The U.S. Securities and Exchange Commission isn’t planning to bring an enforcement action tied to Deutsche Bank AG’s losing nearly $550 million on mortgage-bond trades, after the lender’s own probe found no evidence of wrongdoing, according to people with knowledge of the findings.
A whistle-blower had told the SEC that a former top trader at the bank, Troy Dixon, had inflated the value of mortgage securities on his books in the years after the 2008 financial crisis and masked losses, Bloomberg reported last year. The trading losses came in 2013, after Deutsche Bank decided to scale down its exposure to the securities.
The lender’s internal probe found no evidence of inflated values and masked losses, the people said. Instead, they said, the bank determined that the red ink was caused by a failed hedging strategy and because, after Dixon left the firm, it decided to liquidate the bonds quickly. The U.S. agency is not formally closing its investigation, and may return to it if more information emerges, but it is not actively seeking more detail, the people said, asking not to be named because they aren’t authorized to speak publicly.
The decision was made inside an agency that has been facing possible budget cuts under President Donald Trump. The SEC has eliminated dozens of contractors who were hired to help root out Wall Street fraud. It also now has a new chairman, Jay Clayton, a former lawyer for Sullivan & Cromwell who was questioned during his nomination hearings about his Wall Street clients, which include Deutsche Bank. Clayton would have to recuse himself for a year from matters involving Sullivan & Cromwell and companies he represented.
In response to questions, Clayton told lawmakers that he was “100 percent committed to rooting out any fraud and shady practices in our financial system.”
Representatives for the SEC, Deutsche Bank, and Dixon declined to comment.
Art, Science
Valuing complicated securities like mortgage bonds has subjective elements, said Jaidev Iyer, chief executive officer of J-Risk Advisors and formerly a top risk manager for UBS Group AG and Citigroup Inc.
“In a crisis or in a liquidation scenario you may find that your valuations were too optimistic,” Iyer said. “You may be able to get out, but at prices that were much farther away than you wanted or thought.”
The results of Deutsche Bank’s internal probe may move the bank to the end of another chapter in its difficulties with its mortgage bond business. In 2015, the bank decided to quit trading residential mortgage bonds that were backed by the government, citing insufficient profits. In January, it finalized the terms of a $7.2 billion settlement with the U.S. Justice Department over the mortgage-backed securities it sold before the financial crisis.