Deutsche Bank Stunner: An Inside Look At Former CEO’s Role In Liborgate

Earlier this week in “The Inside Story Of How Deutsche Bank ‘Deals With’ Whistleblowers,” we gave you a play-by-play account of how the bank summarily dismissed Dr. Eric Ben-Artzi after the former Goldmanite raised questions about how Deutsche valued its crisis-era derivatives book.

In short, the story is a reflection of what some say is a hopelessly corrupt corporate culture and indeed, recent events at the bank underscore the extent to which it is reeling from expensive settlements and rampant defections. Here’s a recap of Deutsche Bank’s recent trials and travails: 

In April, Deutsche settled rate rigging charges with the DoJ for $2.5 billion (or about $25,474 per employee). A month later, the bank paid $55 million to the SEC (an agency that’s been run by former Deutsche Bank employees and their close associates for years) in connection with allegations it deliberately mismarked its crisis-era LSS book to the tune of at least $5 billion. On May 8, the bank’s head of structured finance Elad Shraga — who was instrumental in helping Deutsche become “an award-winning arranger of asset- and mortgage-backed debt — left the firm after 15 years. Then on June 5, US Attorney General Loretta Lynch announced the Justice Department would pursue new settlements with European banks over crisis-era MBS sales. Four days later, the bank’s headquarters were raided by authorities in connection with possible client tax evasion and on June 15, the firm’s global head of commercial real estate, Jonathan Pollack, defected to Blackstone. 

Oh, and both CEOs resigned on June 7. 

On June 26, FT revealed that BaFin, Germany’s financial “watchdog”, had raised serious questions about whether outgoing co-CEO Anshu Jain had misled the Bundesbank about who knew what and when with regard to the bank’s participation in the manipulation of LIBOR among other possible infractions. Summarizing, we said that BaFin apparently thinks Anshu Jain might have known his traders were manipulating LIBOR and also might have taken around a half decade or so to punish a trader who PIMCO apparently caught manipulating IR swaps.

Now, the entire BaFin report (which was sent to Deutsche Bank in May) has leaked. Here’s WSJ: 

BaFin, the German financial watchdog, sent the report to Deutsche Bank’s management board on May 11, less than a month before the German lender unexpectedly announced that its co-chief executives, Anshu Jain and Jürgen Fitschen, planned to resign. Deutsche Bank officials said in June that the resignations weren’t the result of regulatory pressure.

Mr. Jain, whose resignation took effect June 30 and who is still employed by Deutsche Bank as a consultant, is singled out for especially harsh criticism in the letter for allegedly providing inadequate leadership and failing to stop manipulation of the London interbank offered rate, or Libor, and other market benchmarks. 

So you’re saying Anshu Jain knew about LIBOR manipulation early on. Do you have any proof?

(From the report)

Mr. Jain had been informed already in 2008 about the discussions in the market relating to the susceptibility of the LIBOR to manipulation.

Mr. Falssola reported to Mr. Jain for the first time, according to the information available to EY about LIBOR submissions which deviated from the market by e-mall dated 21 August 2007.

In an e-mail dated 7 March 2008, Mr. Nicholls informed Mr. Jain, Mr. Cloete and Mr. Falssola that the Interbank markets were moving in a divergent direction and that there were banks which were trying to obtain liquidity for up to 50 basis points above the reference interest rate they had determined. The necessary conclusion based on this Information was that banks had reported reference rates which were too low.

Ok, but that could have been hearsay and it’s not like anyone was really talking about it, right? 

An article appeared In the Wall Street Journal (“Bankers cast doubt on key rate amid crisis”) on 16 April 2008 In which there was a report about the concerns of market participants with regard to the reliability of the this involved and in one paragraph also the possibility of transmitting false Interest rates in order to profit from derivative transactions as well as the possibility of collusion among banks.

Hmm. Well, maybe Jain didn’t read that article. 

This was followed by e-maii communications concerning this WSJ article between Mr. Boaz Weinstein (ZH: A Boaz sighting!) and Mr. Alan Cloete; Mr. Cloete stated that the LIBOR no longer represented a realistic ratio.

The discussion about the calculation of the LIBOR that made the rounds in the market following the WSJ article was the subject of two e-mails from Mr. Cloete to Mr. Jain on 20 April 2008 and 15 May 2008: Mr. Cloete referred in his e-malls to the rumors about the LIBOR noise about how libor noise around the LIBOR

This shows that Mr. Jain was informed about the LIBOR discussion in the market in the first half of the year 2008.

Got it. So clearly Jain knew something was amiss. What role did he play in facilitating it? 

The goal of the reorganization of the seating order in the trading division in London in the year 2005, which resulted in traders and submitters sitting together, was to achieve an open communication between both functions, especially also with regard to the LIBOR. The reorganization of the GFFX sector was initiated by Mr. Jain who was also decisively responsible for this; Mr. Cloete implemented the reorganization.

