Deutsche’s latest mess looks like a Protium moment

May 20, 2016

The author is a Reuters Breakingviews columnist. The opinions expressed are his own. 

Deutsche Bank is in danger of having its own Protium moment. Germany’s largest lender is investigating a 2009 transaction that enabled former investment banking co-head Colin Fan and five other employees to profit directly, with leverage provided by their own employer. That sounds uncomfortably similar to a reputation-sapping entity set up around the same time by rival Barclays.

Deutsche’s trade entailed the common practice of “index arbitrage” – in this case, profiting from temporary differences in valuations between credit indexes and their underlying constituents. In 2009 Deutsche Bank set up a special purpose vehicle largely funded by institutional investors, with $750 million provided by French insurer Axa and a smaller amount from Monaco-based hedge fund Greengate SAM. Deutsche then geared the vehicle up to the gills, providing $30 for each $1 of investment. That juiced returns for an undertaking that otherwise would have been barely worth the effort.

What was unusual was that six Deutsche employees personally invested their own money – a total of $4.5 million, according to The Wall Street Journal. They received both a fixed payment and participation fees based on trades their division executed. Deutsche Bank said in a statement that the investment “may have involved unacceptable conflicts of interest”. A spokesman for Colin Fan said he had “fulfilled all appropriate compliance procedures, been entirely transparent at all times, and denied any wrongdoing”.

Barclays’ Protium deal raised the same issues of whether shareholder interests were being subordinated to those of staff. The UK bank provided funding that allowed credit traders to make millions of dollars via management of assets that were hived off into a separate investment vehicle. An independent review found the arrangement damaged the bank’s reputation.

Deutsche Bank’s probe should establish whether its funding was provided at a market rate, and whether the quirky arrangements left its shareholders financially disadvantaged. Even if they weren’t, the perception that investment bankers used their employer to enrich themselves directly would hurt. It would represent another reputational hit for a bank that is now worth little more in market cap terms than the combined value of its three capital raisings since 2010. Shareholders deserve better.

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