Deutsche Bank set another prime example on how to push dubious investment products in their client portfolios without taking on any risk, but charging absurd commissions.  In 2006 Deutsche Bank promoted a fund in Ferris Wheels called Global View. However, so far not ferris wheel has been built, but nevertheless the fund spend up €208 million for property purchases, banking fees and dubious project development costs. So it looks like the average  investors will incur huge losses, but how about the sponsor and sales arm of the fund Deutsche Bank ?

“For Deutsche Bank, though, the Ferris wheel project turned out to be very good business. The Frankfurt-based bank earned €19.2 million through Global View thanks to its client advisors, who drew in €160 million from the bank’s customers within the space of 10 weeks, primarily from German small investors like Schmidt. The bank itself, however, never invested in the fund. Global View used the bank Delbrück Bethmann Maffei (DBM) instead. Deutsche Bank preferred not to invest its own money in the project, for example through loans. Even when that money was badly needed, the bank declined on the basis of a “market risk” that couldn’t “be assessed and covered by the bank. [...]

The letters and e-mails raise suspicions that Deutsche Bank not only insisted on unusually high commission rates that were meant to be concealed from investors, but even doubted the project’s chance of success. From the beginning, the bank calculated using an “equity commission of 12 percent. The sales brochure was only supposed to show 10 percent, which called for a creative solution. One Deutsche Bank employee suggested in writing that the excess commission simply “no longer be shown in the brochure”.

To me that looks less like a creative but more like a criminal solution !

“Calculation of performance is based on the time-weighted return and excludes front-end fees. Individual costs such as fees, commissions and other charges have not been included in this presentation and would have an adverse impact on returns if they were included.”

That’s the typical wording you find in the fact sheet of your common mutual fund. Ok. Let me get this straight. If  that fund company would be a car manufacturer they would say the total yearly costs of running this car is x dollar. And in the small print they would state: Costs are calculated without taking in account fuel, repairs, maintenance and the cut the dealer gets for selling the car.

Right ! What is next? Fund performance measured by taking out all years with double-digit losses? I understand that the fund industry feels the heat from the ETFs that deliver the same or better performance at a third or less of the costs. But this kind of “creative” fire-fighting adds to the frustration about funds as an investment vehicle in general. It’s time to change the rules and include ALL cost in the performance calculation of a fund.

With the imprisonment of Bernie Madoff and the recovery of the stock markets it seems like that the public eye on Madoffs Ponzi scheme is going down as well. Nevertheless, for (hopefully) a long time his name will stand for a so far unprecedented fraud and therefore investors should take their lessons and understand what really happened.

For those who are interested to dig deeper I recommend the reading of the “Madoff Chronicles”, a series of rather long features (you better print them) on his rise and fall, published in Vanity Fair. It is well researched and offers profound insights on his “system” and family-business, the role of funds and banks feeding him with billions and the greed and naivety of investors. Since the articles are not written for the “Economist” they include a fair share of amusing side notes, making it fun to read (at least as long as you have not been a client).

If you like these articles you might be interested as well to learn more on the role of the biggest feeder fund in the Madoff fraud, the Fairfield Greenwich Group, which alone “entrusted” USD 7 billion of its clients money to Madoff. Finally, if you are sick of Madoff and the Upper East Side Crowd and need some sunshine check “Pirate of the Caribbean”. A feature of Allen Stanford, who managed to rise from a Texan gym owner to running the second biggest Ponzi-scheme ever. During his “big times” it looks like he certainly had a lot more fun than Madoff. Now it seems their “luck” has changed, since Stanford awaits his trial sharing his cell with ten inmates and heated by the strong Texan summer sun.