Speaker 1: But knowledge to work and grow your business with c
Speaker 1: i T. From transportation to healthcare to manufacturing. C i
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Speaker 1: small and middle market businesses. Learn more at c i
Speaker 1: T dot com put Knowledge to Work. Hello, and welcome
Speaker 1: to another edition of Odd Lots. I'm Tracy Alloway, executive
Speaker 1: editor of Bloomberg Markets, and I'm Joe. Why isn't all
Speaker 1: Managing editor of Bloomberg Markets? So Joe. On last week's episode,
Speaker 1: we were talking about money, and I rather globly said
Speaker 1: that money was the thing that everybody wanted. But what
Speaker 1: if I told you today that we are going to
Speaker 1: speak with someone who turned down eight point five million dollars,
Speaker 1: I wouldn't believe it. I wouldn't believe that such a
Speaker 1: such a person would exist, that a person would do
Speaker 1: such a thing. Well, we are going to talk to
Speaker 1: someone who turned out point five million dollars. That person
Speaker 1: is Eric ben Artsy. You might remember him from some
Speaker 1: recent headlines. He used to work at Deutsche Bank as
Speaker 1: a risk manager and basically blew the whistle on the
Speaker 1: way the bank was accounting for a big position in derivatives.
Speaker 1: Since then, Deutsche bank got fined by these Securities and
Speaker 1: Exchange Commission in the US and part of that fine
Speaker 1: goes out to pay the whistleblowers. And Eric was just
Speaker 1: one of um well, I think in the end there
Speaker 1: were two of them. So we're going to talk to
Speaker 1: him today about what it's like to be a whistleblower
Speaker 1: and crucially why he turned down all that money. This
Speaker 1: is so fascinating and surprising. I don't want to do
Speaker 1: any more intro. I think we should get right into it,
Speaker 1: all right, Eric, thank you so much for coming on
Speaker 1: the show today. Thank you for having me. So I
Speaker 1: guess to begin, maybe we should start with your career
Speaker 1: at Deutsche Bank, sort of ground zero for where this
Speaker 1: all started. Tell us what you were doing at the bank. UM,
Speaker 1: My job as a risk officer was to oversee the risks,
Speaker 1: the market risks in the trading portfolio. We oversaw many
Speaker 1: of the businesses that the bank was in, both in
Speaker 1: New York and London. UM, in particular, I was looking
Speaker 1: at the credit derivatives portfolio and that's uh, that's where
Speaker 1: the that's where the problems came up. So tell us
Speaker 1: when did you join Deutsche Bank in what was your
Speaker 1: first indication that, in your view, something was wrong with
Speaker 1: the way derivatives were being priced internally. UM. I joined
Speaker 1: the Beta Bank in the summer of two thousand and ten,
Speaker 1: and I had quite a bit of experience before that
Speaker 1: in credit derivatives, both through my work in City Bank
Speaker 1: and also UM at Golden Sacs uh So UM the
Speaker 1: assignment to the credit derivatives portfolio was was pretty natural,
Speaker 1: and I had experience with with the models, with the
Speaker 1: products involved. You know, Gradually, as I as I learned
Speaker 1: more and more about the portfolio at Deutsche Bank, I
Speaker 1: had more and more concerns. And as I raised those
Speaker 1: concerns with my managers, with a countants, and eventually I
Speaker 1: went to the hotline uh the responses that I got
Speaker 1: were more and more alarming to me. So walk us
Speaker 1: through the problems that you discovered, because I know it
Speaker 1: can get a little bit complex, but there are some
Speaker 1: potentially big numbers involved here, and our and our listeners
Speaker 1: like complex details. You don't have to be afraid to
Speaker 1: get wonky okay great. So essentially, UM, the craving derivatives
Speaker 1: in question were synthetic credit derivatives. These were tranches on
Speaker 1: on portfolios of CDs UM. Initially, I was doing some
Speaker 1: stress testing and and I was tasked with UH finding
Speaker 1: risk numbers to this portfolio. I wasn't quite aware of
Speaker 1: what the products underlying that we're actually in the portfolio,
Speaker 1: what they were. My assumption was that these were regular
Speaker 1: tranches and UH. At some point when I started asking questions,
Speaker 1: all of a sudden I realized that I was looking
Speaker 1: at leverage tranches, leverage super seniors as they were called.
