The US Senate Permanent Subcommittee On Investigations said in a report issued Monday that Wall Street banks sold structured products known as basket options that enabled hedge funds to avoid taxes over a decade with Renaissance Technology, one of the biggest, savings as much as $6.8bn in taxes.
The report outlines how Deutsche Bank AG and
Barclays Bank PLC, German and British banks, from 1998 to 2013 sold 199 basket options to hedge funds
which used them to conduct more than $100bn in trades. The subcommittee focused
on options involving two of the largest basket option users, Renaissance
Technology Corp. LLC (RenTec) and George Weiss Associates.
The report says that had the hedge funds made
their trades in a normal brokerage account, they would have been subject to a
2-to-1 leverage limit – that is, for every $2 in total holdings in the account,
$1 could be borrowed from the broker. But because the option accounts were in
the name of the bank, the option structure created the fiction that the bank was
transferring its own money into its own proprietary trading accounts instead of
lending to its hedge-fund clients.
Data provided by the participants indicates that basket options produced about $34bn in trading profits for RenTec alone, and more than $1bn in financing and trading fees for the two banks.
"The [basket] options offered by Deutsche Bank
which were discussed in the committee's report were at all times fully compliant
with applicable laws, regulations and guidance," said Renee Calabro, a Deutsche
Bank spokeswoman, told The Wall Street Journal. "Moreover, they were a niche
offering to a small number of clients over a discrete period of time which we
completely ceased offering in 2010."
The subcommittee will hold hearings today.
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