The $541 Million Loss that Became a Thorn in the Side of Deutsche Bank

Deutsche Bank which has been repeatedly rocked by scandals is facing one of the most turbulent transformations in its history.

Troy Dixon was said to have gone from “Hollis to Hollywood” after he hit the big time, first at Deutsche Bank and now at his own hedge fund. He has emerged as one of the most powerful and controversial figures in the $6 trillion market for government-backed mortgage bonds.

The story of his journey from Hollis, a neighborhood in Queens, to the world of finance tells a story of outsize trades and power plays, as documented by Bloomberg today. . 

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At one point, Dixon built up a $14 billion position, one of the largest anywhere at the bank. Word soon spread that he effectively controlled a quarter of his target market, inspiring awe and ill-will among rivals and even within his own bank. He even raised eyebrows at the Federal Reserve Bank of New York.

$500,000 Billion Trading Loss

More than two years after Dixon struck out on his own, the story of his phenomenal rise has become a tale of a half-billion-dollar trading loss that has belatedly drawn the attention of federal authorities.

The question remains as to who is ultimately responsible for losses that Deutsche Bank ran up in the aftermath of the 2008 financial crisis, when Dixon headed up a mortgage-backed trading desk there. The Securities and Exchange Commission is looking to find out what happened and, specifically, how the German bank accounted for certain bonds as they lost value. According to sources, a whistle-blower is alleged to have filed a complaint with the SEC claiming the bank inflated some of the values.

Scandal

Deutsche Bank has been rocked by one scandal after another on both sides of the Atlantic and is facing one of the most turbulent transformations in its 146-year history.

Dixon meanwhile, who arrived at Deutsche Bank in 2006, towards the end of the subprime era, spotted an opportunity as the 2008 financial crisis hit. His team started buying securities backed by high interest mortgages. The bet was that these homeowners would keep paying their mortgages at those high rates and have a hard time refinancing amid the tumult.

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By 2009, his team had acquired a breath-taking $14 billion of the government-backed bonds. That year, those investments helped Dixon generate about $467 million in gains, according to an internal presentation. However, the returns proved highly volatile and the group lost over $292 million in 2010 and then made $109 million in 2011.

Deutsche Bank pared its holdings to comply with strict new regulations but by January 2013 was still sitting on about $3 billion of the securities. Top risk officers at the bank told colleagues they were worried about the positions.

Fed Concerns

The trades also reportedly drew the attention of the New York Fed, that worried about the potential impact on the broader market. Dixon and the bank’s head of North American corporate banking and securities, Jeff Mayer, were summoned to discuss the matter but no action was taken.

Other market players who knew that Deutsche Bank was holding large positions would invariably try to turn a quick sale to their advantage by low-balling the prices but it wasn’t long before tensions on the trading floor were strained to breaking point.

In June, Dixon told the bank he wanted to leave and he was then asked to stay to help wind down the trades. By the time he left that October, Deutsche Bank was still holding about $2 billion of the bonds.

With Dixon gone, and Deutsche Bank selling assets worldwide to comply with tightening capital rules, the bank largely exited the position. In 2013, Dixon’s once high-flying trading group, which traded what are known as government-backed pass-through mortgage bonds, lost $541 million, despite hedges designed to soften the blow.

Now, three years later, Deutsche Bank is being asked to account for what happened. The whistle-blower alleges that the bank masked the losses and should have reported them sooner.

Dixon, in the meantime, is perhaps not surprisingly continuing to make money on the same kinds of bonds that he was trading at Deutsche Bank.

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