Speaker 1: These were more exotic, more risky trades that were worth
Speaker 1: less if you think of it as as an insurance
Speaker 1: contract than a leverage tranch. If you buy insurance in
Speaker 1: the leverage way, you have far less protection then if
Speaker 1: you have a regular tranche where you were protected for
Speaker 1: the entire amount of your portfolio. So one one analogy
Speaker 1: that people seem to like is with U parking about
Speaker 1: full of full of cars. If you're a car dealer
Speaker 1: and you have a used car parking about full full
Speaker 1: of full of used kias, you know, you could argue
Speaker 1: about what kind of values those those used keyas you have.
Speaker 1: You can say there worth five thousand or ten thousand dollars,
Speaker 1: but you can't pretend that these are new ferraris and
Speaker 1: essentially I we realized that this is what the bank
Speaker 1: was doing. It was misrepresenting the trade in its portfolio.
Speaker 1: And I also began to realize just how huge in
Speaker 1: this portfolio is. Essentially Deutsche Bank owned the majority of
Speaker 1: this market. So as as I was raising my concerns
Speaker 1: and getting um answers that made by sense, I also
Speaker 1: got answers that that may be more concerned about the
Speaker 1: the amounts that we're talking about, the the hidden losses
Speaker 1: or if you will be in freded valuations. So back
Speaker 1: in the deep dark days of the financial crisis in
Speaker 1: two thousand ten, wasn't that far off from those understating
Speaker 1: those potential losses would have meant a big, big flattering
Speaker 1: of Deutsche Bank's bottom line, right, basically saving it on
Speaker 1: having to reserve lots and lots of extra capital. Absolutely,
Speaker 1: and so in two thousand ten, initially when I raised
Speaker 1: when I raised my concerns, I thought we were talking
Speaker 1: about about potentially hundreds of millions of dollars. And once
Speaker 1: I asked more and more questions, I realized that this
Speaker 1: was you know, we're talking about billions. Uh so, so yes,
Speaker 1: these little, very large numbers I want to get to
Speaker 1: the part where you sort of blow the whistle and
Speaker 1: raise external issues. But I just want to get a
Speaker 1: little more specific on the specific problem that you saw
Speaker 1: with the way that the derivatives were being priced. Because
Speaker 1: obviously pricing of derivatives and portfolio of derivatives is complex
Speaker 1: and people apply different models and techniques. But what was
Speaker 1: the fundamental difference in how you saw the products and
Speaker 1: how they should be valued versus how they were being
Speaker 1: valued by the bank. So I think that's that's a
Speaker 1: very good point that I wasn't arguing that a specific
Speaker 1: model should view there. There are many many models that
Speaker 1: could potentially be used, and all of them had advantages
Speaker 1: and disadvantages. So you could argue about what the actual
Speaker 1: value was of these trades. That's there's no doubt there,
Speaker 1: But you couldn't pretend like they that You couldn't pretend
Speaker 1: that they were not leveraged. The standard valuation, the correct
Speaker 1: sort of financial engineering valuation of a leverage super senior
Speaker 1: or leverage trunch is as a regular trunch minus an option. Essentially,
Speaker 1: you sold an option to the counterparty to walk away
Speaker 1: through the trade. That's that's really what the what the
Speaker 1: what the trade, UH the way to correctly value this trade.
Speaker 1: So what the value of this option is. You can
Speaker 1: argue over what that is. You can argue about you
Speaker 1: can take different models that would give you different numbers.
Speaker 1: What Deutsche Bank did was just said that these options
Speaker 1: were worth zero. And other banks at the time we're
Speaker 1: using the gap option, right, they were valuing it like
Speaker 1: they could lose all the collateral because the counterparties walk away.
Speaker 1: Absolutely so, so they were there were definitely models used
Speaker 1: being used in other banks and um when when the
Speaker 1: issue was raised that you know that the models that
Speaker 1: there's no model that that does a good job, that
Speaker 1: all the models are unstable, Well, the answer to that
Speaker 1: is if if you can't, if you can't value this option,
Speaker 1: you have to you have to apply the worst case,
Speaker 1: not the best case, especially when when you're looking at
Speaker 1: the underlying swap, you're you are quite happy to take
Speaker 1: a maximal valuation. In other words, these level super seniors,
Speaker 1: their value is equal to the swap which is markto
Speaker 1: market left the option, which is also markto market, which
Speaker 1: took that was happy to take the positive markto market
Speaker 1: on the on the swap, which is also relevative in itself.
