Too Big To Fail-A Lesson From Deutsche Bank

[vc_row][vc_column width=”2/3″][vc_column_text]“We enable our clients’ success by constantly seeking suitable solutions to their problems. We will do what is right—not just what is allowed.” That is the classic statement of values from the Deutsche Bank website. In case you missed it, one of the world’s largest and oldest financial institutions has been lurching from scandal to scandal over the last few years and hammering a rusty nail into the coffin that is the “too big to fail” theory. The scandals have occurred largely in the last ten years of its nearly 150 year history and range from artificially propping up housing prices in the 2007-2008 financial crisis to participating in the notorious Libor scandal, to covert spying and espionage of its critics, to doing dollar denominated business with the US sanctioned countries of Burma, Libya, Sudan, Iran and Syria.

There’s not enough space or regulator imposed penalty dollar signs that can efficiently cover those malfeasances on this page, so I’ll focus on just one that makes short shrift of their statement of values. In the early days of 2015, an internal investigation dubbed Project Square that was looking into Deutsche Bank’s Moscow office trades revealed that a 36-year-old American trader Tim Wiswell had overseen over $10 billion of mirror trades that helped siphon cash out of Russia and mainly into London.

The concept was beautiful in its simplicity. An online article on Bloomberg titled “The Rise and Fall of Deutsche Bank’s ‘Wiz’ Kid” outlines the grab-a-bag-of-popcorn-for-the-drama narrative of how Tim Wiswell – Wiz to his friends – brought down the Moscow investment banking unit of Deutsche Bank. Wiswell’s desk, which never had more than a dozen or so employees, carried out thousands of mirror trades over a four year period. The size of the trades would be not too high as to raise an inordinate amount of eyebrows, somewhere in the range of $10-15 million per transaction.
Wiswell, who was promptly fired once Project Square was released, sued the bank for wrongful dismissal and lost. He claimed that at least 20 of his bossed and colleagues, including two supervisors in London, knew about the trades because they were carried out openly. The counterparties were also taken through “strict vetting” by the sales team using a compliance framework that was reviewed in both Moscow and London if any issues were identified. They all passed muster.
But how long had the compliance teams within Deutsche Bank been sticking their heads in the sand? The August 29, 2016 issue of The New Yorker magazine provides a well-written investigative piece on the $10 billion scandal. According to the article, on one day in 2011, the Russian side of a mirror trade, for about $10 million, could not be completed as the counterparty, Westminster Capital Management, had just lost its trading license. The Federal Financial Markets Service in Russia had barred two mirror trade counterparties, namely Westminster and Financial Bridge, for improperly using the stock market to send money overseas. The failed trade was a problem for Deutsche Bank, the New Yorker argues. It had paid several million dollars for stocks without receiving a cent from Westminster. The episode should have raised serious suspicions – especially given the revoking of Westminster’s license – but apparently it did not. The failed trade was resolved over a year later in November 2012 when Westminster repaid Deutsche Bank and the mirror trades continued.

But the patterns of suspicious activity were wagging their tails for the average compliance eye to pick up. Clients of the mirror trade scheme consistently lost small amounts of money: the differences between Moscow and London prices of a stock often worked against them and clients had to pay Deutsche Bank a commission for every transaction. The apparent willingness of counterparties to lose money again and again should have sounded an air raid alarm that the true purpose of the trades was to facilitate capital flight. The counterparties for the mirror trades were not owned by Russian oligarchs. They were brokerages run by Russian middlemen who took commissions for initiating mirror trades on behalf of rich people and business eager to send their money offshore, the New Yorker reveals further. A businessman who wanted to expatriate money in this way would invest in a Russian fund like Westminster, which would then use mirror trades to move that money into an offshore fund. The offshore fund then wired the money, in dollars, into the businessman’s private offshore account. An internal research report by Deutsche Bank titled Dark Matter, and which was totally unrelated to the unraveling scandal in Russia, revealed that Britain had significant unrecorded capital inflows. Since 2010, wrote the research duo of Harvey and Winkler, about a billion and a half dollars arrived in London every month and a good chunk of it was from Russia. “At its most extreme, the unrecorded capital flight from Moscow included criminal activity such as tax evasion and money laundering.” A month after this research report was released to much media debate, the $10 billion scandal broke out, revealing exactly how another department within Deutsche Bank played a big role in that economic anomaly. Of the eighteen billion dollars that the researched had estimated was flowing into the UK each year, about 20% had arrived there as a result of the trades made at their own bank. Deutsche Bank is now facing billions of dollars in penalties, at the last count they were fighting off a $14 billion penalty from the Department of Justice in the United States for mis-selling mortgage securities in the run up to the 2008 financial crisis. This is against a provision that they have made for $5.6 billion for legal costs related to all the scandals they are currently facing. The share price has of course tanked and analysts are concerned about its viability as a going concern if these penalties are exacted, as they’d have to go back to shareholders to raise the cash for making the penalty payments.
I’ve written about Deutsche Bank’s value statements today, and Wells Fargo value statements a few weeks ago. I’m sure if we dug deep within the bowels of Imperial, Chase and Dubai Banks locally, we would find a value statement or two posted proudly at the head office reception. I’m starting to build a healthy cynicism for value statements of any kind. If anything, banks should have a uniform statement globally: “We’re here to take your money, use it, make our money and hopefully give you a return. Someday”

