At a time when mortgage-backed securities were imploding and customers were fleeing the market, a junior analyst at Deutsche Bank AG protested when he was asked to alter the numbers in a spreadsheet to make a Deutsche security look less risky to ratings agencies, according to a person with knowledge of the matter.
The analyst, this person said, was asked by a mid-level Deutsche executive in late 2007 to make it appear that the investment would produce more cash than the bank actually expected at certain time points.
The request came at a crucial moment. In the last months of 2007, investors had grown skittish about such investments amid signs that the housing bubble was deflating, if not bursting. Up and down Wall Street, banks were trying to persuade ratings agencies that large portions of their mortgage-backed securities merited the coveted AAA stamp, meaning that they posed negligible risks of default. The analyst was asked to alter the spreadsheets in order to get a better rating, the person said.
The analyst's protest prompted an internal investigation conducted by a law firm, according to five current and former Deutsche employees. The protest and probe have not been previously reported.
Much remains unclear about this incident. It could not be learned whether false information was actually provided to the ratings agencies, nor whether the internal investigation dismissed or substantiated the analyst's account.
Two Deutsche employees who worked on the same team as the analyst told ProPublica they knew of no wrongdoing, and Deutsche issued a strong denial. "Any suggestion that we misled ratings agencies is unfounded and categorically false," said a Deutsche spokesman, who declined to answer specific questions about the analyst's protest or the internal inquiry.
But four years later, the revelation that an analyst protested raises questions about how vigorously, if at all, the government is investigating Deutsche Bank and its practices leading up to the financial crisis. In any case, ProPublica has learned, neither the S.E.C. nor any other government regulator or law-enforcement agency has interviewed the analyst.
The SEC's director of enforcement is Robert Khuzami. Before joining the SEC in 2009, he had been Deutsche Bank's general counsel for the Americas since 2004. He worked as one of the bank's top lawyers during the time the analyst raised questions. Khuzami has said he would recuse himself from any actions regarding Deutsche.
Another key SEC official -- George Canellos, who oversees enforcement for the New York regional office -- used to be a corporate lawyer who defended Deutsche against M&T Bank Corp. M&T, which was suing Deutsche over a security similar to the one the analyst raised objections to, had sought to depose the analyst and obtain the results of Deutsche's internal inquiry, according to people familiar with the lawsuit.
In December, M&T settled with Deutsche for $55 million in cash, M&T said Tuesday inits fourth-quarter earnings statement.
An SEC spokesman said the agency doesn't discuss whether it is investigating a firm. In general, spokesman Kevin Callahan said, Khuzami doesn't work on matters related to Deutsche, and Canellos is recused with respect to any matters related to Deutsche Bank's CDO business.
"We have policies and procedures for all staff to even prevent even the appearance of a possible conflict of interest," Callahan said. "We have experienced and professional staff ... to follow the evidence no matter where it leads, how complicated the product or which firms are involved."
The analyst's protest sheds light on a little-understood function, called modeling, that was critical to many of the transactions that wreaked major damage during the financial crisis. Modelers created vast and intricate spreadsheets that estimated or "modeled" how the securities were likely to perform, including on payment schedules.
The Analyst
Through 2006 and into 2007, a part of Deutsche Bank known as the CDO Group was humming. CDOs, or collateralized debt obligations, were securities, underpinned by mortgages, that the bank sold to investors. Even as it hawked these CDOs, Deutsche Bank and some clients were often betting that they would fail, because the mortgages that backed them looked increasingly likely to default. In essence, the bank was selling to investors a product that the bank itself believed was composed of "crap," as one Deutsche executive famously put it.
During 2006 and '07 -- when CDO sales peaked -- Deutsche ranked fourth in issuing CDOs behind Citigroup Inc., J.P. Morgan Chase & Co. and Merrill Lynch & Co., according to a 2011 report on the financial crisis issued by the U.S. Senate Permanent Subcommittee on Investigations.
Inside Deutsche's CDO Group, pressure to complete and sell the deals was intense, according to the Senate investigation, court records and people familiar with the Deutsche team. Investors were beginning to balk at purchasing CDOs because of signs the housing market was weakening. Employees often worked until 1 a.m. before being driven home in company-supplied town cars.
Among the hardest workers was a team of financial modelers and analysts. But despite their long hours, they "needed more bodies to process the work that was coming through," said a person familiar with the situation. So, some of the work was farmed out to a relatively cheap but highly skilled source of labor: Deutsche's Global Markets Centre in Mumbai, India. There, workers proficient in mathematics helped assemble and input the data for key spreadsheets.
Workers in Mumbai eagerly wanted to join Deutsche's prestigious and lucrative desks in London or New York. Few got the chance. One employee who did was Ajit Jain.
Jain had studied at the Indian Institute of Technology in New Delhi and joined Deutsche in June 2006, according to employment records kept by the Financial Industry Regulatory Authority. He joined the New York office in September 2007, when the CDO Group was struggling to find investors.
Within a short time of his arrival, according to three people familiar with the matter, Jain raised questions about whether spreadsheets were being improperly altered. His complaints went to senior levels within Deutsche, including its legal and compliance departments, according to people familiar with the matter.
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