Speaker 1: But it but it just said, well, I don't know
Speaker 1: how to value that value. The option is is hard,
Speaker 1: so I'm just gonna market at zero. That was clearly dishonest.
Speaker 1: I should say that that, you know, when I spoke
Speaker 1: with risk managers in other areas, this seems it seemed
Speaker 1: to be a consistent problem throughout the throughout the trading book.
Speaker 1: As I was raising concerns about this particular portfolio, which
Speaker 1: was probably the largest, I also began to realize that
Speaker 1: this there was something more widespread, more systematic here, that
Speaker 1: it seemed as though the bank was really operating on
Speaker 1: little or no reserves for for many trades that should
Speaker 1: have been reserved for. And uh, it seemed as though
Speaker 1: I was trying to sort of inflate inflate its financials.
Speaker 1: That was my impression. So after you start looking at
Speaker 1: the book and talking to other people, walk us through
Speaker 1: exactly what happened when you brought this to the attention
Speaker 1: of your manager. As you mentioned making the call on
Speaker 1: the hotline, I imagine there was quite a process that
Speaker 1: you had to go through before you got to the
Speaker 1: hotline part or the sec part. Yes, I talked with
Speaker 1: you know, with the line of command and within the
Speaker 1: risk management department. I went to the two I spoke
Speaker 1: with with managers and other adjacent areas, model validation, so
Speaker 1: other gatekeepers, if you will. I ended up going to
Speaker 1: the accountants the finance division, so that these are the
Speaker 1: people ultimately responsible for the financials for the statements. And
Speaker 1: that's really where, you know, I was expecting throughout this
Speaker 1: this process that somewhere down the line, somebody is going
Speaker 1: to adjust for this leverage. Somebody's going to adjust for
Speaker 1: the fact that you know, Dutch banks sold a lot,
Speaker 1: you know, options on the huge portfolios that were being
Speaker 1: without good zero Somewhere there's going to be some some
Speaker 1: accounting for that, and the accounting was just it saved.
Speaker 1: Eventually when I talked to the accountants, they said, no,
Speaker 1: it's just about the regular swap. And that's when I
Speaker 1: went to the hotline. So how did the conversations actually go,
Speaker 1: because I can imagine it must be pretty awkward if
Speaker 1: you go up to people and you say, hey, I
Speaker 1: think that um Deytsche Bank's potential losses on its LSS
Speaker 1: portfolio could be massively, massively bigger than we're accounting for.
Speaker 1: UM Yeah, So so absolutely, the answers were were evasive.
Speaker 1: People some people didn't want to talk about it. Therese
Speaker 1: gave answers that were just that we're just wrong. I
Speaker 1: think maybe just because they didn't know. Because these trades
Speaker 1: are pretty pretty complex. Anybody who wasn't who didn't really
Speaker 1: specialize in it, uh, could easily misunderstand. And you could
Speaker 1: tell them that you could you could run into a
Speaker 1: situation where they don't really understand what they're talking what
Speaker 1: what how to value these trades. So some of the
Speaker 1: answers I got, I assumed we're just uninformed answers rather
Speaker 1: than attempt to hide. But when I talk to people
Speaker 1: who did understand, is that the answers were clearly evasive
Speaker 1: and and uh you know was like political were used?
Speaker 1: When when? When? When I asked about it? So all
Speaker 1: of these facts to me, and I want to get
Speaker 1: to the point where you begin to process is of
Speaker 1: um calling the hotline and becoming whistleblower. First, I want
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Speaker 1: T dot com Put Knowledge to Work. And we're back
Speaker 1: with Eric ben Artzief, former risk analyst at Deutsche Bank
Speaker 1: and a whistleblower. So walk us through the process. You
Speaker 1: talk about calling the hotline when you see that there's
Speaker 1: this major unresolved issue with the value of these derivatives.
Speaker 1: What how does that actually work? Walk us through what
Speaker 1: the process is like becoming a whistleblower essentially, So, UM,
Speaker 1: the hotline, there's a number. You call the number and
Speaker 1: it's supposed to be operated by by third party ex
Speaker 1: turn off to the bank, I believe so to to
Speaker 1: the best of my memory, I talk to somebody outside
Speaker 1: of the bank and um and they just take down
Speaker 1: your concerns. That's what you don't You don't really you
Speaker 1: have to express, you know, a fairly complex issue to
Speaker 1: somebody who doesn't really understand what it is, but and
Speaker 1: then hope that that somebody will get back to you.