There is a connection with regard to timing between the reorganization of the GFFX division (with the HMO desk), the change in the trading strategy up to making intense use of IBOR spreads and the generation of profits in a range which had never been realized previously (or afterwards).

The MMD desk had substantially higher earnings in the period between August 2007 and March/April 2010 than had been previously or subsequently generated. There was a significant increase in the for the first time in August 2007. The profits were particularly drastic in 2008 (EUR 1.9 billion). The profits were also clearly increased at EUR1.0 billion in 2009. Mr. Jain knew the trading strategy and the trading result of the MMD desk at the latest starting on 30 August 2007. ‘Mr. Cioete explained to him the trading strategy of the MMD desk and indicated that, especially the trader Christian Bittar had been very successful.

Christian, who is Christian?

Regular readers will remember Bittar. He’s the former prop trader at Deutsche Bank who profited handsomely by betting on the direction of rates he conspired with others to manipulate (recall that when it comes to betting on the direction of rates, it’s much easier to make winning trades when you collude with colleagues to fix the benchmark). Readers may also recall that via a bit of digging which began with the LinkedIn profile of someone else named Christian Bittar, we were soon tossed down the Lieborgate rabbit hole only to find that on the other end was the secretive world of Swiss hedge funds and private banks. We later detailed how Deutsche Bank went about ridding itself of Bittar who was once one of the firm’s most well-paid traders. Most recently, thanks to the now-public e-mails used by the Justice Department to make its case against the bank, we found out exactly what Christian said on the way to influencing the fixings. Here are some particularly amusing quotes from Christian’s rate rigging days: “Ok, let’s see if we can hurt them a little bit more then.” “My cash desk will be against us so we’ll have to do some lobbying.” And best of all “LET’S TAKE THEM ON” (those are Christian’s all caps). 

Wow. So how well did Jain know Bittar? 

The relationship of Mr. Bittar to his superiors was quite remarkable. Mr. Bittar was the predominant trader in the GFFX division and was also treated accordingly. Mr. Jaln, who was Global Head of Global Markets in 2008, knew and promoted Mr. Bittar and supported Mr. Bittar’s entitlement to a bonus before Dr. Ackermann, as is apparent from a telephone call between Mr. Jain and Dr. Ackermann on 7 January 2007 in which Mr. Jain referred to Christian Bittar and Carl Maine, among other words, as  guys, they are the best people on the street” and best guys we have got.”

That’s right. Anshu Jain, CEO of Deutsche Bank until last month once referred to one of Wall Street’s most notorious rate riggers as one of “the best guys we have got.”

And on, and on, and on.

The report (embedded below) contains voluminous evidence of nefarious activities which we’ll outline in still more detail later, but for now, here are the key conclusions from BaFin regarding Jain:

Mr. Jain had the function as Global Head of Global Markets up to and including March 2009.

Mr. Jain must be charged with-the fact that there was an organization and business environment in the GFFX division, for which he was responsible as the Global Head of Global Markets until 31 March 2009 and subsequently as the member of the Management Board with the responsibility for behaviour involving the exploitation of conflicts of interests and that he ignored organizational duties under Sec. 25a KWG in conjunction with MaRisk as well as other provisions in the law, also including incorrect submissions.

Mr. Jain created an environment by the physical and functional restructuring of the business GFFX division in the year 2005, involving also a change in the seating order of the trading floor in London which he initiated in which conflicts of interest between traders and submitters arose or were strengthened. Traders and submitters could communicate openly with each other in this environment that had been created, and the consequence was that traders and submitters notified each other about their requests for LIBOR and EURIBOR submissions. These functions were also not (any longer) separated by Chinese walls.

Mr. Jain has been proven to have learned about discussion in the market concerning the susceptibility of the LIBOR to manipulation in 2008. However, he did not draw any consequences for DB (in the form of investigations) as a result of these indications in the market.

And finally, the accusation that may prove most damaging of all: 

There is suspicion that Mr. Jain might have knowingly made incorrect statements in his IBOR related Interview with the Deutsche Bundesbank on 5 October 2012. Mr Jain stated in this interview that he started having doubts about the fixing of the LIBOR for the first time in the first quarter of 2011 and that, in 2008, he had no knowledge about the LIBDR discussions.

There it is. The suggestion that Anshu Jain lied to the Bundesbank about LIBOR rigging at Deutsche Bank in what certainly appears to be an attempt to cover up his own complicity (or at least acquiescence) in the routine manipulation of the world’s most important benchmark rates. 

So three years after the crisis, the bank was busy firing the Eric Ben-Artzis of the world and promoting the Anshu Jains. If ever there were proof that Deutsche Bank’s corporate culture remained utterly corrupt years after 2008, surely this it.

The full BaFin report is below.

Baf in Deutsche Report