I’d heard from German speaking readers about the Der Spiegel report of an SEC investigation in its German edition over the weekend and they’ve now released it in their English language version.
Der Spiegel is careful about its sourcing, so readers should take this account seriously. The story is about the overall litigation risks facing the German powerhouse, the SEC investigation is a mention in passing (hat tip reader Mary L):
Meanwhile, the US Securities and Exchange Commission is also investigating Deutsche Bank, SPIEGEL reports. According to financial regulatory sources, the bank launched one CDO transaction called “START” in which it allegedly allowed the hedge fund of US speculator John Paulson to choose junk mortgage securities against which he could speculate — without the other investors knowing about it.
Goldman Sachs settled a suit with the SEC in a similar case for $550 million, SPIEGEL reported.
Why is there probably less here than meets the eye? For this investigation to be taken seriously, SEC enforcement chief Robert Khuzami would have to resign. He was the general counsel for the fixed income area at the time when the deals in question were undertaken (contra Der Spiegel, START was a program of synthetic CDOs, not just a single deal, just the Goldman Abacus trade that was the focus of an SEC lawsuit was actually just one of 25 Abacus trades). It would not be sufficient for Khuzami to recuse himself from this investigation. Staff would still be concerned about how the probe might affect their ultimate boss.
In addition, the fact that Paulson approached Deutsche Bank has been in the public domain since October 2009, when Greg Zuckerman’s book, The Greatest Trade Ever, was released. It discussed in detail how Paulson approached Goldman, Deutsche Bank, and Bear Stearns about constructing synthetic CDOs so Paulson could bet against the subprime market cheaply. This is how Scott Eichel, a senior Bear Stearns trader, saw it:
“We had three meetings with John, we were working on a trade together,” says Eichel. “He had a bearish view and was very open about what he wanted to do, he was more up front than most of them.
“But it didn’t pass the ethics standards; it was a reputation issue, and it didn’t pass our moral compass. We didn’t think we should sell deals that someone was shorting on the other side,” Eichel says.
If this conduct was so questionable that the SEC thought it made sense to sue Goldman in April 2010, why was Deutsche not sued then or shortly thereafter? Why is the SEC only “investigating” nearly two years later?