Speaker 1: It telt a little bit like kind of screaming into
Speaker 1: the dark, but eventually, actually pretty quickly I was contacted
Speaker 1: by by the legal department, by the compliance department, so
Speaker 1: that that that part of it worked pretty well. And
Speaker 1: when did you go to the SEC, because I imagine
Speaker 1: once you made that hotline call, you were probably already
Speaker 1: at least a little bit worried about your job at Deutscha. Yeah,
Speaker 1: so my, my, my, my strategy there was to was
Speaker 1: to go in parallel, essentially to be safe. And I
Speaker 1: wasn't sure whether I would be instantly fired after them
Speaker 1: to the hotline. There was always that that concern, so
Speaker 1: I made sure to go almost simultaneously to the SEC
Speaker 1: with information that I had add and to the Holland
Speaker 1: at the same time. So effectively, it was as though
Speaker 1: these two you know, we're talking about March two thousand eleven,
Speaker 1: these two things were being were being raised and and
Speaker 1: I relater realized that there were ongoing investigations both inside
Speaker 1: the bank ended that you see, you know, a year prior,
Speaker 1: but at the time I thought it was starting investigations
Speaker 1: in both. There were other whistleblowers, and yes, as far
Speaker 1: as I understand it, I've never spoken to Matthew Simpson,
Speaker 1: who is I believe he is the other whistleblower. And
Speaker 1: apparently there was another whistle blow before that, so we
Speaker 1: know of at least three three people who who are
Speaker 1: concerns there? But all were identifying the same thing. Apparently
Speaker 1: I didn't I've ever seen the concerns that that Matthew
Speaker 1: Simpson order the third person raised, and there I believe
Speaker 1: there might have been other whistle blowers as well. They
Speaker 1: might have raised issues that are related or similar. Um,
Speaker 1: these businesses are very complex, you could use there are
Speaker 1: lots of different risks that you can look at. Um,
Speaker 1: the trades were, uh, you know, I'm going to be
Speaker 1: a little bit technical here. These will bespoke leverage super
Speaker 1: senior trades, which is an animal that I didn't really
Speaker 1: think existed before I joined Deutsche Bank. So they were
Speaker 1: very very There were different kinds of risks there, and
Speaker 1: so I wouldn't be surprised this. Other whistle blowers raised
Speaker 1: concerns over other valuation issues, such as quanto. I've heard
Speaker 1: that that was an issue that which I did not raise.
Speaker 1: I talked specifically about the gap of the gap option,
Speaker 1: but there were other issues with this portfolio. Also, there
Speaker 1: are other portfolios that that we're kind of related and
Speaker 1: might might have been similar, maybe CDs portfolios or other
Speaker 1: CEO put photos that had similar issues in them. Possibly,
Speaker 1: so this is all speculative. I don't really know of
Speaker 1: the other whistle blowers, really like what concerns they raised.
Speaker 1: But presumably since since Matthew Simpson, the other whistle low
Speaker 1: assuming is what Matthew Simpson is is uh was also
Speaker 1: given a whistle Goo award. They they also contributed to
Speaker 1: the to the investigation. So it's March of two thousand eleven,
Speaker 1: you've just gone to the SEC. I'm going to be
Speaker 1: slightly facetious. How quickly were you shown the door at
Speaker 1: Deutsche Bank? I took a few months, actually, so I
Speaker 1: I was fired in two thousand eleven, and in between
Speaker 1: that I was actually, you know, I became I was
Speaker 1: introduced to the to the head of compliance regulatory affairs
Speaker 1: at the bank in New York, Robert Rice, and he
Speaker 1: was one who was handling the investigation. There was also
Speaker 1: an outside law firm, Freed Frank that was so I
Speaker 1: guess they were formally in charge of the investigation and
Speaker 1: cooperation was the compliance department. I'm not I'm not quite
Speaker 1: sure what what that means in terms of what the
Speaker 1: regulatory requirements are in terms of an outside law firm
Speaker 1: investigating this. But in the court during this during the
Speaker 1: next few months, I Robert rice Is the Compliance department
Speaker 1: introduced me to a number of other executives, mostly in
Speaker 1: the finance division, so most mostly accountants, h to explain
Speaker 1: or at least they claimed it was to explain to
Speaker 1: me what what was being done inside the bank. Uh.
