Sajid Javid: From risky business to business secretary
The rising star of the UK’s victorious Conservative Party now has a mandate to help business. However, in his previous incarnation as an investment banker, he was at the heart of the credit trading business, and was responsible for structuring an emerging-market synthetic CDO that incurred millions of dollars worth of losses for investors.
Sajid Javid: '[Being an investment banker] helped prepare me for a profession not well liked'
As the UK’s new business secretary Sajid Javid settles into his new office – under the watchful gaze of his favourite portrait of Margaret Thatcher – his days as an investment banker at Deutsche Bank must now feel like a distant memory.
Javid has said that being an investment banker “helped prepare me for a profession not well liked by the general public”, but his past career at Chase Manhattan and the German lender has been useful as an imprimatur of economic competence.
Javid joined Chase Manhattan Bank in New York after university and subsequently moved to Deutsche Bank in 2000. In October 2006, he was appointed head of global credit trading (GCT) Asia (ex Japan) and was responsible for all cash and derivative credit trading, collateralized debt obligation (CDOs), securitization, structured finance and convertibles and for the commodities business. He reported to Rajeev Misra, global head of GCT, and Loh Boon-Chye, head of global markets Asia.
Javid “is spinning his former career” as a sober investment banker as opposed to a structured credit trader at the heart of the business that precipitated the global financial crisis
Former Deutsche Bank colleague
As anyone who bought a sub-prime ABS CDO will likely recall, 2006 was an interesting time in the global credit trading and structuring business. Speaking to Euromoney in July of that year, however, Javid brusquely dismissed any concerns about the riskiness of the broader asset class, and specifically emerging-market (EM) CDOs.
“As long as investors understand the risk/rewards of an emerging-market CDO, they are very appropriate,” he told Euromoney, enthusing that with an EM CDO “investors are getting a huge amount of leverage and they are comfortable taking the risk”.
Javid was speaking to Euromoney in his capacity as global head of EM structuring shortly after the close of a $500 million EM CLO called Craft EM CLO 2006-1. The deal was a replenishable synthetic balance-sheet CDO referencing a pool of highly illiquid loans on Deutsche’s loan exposure management group’s balance sheet. It was subsequently upsized to $1 billion in the face of investor demand.
However, the risks and rewards of this type of deal didn't turn out to be quite as appropriate as Javid claimed. By March 2009, losses on defaulted assets in the Craft EM CLO 2006-1 pool stood at $32 million, according to Moody’s, which downgraded the ratings on four classes of notes in the deal. It said that there had been a substantial deterioration in the quality of the transaction’s reference portfolio. Defaults had effectively depleted more than 50% of the $60 million subordination available for the junior notes.
Javid’s enthusiasm for the huge amount of leverage that investors were getting was presumably not shared by US private equity firm Arco Capital, which tried to take Deutsche Bank to court in September 2012 over the $37 million in losses it incurred by investing in the deal. The case was dismissed as it came after the expiration of the five-year statute of limitations.
Arco claimed that Deutsche had stuffed the CDO with ineligible loans that resulted in the 14.28% loss rate in the pool. Deutsche claimed that the losses were due to the financial crisis and that Arco was aware of the risks it was taking on.
One former Deutsche Bank colleague expressed amazement to Euromoney at how Javid “is spinning his former career” as a sober investment banker as opposed to a structured credit trader at the heart of the business that precipitated the global financial crisis.
Javid left Deutsche Bank in 2009, just as the full extent of the firm’s credit-related losses were becoming apparent. In 2010, he ran for safe Conservative seat of Bromsgrove.
In politics, as in banking, timing is everything.