanatha, Aruna. "Deutsche Bank Completes $7.2 Billion Mortgage Security Settlement With U.S." The Wall Street Journal. Dow Jones & Company, 17 Jan. 2017. Web. 11 Apr. 2017.

No comments:

Post a Comment