Speaker 1: In fact, those meetings were more I felt more away
Speaker 1: of trying to to to glean what I understood, what
Speaker 1: I knew, uh, and to help them get a leg
Speaker 1: up on the on the SEC investigation, and also to
Speaker 1: prevent me a vote, to discourage me nuplicitly discourage me
Speaker 1: from going to the SEC. That's that's how I interpret
Speaker 1: those meetings. Uh. They certainly, I certainly was not satisfied
Speaker 1: with the answers that I was given, and I don't
Speaker 1: think that was I don't think an investigation that with
Speaker 1: the purpose of protecting shareholders would have been conducted differently,
Speaker 1: completely and hundred eighty degrees the Instead of instead of
Speaker 1: trying to download the information and try to essentially belong
Speaker 1: to my concerns, they should have They should have gone
Speaker 1: along and gotten to the bottom of it and corrected
Speaker 1: the what what was wrong? And I'm pretty sure that
Speaker 1: you were trying not to do that. When you were fired,
Speaker 1: what did they say the reason was? They just said
Speaker 1: that it was my job was being moved to Berlin.
Speaker 1: In fact, Bank was opening a quantum center for a
Speaker 1: serious department in Berlin, and I had previously before I
Speaker 1: brew the whistle, I had been offered a job there
Speaker 1: and I expressed interest in moving to Berlin. So so
Speaker 1: this was this was clearly just an excuse. But nobody
Speaker 1: ever said anything about conduct. I had. The reviews that
Speaker 1: I had were positives in the time that I expent
Speaker 1: to Burti Bank, So there was really no reason other
Speaker 1: than I can see no reason other than my whistle blowing.
Speaker 1: Did you regret going to the SEC at that point? Oh? No,
Speaker 1: I I thought I did the right thing, and I
Speaker 1: thought that the right thing would happen, that justice would
Speaker 1: be would be uh served us. Well, let's skip ahead then,
Speaker 1: because you were just in the news at the end
Speaker 1: of last month because there was this huge um whistle
Speaker 1: blower award for you and your fellow whistleblowers, and you
Speaker 1: were offered several million dollars as a reward for shining
Speaker 1: a light on this and you didn't accept it. So
Speaker 1: explain to us how that a word came about and
Speaker 1: whether you're surprised by that, and how you made this
Speaker 1: decision that, as we said in the beginning, seems almost
Speaker 1: unfathomable for a person to make. During the years since
Speaker 1: you know, I started, I blew the whistle and spring
Speaker 1: two thousand eleven really blew blew the whistle before that,
Speaker 1: because I started raising the concerns months before that. I
Speaker 1: gradually became not only attached to the case, but also
Speaker 1: attached to the to the idea of seeing justice carried out.
Speaker 1: And after I was fired, this case was also the
Speaker 1: case of my career. So so you could say that
Speaker 1: my life became completely I wouldn't say dependent, but but
Speaker 1: it became very very much attached to this case. And uh.
Speaker 1: And so in the next few years, I pushed the
Speaker 1: sec along. At some points, um, you know, there was
Speaker 1: there was a point where we heard that where there
Speaker 1: were rumors that the the the case is about to
Speaker 1: be closed. Uh. This was in two thousand and twelve,
Speaker 1: and so we went and worked with the Financial Times
Speaker 1: to get the story out and that really kind of
Speaker 1: gave gave gave new life to this case. So I
Speaker 1: wrote a lot to the to the Francial Times reporters
Speaker 1: in this case did a great job and and ultimately
Speaker 1: over these years, I became you know, I became I
Speaker 1: also became familiar with the the lawyers, the Deutsche Bank
Speaker 1: lawyers who went in and out of the SEC. I followed,
Speaker 1: you know, I was forced to follow their their their
Speaker 1: career paths. You know, I read not to these piece
Speaker 1: in two thousand eleven about uh the SEC the internal
Speaker 1: whistle though Darcy Flynn, that's a story that I think
Speaker 1: hasn't gotten that the attention that it deserved. And you
Speaker 1: know which he drew the whistle to Robert Cruisealny the
Speaker 1: who was head of Enforcement and the ads he's seen
Speaker 1: previously was with Deutsche Bank's General Council al from North America.
