Morning Coffee: Shock as senior ex-Deutsche and Nomura bankers get preliminary jail sentences; Iqbal Khan's plan for UBS
Ever since the financial crisis, it's been common for people to complain that bankers never face justice for alleged wrongdoings. For the moment, those complaints may have been appeased.
Last Friday, a court in Italy ruled that former senior executives at Deutsche Bank and Nomura, plus several employees of Banca Monte dei Paschi di Siena should be handed jail terms after being found guilty of using complex derivatives contracts to help Monte dei Paschi hide millions of euros in losses between 2008 and 2012. Those jail terms are currently quite significant in length. However, Italian convictions are not enforceable until all levels of appeal have been exhausted, and the men plan to appeal exhaustively.
Equally significant is the seniority of the ex-Deutsche and ex-Nomura bankers involved. From Deutsche, Michele Faissola, the former global head of rates, received a sentence of four years and eight months, as did Ivor Dunbar, the former co-head of global capital markets and Michele Foresti, Deutsche's former head of structured trading. Sadeq Sayeed, Nomura's ex-CEO for the entire EMEA region, was given a similar sentence, while Raffaele Ricci, Nomura's head of EMEA sales, was given a sentence of three years and five months.
It is Faissola's fate that is most likely to interest current and ex-Deutsche Bank employees (and everyone else in the market), though. Faissola left Deutsche Bank in 2015 when John Cryan took over, but until that point he was a major figure - both at the bank and in the City of London as a whole. A member of an established Italian banking family, Faissola was credited with building Deutsche's credit derivatives business into a global leader. He joined Deutsche Bank in London in 1995, as a proprietary trader in the OTC derivatives division. From there, he cycled through a series of major roles at the bank, including global head of OTC derivatives, global head of rates, and head of global asset- and wealth-management. Between 2009 and 2013 Faissola was also a board member for the association of financial markets in Europe, and between 2010 and 2012 he was chairman of the global financial markets association in New York. Reporting directly to Anshu Jain, Faissola was big in Deutsche Bank and he was big in the market as a whole.
Under the Monte Paschi transactions, Faissola and colleagues at Deutsche Bank were accused of hiding around €430m in losses at the Italian bank using a two-leg derivatives transaction that first granted an immediate gain and then led to several years of losses in order to pay Deutsche back for the gains that were made initially. Prosecutors previously argued that Deutsche engaged in market manipulation after an internal audit in 2014 suggested employees could also have manipulated internal indexes to ensure the success of the deal. The Italian government was eventually compelled to take a more than 70% stake in Monte dei Paschi after bailing it out to the tune of $6bn when depositors fled. However, prosecutors stated in the parliamentary commission that the bailout was not driven by those transactions.
Conspiracy theorists are especially likely to celebrate the preliminary jail sentences. The Monte dei Paschi case and Deutsche itself were tangentially associated with various unexplained suicides in 2013 and 2014, including that of David Rossi, Monte dei Paschi's 51 year-old communications director, and William Broeksmit, a pioneer of interest rate swaps at Deutsche Bank. Bloomberg previously said that Broeksmit expressed specific concerns about the Monte dei Paschi deal, but evidence presented in the criminal trial proved Broeksmit was in fact in support of the deal. After Broeksmit's suicide in 2014, Faissola was reportedly one of the first on the scene and was said to have tried to access Broeksmit's computer. However, Faissola subsequently denied this and said that Broeksmit was a close friend and that he arrived simply to comfort the family. This was later confirmed by Broeksmit’s widow, who called Faissola after finding her husband dead.
Both Faissola, the other defendants and the banks involved deny any culpability in the Monte dei Paschi case and are planning to contest the verdict. Giuseppe Iannaccone, the lawyer for the ex-Deutsche defendants, said he's confident they are innocent and that he was shocked by the outcome. "I am fully convinced that our clients are not guilty since they acted in the ambit of their role in a diligent and appropriate manner," said Iannaccone. "The Italian criminal system, differently from others, requires three levels of judgment in order for the decision to be final and enforceable. We will read the grounds of the decision and surely, we will appeal it. We are confident of a positive outcome of the appeal”.
The men could each have faced up to nine years in prison had charges of market manipulation held, so it might be argued that they got off lightly. Reuters notes that first jail sentences are often substantially reduced or overturned in the appeals process.
If Faissola wins the appeal, he has plenty to be busy with. Since leaving Deutsche he has set up his own family office, and sits on various advisory boards. Together with various other ex-Deutsche bankers he also started Jersey-registered FAB partners in 2016. In 2017 Faissola and FAB helped raise money for SoftBank's Vision Fund, which is also staffed by ex-Deutsche Bank people. The way things are going, the Vision Fund could soon need Faissola's help again...
Separately, Iqbal Khan has landed at UBS and has unveiled a strategy there that sounds fairly similar to that pursued by his neighbor and arch-enemy Tidjane Thiam at Credit Suisse. Reuters reports that Khan wants to integrate UBS's investment bank and asset management business more closely and to expand the amount of credit extended to private clients. He also wants to expand the bank's financing, private equity, private debt and infrastructure businesses. Morgan Stanley, too, is doing much the same.
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