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Regulatory Sanctions

No SEC Enforcement Action in Whistleblower Case Where Deutsche Bank MBS Traders Lost $550Mn

May 11, 2017

A whistleblower had told the SEC that a former Deutsche Bank trader had inflated the value of mortgage back securities in the years after the 2008 financial crisis and in doing so masked losses. By the time the positions were closed out in 2013, DB was left with a trading loss of nearly $550 million - which left open the possibility of a large whistleblower award.


Prior to the SEC's involvement, Deutsche Bank conducted an internal investigation into the matter and found no evidence of inflated values and masked losses. The bank concluded, instead, that the losses were attributed to a failed hedging strategy and to the decision that it quickly liquidate the positions after the trader – Troy Dixon – had left the firm.


Unofficially, it's now reported that the SEC plans to bring no enforcement action against the bank, choosing to rely on the bank’s determination that there was no evidence of wrongdoing. Some believe that SEC examiners made this decision under the duress of possible budget cuts. Whatever the reason, the SEC it is not actively seeking more detail, though it could reopen the case if more information emerges.


ACCORDING TO BLOOMBERG NEWS.    The MBS trades in question started around the 2008 financial crisis. Troy Dixon, then a top trader at the bank, bought securities backed by high-interest mortgages, betting that these homeowners would keep paying their loans at those high rates, and have a hard time refinancing amid the tumult. By 2009, his team had acquired $14 billion of the government-backed bonds. At one point, the position was among the biggest on Deutsche Bank’s books anywhere in the world.


The bank held onto the positions despite the wild fluctuations in prices. In 2009, for example, Dixon’s gains were about $467 million. In 2010, the trading desk lost $292 million, and lost another $109 million in 2011. By 2013, the positions had grown more problematic.


Disagreements broke out over how to value the bonds. Dixon and risk managers had shouting matches over the right prices, people who saw the fights said. One point of contention was whether the bank should assume the bonds would be held to maturity, or if it should instead assign valuations based on prices they would fetch if they were sold immediately.


The whistle-blower said that Dixon had been too slow to record losses on the bonds as markets grew volatile, and that at least $132 million of the hit that the bank took in 2013 on the positions should have been recognized sooner, according to people with knowledge of the matter. But Deutsche Bank found that losses came in part because a hedge that was supposed to reduce its net exposure apparently failed to do so. Also, after Dixon left in October of 2013, the bank elected to offload the remaining position quickly. Traders at other firms knew that Deutsche Bank had a big position in the securities, and that liquidating it wouldn’t be cheap.