Speaker 1: At the same time I followed, you know, Robert Rice
Speaker 1: was appointed, you know, went from being the head of
Speaker 1: compliance to being the Chief Counsul at the SEC. So
Speaker 1: so I realized that a gold was working working against
Speaker 1: me and really was working against the rule of law
Speaker 1: in the United States. So the decision not to take
Speaker 1: the award was essentially a protest against this revolving door
Speaker 1: concept between the SEC and Deutsche Bank. But that kind
Speaker 1: of throws up a question, do you think that there's
Speaker 1: a problem with whistle blowing in general or is it
Speaker 1: something specific because which I had so many people at
Speaker 1: the securities watchdogs, so I think I do think that
Speaker 1: that is the problem, the revolving dual problem. Uh. And
Speaker 1: maybe I shouldn't use the word revolving door. I think
Speaker 1: that the justice for sale problem is widespread. It goes
Speaker 1: beyond just bank. It was especially bad here, but I
Speaker 1: think it happens quite unfortunately. It happens quite a bit today.
Speaker 1: So it's not a problem uh, necessarily with little blowing.
Speaker 1: It's a problem with with with the justice system. I
Speaker 1: think justice and money don't mix very well, and there
Speaker 1: are too many, too many loopholes to which it makes
Speaker 1: its way into the system. Not just insecurities law, but
Speaker 1: the insecurity laws especially bad. So so I think my
Speaker 1: case was especially bad. It was especially latent the fact
Speaker 1: that the victims were clearly the shareholders. There was no
Speaker 1: third party, you know, there was no way to I
Speaker 1: can't see any way to argue that the shareholders benefited
Speaker 1: from this, uh, from the inflation of this portfolio. I
Speaker 1: think this is like end there's the shareholders are clearly
Speaker 1: to me the primary victims. I was just gonna say,
Speaker 1: there is a devil's advocate type argument where you could say, well,
Speaker 1: all right, so Deutsche Bank didn't value the gap risk
Speaker 1: in the way that it should have, but it ended
Speaker 1: up not suffering catastrophic losses anyway. Right, So it made
Speaker 1: it through and its assumptions about the gap risk turned
Speaker 1: out to be correct, and in effect it's saved as
Speaker 1: shareholders a lot of pain. Again, that's just a devil's
Speaker 1: advocate argument for you, but it does get to the
Speaker 1: heart of the point that Joe made earlier, which is
Speaker 1: these are really complex things and you're making a lot
Speaker 1: of assumptions about them, and right and wrong aren't always
Speaker 1: that clear cut. Yeah, So I think this devil's advocate
Speaker 1: argument is very important and I've heard it in a
Speaker 1: number of times, and I think the answer to it
Speaker 1: is you can look at you can see the answer
Speaker 1: in the stock place. So the stock price was in
Speaker 1: two thousand and ten after the financial crisis, was north
Speaker 1: of seventy dollars and now it's you know, it reached
Speaker 1: something like twelve with their team. I'm not sure where
Speaker 1: it is today, but you know, the rumors about them
Speaker 1: may possibly requiring a bailout. So it's hard to argue
Speaker 1: that Deutsche Bank didn't take some of those losses and
Speaker 1: just spread it out over subsequent years. And in those
Speaker 1: years that that it tindles losses, the executives took large
Speaker 1: bonuses at the extense of the shareholders. So you're arguing
Speaker 1: that the ill fortunes we've seen of Deutsche Bank in
Speaker 1: recent years, and the stock price is down about from
Speaker 1: its pre crisis peak, is not just some secondary result
Speaker 1: of poor conditions for European banking, but also to some
Speaker 1: extent a direct function of what you see you saw
Speaker 1: as the behavior of the people internally. Two, as you say,
Speaker 1: misstate the value of the assets on the books. Absolutely,
Speaker 1: I think that's it's not the only Obviously, you know,
Speaker 1: this gaps was just one of many things. And yet
Speaker 1: the weakness in your in the European economy I'm sure
Speaker 1: did not help, don't your bank, But if you look
Speaker 1: at some of the other banks, so that the US banks,
Speaker 1: for example, they didn't suffer the same kind of losses
Speaker 1: over the subsequent quarters. Gutamic has a big has a
Speaker 1: big presence in North America, the global bank, So you
Speaker 1: wouldn't expect that you just be exposed only to Europe. Also,
Speaker 1: I want to address one point that Tracy brought up,
Speaker 1: which is well that you know those laws that deutchmk
Speaker 1: was correct and assess things that the gap risk glosses
Speaker 1: are going to go away. Well, that's another way of
Speaker 1: thing of of looking at this is to say that
Speaker 1: the value of the swaps was not was inflated. In
Speaker 1: other words, if you say that the gap option it
Speaker 1: was worthless, was was worth zero and it was just
Speaker 1: a temporary fluke around two thousand nine and ten or
Speaker 1: eight nine ten, that its value was very high, you
Speaker 1: have to say the same thing about the swap itself.
