Deutsche Bank chief approved controversial trade he was later asked to probe
Christian Sewing oversaw audit into transactions restated following Monte dei Paschi controversy
Deutsche Bank’s chief executive Christian Sewing signed off a €1.5bn deal that was later scrutinised as part of a probe he oversaw that led to the conviction of former colleagues, according to documents seen by the Financial Times.
The transaction with Italian lender UniCredit was arranged in 2010 when Sewing was Deutsche’s chief credit officer, and was similar to a controversial €2.2bn deal from 2008 with Italian bank Monte dei Paschi di Siena.
Both were so-called enhanced repo deals, which utilised bonds and derivative transactions to conceal the size of loans Deutsche was making to other banks by netting off different elements against each other.
Deutsche subsequently restated its accounts after changing the accounting treatment of the trades, from financing transactions to derivatives trades.
In the wake of that change, the bank in 2013 commissioned a probe into the accounting which was overseen by Sewing, who by then had become the head of the bank’s internal audit unit.
The audit’s findings became a central part of an Italian criminal trial which resulted in six former Deutsche bankers being sentenced to jail terms of up to four years and eight months for abetting false accounting and market manipulation.
The managers were later acquitted by an appeals court and are now accusing Deutsche of mishandling the case. One of them is suing the lender for €152mn in Frankfurt, with others preparing similar lawsuits in London.
According to people familiar with the matter as well as documents seen by the FT, Deutsche did not disclose Sewing’s involvement in one of the deals that was included in the probe, either in the audit report itself or in a later presentation to the Italian central bank.
According to people familiar with Deutsche’s thinking, disclosure of Sewing’s role had been unnecessary because no potential conflict of interest existed at any point in time.
Deutsche told the FT that Sewing, in his role as chief credit officer, was “involved in the credit risk assessment of transactions, including the 2010 UniCredit transaction in question”.
The bank said that Sewing’s audit did not address “the credit risk assessment of the transactions in question” but focused on aspects that Sewing “was not involved in” in his earlier role.
“Any allegation of a conflict of interest involving Christian Sewing is completely unfounded,” the lender said.
Deutsche added that it stood by an earlier statement that the audit was conducted “thoroughly, properly and independently, and the executives involved discharged their responsibilities appropriately”.
Sewing’s audit was launched after Deutsche changed the accounting treatment of billions of euros of deals with counterparties including Italian lenders Monte dei Paschi and UniCredit.
The probe focused on the Monte dei Paschi transaction, which had additional features that enabled the Italian bank to conceal losses and were particularly controversial.
But it also examined 87 other enhanced repos with 22 counterparties, including the one with UniCredit, with more than 30 of those restated.
The audit blamed the bankers who structured the enhanced repos for the restatement, which it attributed to a “failure of front office to inform finance” about core details of the structure, backing up the rationale Deutsche had given for the retrospective accounting change to its external auditor and regulators.
An Italian appeals court later rejected that view, arguing that the structure had been standard and well known in the bank. The appeals court also argued that Deutsche’s justification for the restatement had been a red herring, concluding the bank had changed its accounting to sidestep costly regulatory requirements.
Deutsche has disputed the court’s conclusions. People familiar with the bank’s thinking said a separate investigation commissioned by German regulator BaFin into the matter in 2014 vindicated Sewing’s audit.
Sewing, who rose to become chief executive in 2018, was not involved in setting up the most contentious deal that was at the heart of his probe — Deutsche’s 2008 transaction with MPS worth €2.2bn.
He did, however, have a role in the second biggest transaction that was subject to Deutsche’s accounting change: the 2010 trade with UniCredit.
At that point, Sewing was the lender’s chief credit officer and part of a committee that approved the UniCredit deal in which Deutsche acquired bonds worth at least €1.5bn.
The Italian bank committed itself to repurchasing the securities at a later stage and a higher price — a standard feature of a repo deal, with the spread earned by Deutsche in effect equivalent to the interest payable to a lender.
The enhanced repo structure allowed clients to avoid using mark-to-market accounting, which would have otherwise forced them to immediately recognise changes in value.
Before the deal however, UniCredit acquired the bonds underpinning the trade from Deutsche in a structure similar to the MPS transaction — referred to as “bond sourcing” in its internal probe, and a point of contention because it meant the movement of the bonds was circular. This fact was key for the restatement.
Documents seen by the FT show that the €1.5bn UniCredit deal that Sewing approved was identified as a “similar transaction” to the MPS trade in the internal audit, and as one of three other comparable deals with “large notional balances”.
The documents also show that Sewing was directly involved in the approval of the UniCredit deal, which in parts needed sign-off from the executive board. In an internal email from October 2010, Sewing told colleagues: “Unicredito was approved by the Board”.
Sewing declined to comment for this article.
Asked by the FT if Sewing had been required by internal compliance rules to disclose his work on the UniCredit transaction internally and if he did so, the bank declined to comment.
His audit found that “no reference to bond sourcing was made in the Board Credit & Approval Form”, underpinning Deutsche’s argument that its finance department was not aware of all necessary details at the time and hence erroneously booked the trade as a repo transaction rather than a derivatives deal.
Deutsche said it was “unaware of any evidence suggesting that Mr Sewing knew that the UniCredit transaction involved bond sourcing”, stressing that this aspect of the transaction was “not a relevant factor in assessing the credit risk of a repo transaction”.