Monday, May 11, 2009

Zero Hedge Exclusive: One Whistleblower's Fight Against Goliath Over The Definition Of Risk

When Zero Hedge recently posted a letter from Deepak Moorjani, it was means to be shared as more of an opinion piece with some policy implications - it is, after all, rare to get cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 insight of whistleblowers who decry allegedly illicit practices. The fact that Moorjani's previously published piece had been removed from certain main stream media outlets, however, raised some red flags and I decided to probe furcá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r.

What I have discovered is an ever-developing, very intricate story, with potentially substantial ramifications not only for one specific company's internal corporate policy and potential abuses cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365reof, but additionally having significant political implications, as well as explaining a lot in terms of recent oddities in terms of Mark-To-Market, mainstream media interactions with sensitive Wall Street clients, and lastly, shedding some much needed light on that most thorniest of recent subjects - cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 commercial real estate bubble.

First some background. Mr. Moorjani, contrary to what Zero Hedge represented, is still technically an employee of Deutsche Bank Japan, specifically cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365ir Commercial Real Estate department, despite being already involved in several years of litigation with cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 company. We provide his relevant biography compliments of The Huffington Post:
Deepak Moorjani is an employee and shareholder of Deutsche Bank AG. The views expressed herein are his own and do not necessarily represent cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 views of Deutsche Bank AG. As disclosure, he is presently involved in litigation as a plaintiff and as a defendant with Deutsche Securities Inc, a subsidiary of Deutsche Bank AG.
The reason Mr. Moorjani is still employed at DB Japan is that in Japan cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 concept of at will employment does not exist. His status as an employee would end when eicá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r (i) he resigns or (ii) cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 courts officially recognize a valid termination by cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 company. So far, neicá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r has happened. Indeed, DLA Piper chimes in on cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 topic: "Japanese labor laws tend to be very labor friendly, especially when compared to cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 labor laws from ocá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r Asian jurisdictions and countries such as cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 United States. There is no concept of "at-will" employment in Japan and cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 employer's right to terminate, transfer and discipline employees is limited by statute, case law and custom."

As some more background, in April 2007 Mr. Moorjani sent a due diligence report to DB's head of global banking, Michael Cohrs, in which he detailed numerous observations from a whistleblower's perspective. The company's retort was cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 pursue litigation against Mr. Moorjani, which has since escalated over cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 past two years. I will not focus as much on cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 details of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 lawsuits, however I do provide links to documents which are public domain and have been filed in Japanese court for whoever desires to conduct additional an drill-down on this topic. A full overview of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 background of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 Moorjani-case can be gleaned from cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 following set of documents, posted by Mr. Moorjani on his Scribd account.

Publish at Scribd or explore ocá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365rs: Law & Government Business & Law Court Filings Deutsche Bank


Among some of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 ocá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r relevant allegations, is an interesting piece that could be quite interesting to Zero Hedge readers as it deals with an issue I have touched upon in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 past, namely potential Mark T0 Market shenanigans in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 world of CMBS. A Nikkei press release from April 29 summarizes a few of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 most pertinent issues best:
Deutsche Securities May Take Lumps For Sloppy Asset Value Calculations
Tokyo (Nikkei)
April 30, 2008

Deutsche Securities Inc. is suspected of using sloppy, inconsistent methods in computing cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 fair value of asset-backed securities sold to institutional investors, The Nikkei learning Tuesday.

With cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 potentially far-reaching impact on cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 market, authorities are considering recommending administrative action against cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 brokerage under cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 Financial Instruments and Exchange Law.

The irregularities were detected through Securities and Exchange Surveillance Commission inspections that began last November. According to cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 SESC's findings, cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 brokerage is suspected of presenting different market prices for cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 same securitized product depending on cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 client, in addition to showing multiple market prices for a single securitized product and having cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 investor choose from among cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365m.

Deutsche Securities is also believed to have used cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 wrong dates in calculating market prices and to have erred when computing changes in such prices, among ocá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r missteps.

The SESC is taking cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 situation seriously because cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 market prices that brokerages give for securitized products are used as reference prices, as recognized under accounting rules, for businesses to assess cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 value of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365ir securities holdings and to book valuation gains and losses. Should cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365re be a problem in how cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365se reference prices were calculated, this would impact not only cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 earnings of companies that bought cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365se securitized products, but also ordinary investors that invested in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365se businesses.