Speaker 1: So the swap in the options go hand in hand.
Speaker 1: So you can't make an argument about one without making
Speaker 1: the same argument about the other. What I see is
Speaker 1: having happened to Deutsche Bank in those years is that
Speaker 1: they invented quite a bit of capital on the on
Speaker 1: the balance sheet, and that in that capital that they invented,
Speaker 1: they dissipated it over the subsequent quarters. How much was
Speaker 1: the Deutsche Bank scandal that you identified to do with
Speaker 1: the complexity of these leverage super senior positions, and how
Speaker 1: much of it had to do with a cultural problem
Speaker 1: at the bank. I guess what I'm asking is, could
Speaker 1: we get a scandal on the same sort of level
Speaker 1: for something like a certificate of deposit or like a
Speaker 1: much simpler type of product, or is this something that
Speaker 1: you think could only happen in the deep dark realms
Speaker 1: of the derivatives world. I think certainly it's easier to
Speaker 1: too high losses when you have something that nobody really understands.
Speaker 1: So certainly when you have these these I think they're
Speaker 1: called level three assets with with very complex UH models
Speaker 1: that understanding what the what the contract itself is, you know,
Speaker 1: a very complicated It's easier to to to inflate the valuation.
Speaker 1: It's a lot harder to to say that, you know,
Speaker 1: some stock of company X, Y and Z which is
Speaker 1: treading at twenty. It's harder to market at forty dollars.
Speaker 1: So what are you doing now? So you've renounced this
Speaker 1: U reward? Do you feel that you've made a statement
Speaker 1: that you tried to make by not accepting this money,
Speaker 1: that the punishment of Deutsche Bank shouldn't fall on the shareholders.
Speaker 1: Do you feel like you've made that statement? And where
Speaker 1: to next? For you. Uh So I think it's it's
Speaker 1: not so much a statement as much as it just
Speaker 1: refusal can be part of that. So I just don't
Speaker 1: want to, you know, if you saw, you know, if
Speaker 1: you saw the analogy that I like to give it,
Speaker 1: if you if you saw somebody getting mugged in the
Speaker 1: street in New York and then you call the cops,
Speaker 1: and then the cops shows up, and the cop is
Speaker 1: actually the guy who just who just mugged the victim,
Speaker 1: and he mugged the victim again, and then wild you
Speaker 1: a couple of dollars out of the water so that
Speaker 1: you shut up. You probably woudn't do that, And so
Speaker 1: I don't think what I did is so extraordinary. I
Speaker 1: think if people, if you see the see it the
Speaker 1: way I do, which is which is as you know,
Speaker 1: the victim being robbed again and the award money being
Speaker 1: sort of hush money, then then it's what I did
Speaker 1: is really not not not extraordinary at all in terms
Speaker 1: of the impact or the outcome. You know, I think
Speaker 1: it's you know, the the fight to get the justice
Speaker 1: system cleaned up, if you will to to to have
Speaker 1: you know, to have the same the same kind of
Speaker 1: justice of the power phone that connected as everybody else.
Speaker 1: I think that's that's a really long term struggle. So
Speaker 1: I don't think I'm going to make buy myself. I'm
Speaker 1: not gonna make a difference. But I do think that
Speaker 1: I have that they make a small difference and hopefully
Speaker 1: there will be more people like me and then hopefully
Speaker 1: we will make a difference together. What's next for me? Uh?
