ABUSE OF STRUCTURED FINANCIAL PRODUCTS- Misusing Basket Options to Avoid Taxes and Leverage Limits MAJORITY AND MINORITY STAFF REPORT

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Percentage Allocations. Because the assets purchased through multiple options were
pooled, at Deutsche Bank until the end of the year 2008, and at Barclays through the present day,
RenTec and George Weiss determined the value of an individual option using a rough-cut
percentage allocation, meaning using a process to allocate a percentage of the pooled assets to a
particular option. 345 In other words, neither the hedge funds nor the banks made any attempt to
assign specific securities to specific options and track those specific securities on an ongoing
basis. Instead, given the pooling of assets, RenTec told the Subcommittee that it was impossible
to say at any given time that the gains from any given holding in the pooled securities applied or
did not apply to a particular option. 346 One RenTec employee agreed that, during the time that
the options were accounted for in this manner, it would have been impossible to walk it back and
determine which assets from the pooled securities had belonged to which option. 347 Similarly,
Barclays personnel told the Subcommittee that they accounted for RenTec trading and
compliance with the bank’s investment guidelines on a single, structure-wide basis. 348
The evidence indicates that the method actually used for calculating the value of an
option under the old Deutsche Bank structure and the Barclays structure required looking at each
option in existence at the time that a new one was added and assigning a percentage of the total
assets invested in the structure at that time to each existing option. 349 In other words, each time
that a new option was added or an existing option was exercised, every other option was revalued
and assigned a new percentage of the total pooled assets.
This rough-cut percentage allocation method meant that every option affected the overall
value of every other option that coexisted with it at any point in time. The value of each option
was not individually tracked, but calculated as a percentage of the value of the overall pooled
assets at each bank. This practice provides additional evidence that the assets in the individual
options were pooled and treated as an integrated whole, rather than being associated with
specific options. It is also far from clear that an “option” with an ever changing basket of
securities with no identifiable assets of its own merits treatment as a true option, or even as a
derivative.
345 See, e.g., 12/16/2007 Deutsche Bank letter agreement with Mosel Equities L.P., “‘OUTPERFORMANCE’
BARRIER OPTION TRANSACTION—Cash Settled, Linear Amortizing Premium—DB Reference No. 941-
50053,” DB-PSI 00000320-337; 12/21/2005 Barclays letter agreement with Badger Holdings L.P., “Option HH,”
BARCLAYS-PSI-002879-896. See also Subcommittee interview of Frederick Doucette, George Weiss (5/23/2014);
12/17/2007 Deutsche Bank letter agreement to RenTec, “First Amendment to the Amended & Restated Investment
Advisory Agreement,” RT-PSI-00000932-933.
346 Subcommittee interview of Thomas Kerns, RenTec (5/6/2014) (stating it would it be very difficult or even
impossible to determine what stocks were assigned to a particular option during or after an unwind).
347 Subcommittee interview of Thomas Kerns, RenTec (5/6/2014).
348 Subcommitte interview of Lansford Dyer, Barclays (4/3/2014).
349 See, e.g., 12/16/2007 Deutsche Bank letter agreement with Mosel Equities L.P., “‘OUTPERFORMANCE’
BARRIER OPTION TRANSACTION—Cash Settled, Linear Amortizing Premium—DB Reference No. 941-
50053,” DB-PSI 00000320-337; 12/21/2005 Barclays letter agreement with Badger Holdings L.P., “Option HH,”
BARCLAYS-PSI-002879-896. See also Subcommittee interview of Thomas Kerns, RenTec (5/6/2014).