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Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

The City of Nairobi as a Financial Hub

‘Our ultimate aim is to create a vibrant and globally competitive financial sector that will promote high level of savings to finance Kenya’s overall investment needs. That will not happen without extensive reforms. Let me highlight some of the most important. First, we will establish a Nairobi International Financial Centre. Our model is the City of London. Once complete, it will consolidate Kenya’s position as our region’s hub, while also supplying the world-class financial services that East Africa’s rapidly growing oil and minerals sector needs.’

The above mentioned quote is extracted from a presentation made by Manoah Esipisu, the Secretary of Communication and State House Spokesperson on February 3rd 2014 at the Bloomberg Africa Forum. So I decided to dig up a little information on why the City of London stands tall and worthy of emulation in Esipisu’s educated eyes. First of all, the Greater London administrative area is made up of 32 boroughs. There are two cities within the 32 boroughs, namely the City of London and the City of Westminster. The City of London is the trading and financial nucleus of Greater London. Colloquially known as the Square Mile due to its geographical acreage of 1.12 square miles, it houses the London Stock Exchange, the Bank of England and Lloyd’s of London. Over 500 banks have offices in the City while a number of the world’s largest law firms are headquartered there and, consequently, the Square Mile accounted for 2.4% of United Kingdom’s GDP in 2009.

As at the last census in 2011, the City has a population of about 7,000 residents, but over 300,000 commute there daily to work, mainly in the financial services sector. Administratively, the City of London Corporation headed by the Lord Mayor governs the City. According to Wikipedia, the 2001 census showed the City as a unique district amongst 376 districts surveyed in England and Wales. The City had the highest number of one-person households, people with qualifications at degree level or higher and the highest indications of overcrowding. It recorded the lowest proportion of households with cars or vans, people who travel to work by car, married couple households and the lowest average household size: just 1.58 people. It also ranked highest within the Greater London area for the percentage of people with no religion and people who are employed. The City has its own police force with slightly over 800 police officers separate from the Metropolitan Police Service covering the remainder of Greater London.
My conclusions: to live in the City of London you have to be paid a ton of money to do a lot of work and have a total lack of discretionary time for matrimonial, social or religious matters! Oh, and that thing called traffic? What traffic? The public transport works quite well thank you! Well enough to get 300,000 in and out of the City environs daily.

So I look at Esipisu’s speech again, especially with regard to the aim of becoming a key financial centre for East Africa’s oil and minerals sector. A friend of mine providing consulting services in the rapidly expanding local Oil and Gas sector told me that there are at least over thirty foreign oil exploration related companies in Kenya closely followed behind by their attendant service providers in aviation, drilling equipment, security and what have you. They are located all over Nairobi as there doesn’t seem to have been foresight at central government level to create a bespoke business district for this critical source of foreign direct investment. Neither have there been any efforts on the immigration side to fast track work permits for the hundreds of specialized professionals that are flying into Kenya to work in the exploration fields. They arrive at JKIA and it takes 3 hours to get from the airport to their hotel rooms because the green city in the sun is actually the gridlocked city in the smog. The average Joe doesn’t want to drive if he can take clean, reliable and decent public transport. But for as long as the city’s transport policy is written by an individual who has a driver waiting for him at his designated parking spot under a cool parking shed, we will struggle to achieve the dream of becoming a financial centre. If goods and services cannot move or be provided freely in Nairobi then providers and consumers of capital, which is a key tenet of a global financial centre, will not come to deliver Esipisu’s dream.

If the Governor’s solution to the endemic traffic jam is to tell Nairobi natives to wake up earlier to get to work, then we’re sunk. Nairobi is not made up office working minions imprisoned on swivel chairs. It’s made up of entrepreneurs who traverse the length and breadth of the metropolitan area buying and selling goods and services. It’s made up of professionals moving from place to place to deliver their professional services as well as their customers coming to them for the same. It’s made up of citizens seeking medical, banking, insurance, education and a whole host of government services between 8 am and 5 pm. Nairobi natives cannot be trusted with the heavy responsibility of choosing the lesser evil between an ex-CEO of a grossly mismanaged corporate versus a stone thrower or, God help us, a bejeweled, money splashing hustler if 2017 rumors are to be believed. In my own view, a college of voters who constitute business owners should elect Nairobi County’s administrative leader. A staggered system of votes, based on number of employees can be designed so that those with more skin in the game have more say. A business owner with 10 employees or less would have one vote, one with 20 employees two votes etcetera.
Only then can we start seeing business minded individuals drive the social and economic agenda of this critical county and lay the groundwork that would help make some of Esipisu’s dreams of a regional financial centre valid.

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Twitter: @carolmusyoka