IKB Deutsche Industriebank took a $150 million bath on Goldman’s famed Abacus deal and is named as the key victim of the alleged GS/Paulson scheme in the SEC’s lawsuit. But the German bank touted itself as an expert in CDOs with a top notch staff that examines investments with a fine-tooth comb.
"CDO pools are examined with a drill down to underlying assets and stress testing of the underlying asset pools," IKB bragged in marketing materials obtained by John Carney at The Daily Beast.
But it appears like the German bank never “drilled down” enough to realize the underlying mortgages in Abacus were doomed to failure.
It is possible, or even probable, that IKB was overstating its level of sophistication—it lost hundreds of millions in the transaction, money that was ultimately covered, most likely, by some byzantine combination of the French bank Calyon and German taxpayers—and the depth of investigation it undertook when making CDO investments. If so, the SEC may still find its case fatally undermined. Because that would indicate that IKB's executives cannot be trusted. No lawyer wants to see a jury wondering whether his star witness was lying back then or lying now.
But that is precisely the dilemma the SEC is faced with. Either the German bank executives were sophisticated and knew what they were investing in when they bought derivatives from Goldman, or they were lying about their sophistication when they bought them.