Joseph Ackermann CEO of Deutsche Bank, the world's most highly-leveraged financial institution.
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Germany's highest civil court has ruled that Deutsche Bank should have warned its customers of the risks of an exotic investment product it sold in the run-up to the financial crisis. The landmark ruling has huge implications for the banking industry and could unleash a wave of similar cases, with compensation possibly running into the hundreds of millions.
The amount of money at stake is peanuts for a bank that made over €2.3 billion ($3.3 billion) in profit last year. But the repercussions of the €541,074, plus interest, that Deutsche Bank will now have to pay in compensation to Ille Paper Service could be large enough to keep financial executives awake at night. The bank's lawyer even went so far as to warn of a "second financial crisis."
The presiding judge, Ulrich Wiechers, ruled that Deutsche Bank had abused its obligation to give its customers proper advice. The product, called a "spread ladder swap," was essentially a bet on how interest rates would develop in the future. The judge said that the bank did not explain the risk of the product properly, particularly given the fact that the risk to the customer was unlimited if they lost the "bet."
There was also a conflict of interest, the court ruled, as the bank was effectively betting against its own customer and giving them advice at the same time. Wiechers also said that the bank had deliberately structured the product to the customer's disadvantage, in order to make a profit from the deal.
A wave of lawsuits are now expected.
Deutsche Bank headquarters in Germany.
