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ABCP ends up front and centre in Deutsche Bank case

Deutsche Bank, headquartered in Frankfurt, changes hands at 75 per cent of tangible book value.

Ralph Orlowski/REUTERS

ABCP may be at the heart of another scandal.

It appears that the derivatives trades at the heart of Canada's non-bank asset-backed commercial paper fiasco may be the same trades at the centre of the current accusations that Deutsche Bank AG traders may have mispriced assets to hide losses during the credit crisis.

The debate about pricing at Deutsche involves so-called leveraged super senior credit derivatives.

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Deutsche Bank was one of the biggest providers buyers of credit insurance on so-called leveraged super senior credit derivatives from the Canadian ABCP sellers. That created a stream of payments flowing from Deutsche to the ABCP sellers. The income from providing the insurance to banks like Deutsche Bank was supposed to provide the cash to pay investors the interest on their ABCP notes.

In its reporrting, the Financial Times points to "Canadian pension funds" that sold the credit protection to Deutsche Bank. How did the pension funds end up on the other side of the trade? Funds like the Caisse de dépôt et placement du Québec were some of the biggest buyers of non-bank ABCP in Canada. When the ABCP market froze and was painstakingly restructured, the pension funds ended up essentially replacing the now-wound up ABCP sellers.

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