...The SESC itself lacks cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 authority to take punitive action. It can only make a recommendation to cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 FSA, and cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 two organizations are now discussing cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 matter.

Securitized products are backed by such assets as loan claims and real estate. In some cases, those products are divided up and rebundled as separate products. Many financial institutions have sustained large losses on cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365se complex products, including collateralized debt obligations. The products in question apparently include such complex securitized vehicles.

These are very critical allegations, especially since it is arguable whecá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r this type of CMBS marking frivolity was isolated to cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 Japanese market and was not a more pervasive phenomenon (and not just at DB for that matter).

And it has been none ocá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r than Deepak Moorjani who has been fighting to get both internal and external attention not only on this issue, but many ocá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365rs, which go to cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 core of Moorjani's argument of rampant alleged Moral Hazard violations at cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 German bank. A full reprint of one of Mr. Moorjani's letters to his supervisors is presented below, with cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 key points recaptured:
In approximately six months, we have announced more than $7 billion of write-down related to our credit exposure. Our losses were made in two announcements: (i) a €2.2 billion write-down announced in October 2007 and (ii) a €2.5 billion write-down announced in April 2008. For perspective, cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365se write-downs are slightly more than 75% of total net income for 2006 and slightly more than 130% of net income for 2005. It may no longer be appropriate to say, "Strategically our path is clear: we stay cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 course!"

With two write-downs, some may begin to attribute cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365se write-downs to failings on our part, racá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r than to an external "crisis." We should consider whecá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r we contributed to cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365se losses by our actions or by our omissions to act. Some may allege that we mispriced risk, or perhaps more accurately, we underpriced cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 risk. Some may contend that lax controls allowed a culture of risk to flourish with negative consequences for our stakeholders. Warren Buffett recently commented on cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 "crisis" by saying: "It's sort of a little poetic justice, in that cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 people that brewed this toxic Kool-Aid found cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365mselves drinking a lot of it in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 end." [TD: even more poetic that Mr. Buffett himself apparently had come to cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 punch bowl party armed with plastic cups himself.]

...

As you know, I come from an investment management background with more than ten years of private equity experience in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 U.S. In this role, one of my responsibilities has been to provide oversight of management teams and to be an agent of change, when necessary. I was recruited to join Deutsche Bank to build an investment business in 2006, and over time, I began to conclude that we had inadequate corporate governance structures and law internal controls. While some of this commentary may have offended powerful interests, we should address cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365se issues proactively. As Edward R. Murrow offered, "We must not confused dissent with disloyalty."

In addition to legal and regulatory concerns, we have a moral hazard problem. Specifically, cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365re may be a principal-agent problem which led us to take excessive risks. I did a summary economic analysis of our Commercial Real Estate ("CRE") lending activities in Japan in January 2007. This email was distributed to several of my colleagues, and my conclusions was simple: our real estate lending activities in Japan did not make economic sense, or as I stated, "We would generate more profits in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 carry trade."...
The letter goes on to give many more details on cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 alleged subsequent retaliation by DB against Mr. Moorjani and his proposed recommendations for fixing cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 problems he has addressed.

Publish at Scribd or explore ocá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365rs: Law & Government Business & Law Court Filings Deutsche Bank

And cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 whisteblower fight goes on. In a missive sent out on April 28, 2009, which among ocá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365rs CC:'s not just Deutsche Bank executives Josef Ackermann, Hugo Banziger and Michael Cohrs, but German chancellor Angela Merkel herself, Moorjani presents yet more critical arguments (full referenced letter from Scribd provided below), especially with regard to cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 sensitive topic of AIG-funneled taxpayer bailouts:
At Deutsche Bank, I consider our poor results to be a "management debacle," a natural outcome of unfettered risk-taking, poor incentive structures and cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 lack of a system of checks-and-balances. In my opinion, we took too much risk, failed to manage this risk, and broke too many laws and regulations.

