Macaskill on markets: New questions for Deutsche Bank and Jain
A scathing report by German regulator BaFin on interest rate rigging by Deutsche Bank will no doubt give any potential employer of former co-CEO Anshu Jain pause for thought.
Jain is reportedly in talks with Japanese technology firm SoftBank about a new role. The BaFin report should also prompt further investigation by regulators in Germany, the UK and the US into historical compensation practices at Deutsche Bank, as it raises new questions about how bonuses were allocated when market abuse was occurring at the firm.
Some findings of the report, which BaFin sent to the Deutsche Bank board in May, had already been leaked. New details emerged when the Wall Street Journal posted a copy of the entire document online in July, however.
The report places Jain as a player in Deutsche Bank’s own version of the Watergate scandal, complete with mysteriously erased tapes of phone calls from the period when the firm’s traders were engaged in systematic rigging of interest rate fixings and opaque explanations of what Jain and his closest lieutenants knew, and when they knew it.
The report’s author, Frauke Menke, was unequivocal in her condemnation of cultural deficiencies at Deutsche Bank, which created an environment where market abuse became a route to bonus awards that were far in excess of industry standards, even in a period when payouts were higher than they are today.
Deutsche Bank has made a number of public statements disputing the findings of the report, notably that "the report includes statements that are taken out of context. It would be unwarranted to infer conclusions about the conduct of the bank or any individuals at this stage, especially because their detailed responses are submitted privately out of respect for the regulatory process." One key allegation in the report (the allegation of misleading the Bundesbank) has already been dropped.
Euromoney has already highlighted the extraordinary bonus allocated to Deutsche Bank trader Christian Bittar for his revenue generation in 2008, when his desk’s rigging of Libor and Euribor rate fixings helped the firm to avoid a state bailout that would almost certainly have resulted in the dismissal of Jain and his trading lieutenants. Jain was at the time head of the global markets unit where Bittar worked, and was also co-head of investment banking at Deutsche Bank.
The BaFin report provides further information on the bonus allocation and Jain’s role in defending its payment (which was ultimately incomplete) despite a backdrop of massive trading losses in other parts of Deutsche Bank’s global markets division.
The US Department of Justice previously said that Bittar was allocated a £90 million bonus for 2008, which indicated that his money market trading desk had generated at least £900 million of revenue for the year and probably more, given that it is unlikely that a trader would earn more than 10% of revenue when the total is a substantial amount. The BaFin report provided extra detail, stating that Bittar’s money market desk generated €1.9 billion of revenue in 2008 and that he and colleague Carl Maine were allocated a combined bonus of €130 million for the year in a proposed payout that was first approved then defended by Jain.
Sterling was trading at around 90p to the euro at the end of 2008, indicating that Bittar was allocated the lion’s share of the proposed combined bonus payment. BaFin’s Frauke Menke noted Jain’s defence of the proposed bonus in a phone call to Deutsche Bank CEO Josef Ackermann on January 7 2009 and his description of Bittar as a “guaranteed money maker”.
Menke was unable to find evidence that directly tied Jain or his subordinate Alan Cloete, the head of global finance and foreign exchange (GFFX) at the time, to Bittar’s rate rigging. She did link their reorganization and management of Bittar’s department to the market abuse, however.
“The enormous increase in the trading profits of Mr Bittar and, thus, also the enormous increase in his bonus entitlements coincide in terms of time with the restructuring of the GFFX division,” Menke said in her report. “The question accordingly arises as to whether and to what extent the restructuring of the division by Mr Jain and Mr Cloete was specifically made in order to give, among others, Mr Bittar the possibility of directly communicating with the (rate fixing) submitters and accordingly achieving higher trading profits. In any event, the coincidence in timing between the physical changes in the GFFX division and the substantially increased trading profits at DB is remarkable.”
Other questions arise when so much money is at stake. Bittar’s bonus allocation was an extreme example of the practice of giving dealers a cut of the revenue generated by their trading desks. At times this could – and still can – create perverse incentives that muddy the relations between traders and their managers at investment banks. Bittar reported to David Nicholls during the period of the most sustained rate rigging by Deutsche Bank. Nicholls reported to Alan Cloete, who in turn reported to Jain, with both Nicholls and Cloete featuring on Jain’s global markets executive committee.
Jain, as a member of Deutsche Bank’s overall executive committee, was forced to join CEO Josef Ackermann’s example in renouncing any bonus payment for 2008 in a public act of contrition during the credit crisis.
Cloete and Nicholls were not obliged to join this exercise in self-denial and are likely to have been awarded hefty bonuses for the year, given the role their group played in helping to offset enormous losses in credit and equity trading. Their payments – which have not yet been disclosed – were almost certainly a fraction of those allocated to Bittar, however. Trading heads at firms such as Deutsche Bank could earn in excess of €10 million in a good year during the go-go era of the first decade of this century, but not in the €100 million range proposed for Bittar’s 2008 bonus.
Bittar was certainly not the only trader at a big global investment bank to earn enormous bonuses before the financial crisis. But such discrepancies could lead regulators to investigate the details of financial relationships between traders and managers in circumstances where a subordinate is awarded a bonus payment that is disproportionate relative to the compensation of the manager.
There are plenty of ways in which the relationship between a manager and a high-earning employee can become clouded. Co-investment in personal account trades or structured deals that involve different levels of seniority can be one way to provide a reciprocal service. When the collateralized debt obligation and collateralized loan obligation markets were in full swing between 2000 and 2008, some bankers made personal investments and viewed access to these and other structured instruments as a source of value, for example.
Over the length of a successful banking career, side investments can become a big provider of wealth. A recent Bloomberg Business article estimating that Goldman Sachs CEO Lloyd Blankfein is now a billionaire (finally!) broke down its assumptions on the sources of his worth. Only around $500 million was from the value of his publicly disclosed holdings of Goldman Sachs stock, with the rest coming from real estate and other investments, including distributions from stakes in the bank’s private equity funds.
There is nothing inherently suspicious about side investments by bankers, of course. But senior bankers who are already fed up with the level of interest in their pay packages would probably not welcome additional scrutiny of their non-payroll income as well.
Jon Macaskill is a leading capital markets and derivatives journalist with more than 25 years' experience covering financial markets from London and New York. He was for a period of time employed by Deutsche Bank.