ABP wants its fortune back

The Dutch pension fund for employees in the government, public and education sectors (ABP) lost a fortune in the credit crunch.

The Dutch pension fund for employees in the government, public and education sectors (ABP) lost a fortune in the credit crunch. It has now issued a claim for compensation against Deutsche Bank.

The law provides that you can cancel an agreement if you buy a painting by Van Gogh and it turns out to be a fake. Whether the seller knew it was a fake is irrelevant. This is known as ‘mutual error’.

Does this logic also apply to the ‘financial products’ that were traded between banks shortly before the credit crunch? Were they actually something different from what people thought they were buying?

What kind of products were they? Loans and shares were put into ‘baskets’ and given a label with a risk profile, estimated by finance specialists. These were then put into new ‘baskets’. If you keep doing this you end up with a kind of Russian matryoshka doll, containing smaller and smaller dolls of the same sort. Were the risks actually much greater or did the small risks actually materialise, in the same way that you can win the lottery with one ticket by ‘pure chance’?

The consequences are well-known. When something went wrong on the housing market in the US, a drama unfolded. Even the finance specialists at the banks didn’t know what the risks were and had no idea how much US real estate was in their products. Suddenly, all those ‘baskets’ were infected. The catalyst for the credit crunch.

Of course the financial crisis was much more complex than this suggests. But the question is still valid. Did ABP and Deutsche Bank make a mutual error? Were the risks much greater than was thought and will ABP win the case? If so, many more cases will follow!