Speaker 1: You know, I've we built my career and UH in
Speaker 1: the fintech company are very proud of of the work
Speaker 1: we're doing. The name of the company's bond i t
Speaker 1: um We we had a product aims to improve the
Speaker 1: world of invest in bond investing specifically, so we work
Speaker 1: with with some of the major financial institutions in the
Speaker 1: world to help construct smart portfolios, small bond portfolios for
Speaker 1: their retail and private banking customers. Would you ever return
Speaker 1: to Wall Street? Could you ever return to Wall Street?
Speaker 1: You know, I think I think that as yes I would,
Speaker 1: and I also think yes I could. I just think
Speaker 1: that you know, it's it's it's a matter of it's
Speaker 1: a matter of a change in in in culture and perception.
Speaker 1: I think I think the fact that what I didn't
Speaker 1: seems extraordinary. It's conceivable that it could happen that that
Speaker 1: the culture and the management in in some of these
Speaker 1: major financial institutions would be um more aligned with that,
Speaker 1: more aligned with the shareholders, more aligned with with the
Speaker 1: rule of law. Then I think, then I think I
Speaker 1: couldn't very well find myself working again on Wall Street.
Speaker 1: It may sound like, you know, like uh, like a
Speaker 1: dream when I'm saying it now, but I think, you know,
Speaker 1: stranger things have happened. All right, let's leave it there, Eric,
Speaker 1: thank you so much for joining us today. Thank you.
Speaker 1: I appreciate are you having done so? Joe. I thought
Speaker 1: that was a really fascinating story, And I think the
Speaker 1: thing that emerges the most from it is probably the
Speaker 1: courage of a guy who kind of knew he was
Speaker 1: probably going to lose his job by blowing the whistle
Speaker 1: on this, and then the idea that he gave up
Speaker 1: millions of dollars on principle. I like to think I
Speaker 1: would do the same thing, But let's be a real realistic.
Speaker 1: How many of us actually would? Yeah, um, you know,
Speaker 1: he said he didn't think that that was a really
Speaker 1: extraordinary thing, and I did like his framing that Essentially,
Speaker 1: if you consider what he blew the whistle on to
Speaker 1: be deleterious to shareholders, and his whistleblow reward would also
Speaker 1: come from shareholders that he was, as he put it,
Speaker 1: participating in the theft. I still think that is a
Speaker 1: way of framing it. That is quite extraordinary that very
Speaker 1: few people would get to that way of thinking about
Speaker 1: it when given the opportunity to collect so much money.
Speaker 1: The other thing that struck me is, uh, you know,
Speaker 1: it warms my heart to talk about all these financial
Speaker 1: crisis relics like leverage, super seniors and quanto risk and
Speaker 1: correlation books and things like that, but it throws up
Speaker 1: this question. You know, many years after the financial crisis,
Speaker 1: it feels like we've gone some way towards tackling some
Speaker 1: of the complexity in banking, but I'm not sure we've
Speaker 1: done that much to actually fix some of the cultural
Speaker 1: problems that people like Eric have identified. I totally agree
Speaker 1: with that. One of the things I thought was interesting
Speaker 1: was this kind of reminds me a little bit of
Speaker 1: the discussion that we had several weeks ago with the
Speaker 1: professor who say, uh, Lehman could have been saved. And
Speaker 1: when we go back to these stories. Common thread, of
Speaker 1: course is that during periods of extreme volatility and with
Speaker 1: these complicated financial products, there's often some debate about how
Speaker 1: they're valued at any given moment. So I like the
Speaker 1: way he clarified that his take, which was that this
Speaker 1: was not really, in his view, a debate about which
Speaker 1: model to use, and of course you could have agreed, um,
Speaker 1: disagreement about that, but sort of fundamentally the building blocks
Speaker 1: of the model, just acknowledging what you and it's sort
Speaker 1: of like agreeing on a common side facts to go
Speaker 1: into the model and so being a little bit, in
Speaker 1: his view, more clear than mirror sort of disagreement about
Speaker 1: or deconstructing your conclusion, right right, right, all right? Um,
Speaker 1: well on that happy note, shall we deconstruct this conversation?
Speaker 1: Sounds good? All right? Uh, this is another episode of
Speaker 1: Odd Thoughts. I'm Tracy Alloway. You can find me on
Speaker 1: Twitter at Tracy Alloway and I'm Joe wi Isn't All.
Speaker 1: You can follow me at the stall Warts. Thanks for listening.
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