The trades that the SEC was probing started around the 2008 financial crisis. Dixon bought securities backed by high-interest mortgages, betting that these homeowners would keep paying their loans at those high rates, and have a hard time refinancing amid the tumult. By 2009, his team had acquired $14 billion of the government-backed bonds, Bloomberg reported in June. At one point, the position was among the biggest on Deutsche Bank’s books anywhere in the world.
Zigzagging Returns
The trade’s returns were wildly volatile. In 2009, Dixon’s gains were about $467 million, according to an internal presentation. The next year, the trading desk lost $292 million, followed by another $109 million of profit in 2011, according to a document seen by Bloomberg.
By 2013, the positions had grown more problematic. As the Fed hinted it might start to taper some of its efforts to ignite growth, markets grew skittish. Investors also feared that new government policies might make it easier for homeowners to refinance the high-rate mortgages behind the investments. Preparing for new capital rules and stress tests was making it more expensive for the bank to hang onto the securities.
Disagreements broke out over how to value the bonds. Dixon and risk managers had shouting matches over the right prices, people who saw the fights said. One point of contention was whether the bank should assume the bonds would be held to maturity, or if it should instead assign valuations based on prices they would fetch if they were sold immediately.
The whistle-blower said that Dixon had been too slow to record losses on the bonds as markets grew volatile, and that at least $132 million of the hit that the bank took in 2013 on the positions should have been recognized sooner, according to the people with knowledge of the matter. But Deutsche Bank found that losses came in part because a hedge that was supposed to reduce its net exposure failed to do so, the people said. Also, after Dixon left in October, the bank elected to offload the positions quickly. Traders at other firms knew that Deutsche Bank had a big position in the securities, and that liquidating it wouldn’t be cheap, Bloomberg reported in June.
Dixon now runs hedge fund Hollis Park Partners, which gained 10 percent in 2016 and 3.5 percent in the first quarter.
This article was provided by Bloomberg News.