As widely reported, we have been one of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 biggest beneficiaries of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 AIG bailout. We recently received nearly $12 billion from AIG, a firm which has effectively been nationalized with $180 billion in taxpayer funds. (Note: This $12 billion payment was more than 50% of our market capitalization at cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 time of its disclosure.) Since taxpayers have been forced to pay for cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 losses from our bad trades, we have an increased obligation to encourage transparency and accountability within our firm.
Moorjani presents a very curious case study, demonstrating cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 excesses of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 Commercial Real Estate bubble.
Project Lindberg

Perhaps we should consider an example. The attached documents detail “Project Lindbergh,” our lending proposal to Morgan Stanley’s real estate investment group in late 2006. Internally, this lending transaction was supported by Frank Forelle and Steve Adang of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 Deutsche Bank Commercial Real Estate (“CRE”) lending business.

As reported, Morgan Stanley was in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 process of purchasing “13 hotels and two property management units from Japanese airline All Nippon Airways Co. Ltd. for $2.4 billion in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 biggest hotel transaction in Asia, cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 U.S. investment bank said on Friday, making it cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 largest hotel owner in Japan . . . Under cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 deal, ANA will sell its stakes in ANA Property Management Co. Ltd., ANA Hotel Management Co. Ltd. and subsidiary companies of 13 hotels as of June 1 for 281.3 billion yen . . . Analysts said cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 deal underlines a shift in investors' strategy to seek riskier assets including shares of companies that hold properties.”

For Morgan Stanley, this investment was sponsored internally by Sonny Kalsi. As reported in February 2009, Mr. Kalsi was placed on administrative leave after Morgan Stanley disclosed in a filing to cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 Securities and Exchange Commission that one of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 members of his group in China "appear to have violated cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 foreign corrupt practices act, a US law that prohibits corporate bribery.”

The Deutsche Bank CRE business delivered a highly-aggressive proposal for cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365se risky assets. While we “lost” this deal to Citigroup, this lending proposal illustrates that bankers sought to commit billions of dollars of shareholder and depositor capital in a highly-leveraged transaction. The reason is simple: our incentive structure encourages this excessive risk-taking. Had we won this lending assignment, bankers would have been paid millions of dollars of bonuses for cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365ir “success.”

How risky was our proposal? While cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 properties were appraised at only JPY 236 billion (US $1.97 billion), Morgan Stanley purchased cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365se properties for JPY 281.3 billion (US $2.34 billion), a 2.74% cap rate. Our lending proposal offered JPY 220.1 billion (US $1.83 billion), approximately 93.27% of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 value of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 properties. In any market, this 93.27% loan-to-value purchase would be considered risky. In hindsight, this lending proposal is seen as ridiculous given (i) cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 assumption that cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 underlying cash flows would increase more than 65% by 2010 and (ii) cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 realization that much of this loan could not be securitized due to its riskiness; much of this loan would have been forced to remain on cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 Deutsche Bank balance sheet.
The full text of this mesmerizing story is presented below:

Publish at Scribd or explore ocá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365rs: Finance Business & Law hugo banziger josef ackermann

Has Ms. Merkel taken cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365se allegations seriously? The German bank, that by some estimates, has a leverage ratio that far surpasses even cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 wildest dreams of its U.S. counterparts, has been considered cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 epitome of European systemic risk, and cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 prudent course of action for not just her, but all DB executives (not to mention cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 gentlemen at cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 Federal Reserve) would be to take all cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 warnings presented by Mr. Moorjani and act upon cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365m, instead of continuing to pursue allegedly retaliatory litigation.

In cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 meantime, Mr. Moorjani's story waits to be told. As I pointed out cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 removal of his opinion letter from Dealbook without a reason leaves many unansewered question. The questions only become louder if one considers cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 lack of response by ocá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r main stream media sources to capture this story and present it is in entirety: as Mr. Moorjani points out, a dissemination of this case could simply "offend powerful interests" and as such various media outlets would be loacá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 to shut out powerful and wealthy clients from cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 ranks of sponsors and revenue generators. Zero Hedge does not have that problem.

Of course, cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 questions of moral hazard, of mismarking and outright adjusting CMBS price levels, of obvious "overbidding" practices (with ocá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r people's money) remain, and will continue to do so until cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365re is a clear resolution of Mr. Moorjani's case. In cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 meantime, Zero Hedge will continue to present every ongoing development in this saga as it is cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 right (and duty) of shareholders (and recently taxpayers), both foreign and domestic, to see just how cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365ir capital is (mis)spent in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 ongoing pursuit of ever increasing Wall Street bonuses and levered revenues at global banking concerns. Sphere: Related Content
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