When Bankers Bet on Themselves: A Credit Derivatives Case Study

Sometimes, investment banks invest in their own products—and that can be oddly reassuring to outside investors. Imagine someone you don’t fully trust handing you a piece of cake… and then eating some themselves. At least you know it’s not poisoned, right? A better analogy might be a waiter eating the food they serve. There’s some comfort in knowing that someone behind the scenes isn’t totally repulsed by what they’re serving up.

But what happens when the bankers personally invest in the deal—then make a fortune—at the bank’s expense?

Back in 2009, Deutsche Bank employees structured a credit derivatives transaction intended to reduce the bank’s exposure to risk with another client. AXA SA bought the senior tranche, while a hedge fund in Monaco—Greengate SAM—bought the junior tranche. Interestingly, six Deutsche Bank employees also bought a portion of that junior tranche, collectively investing around $4.5 million.

Fast forward to today: that investment is set to pay out at the end of the year, and those six employees are projected to walk away with roughly $37 million. Colin Fan, the former co-head of Deutsche Bank’s investment arm, is expected to earn the most turning a $1 million investment into about $9 million. Greengate and AXA have profited too, but the real loser? Deutsche Bank, with estimated losses nearing $60 million.

The bank seems less concerned about its client’s making money and more upset about employees profiting from trades they structured themselves. Internal auditors are reviewing the transaction, compliance logs, and previous audits to determine if the deal was intentionally set up to pay outsized profits to the employees and Greengate, while locking Deutsche Bank into high fixed costs.

As a former bank employee, I find this situation fascinating. I never worked on anything quite like this, but I remember the yearly bonus conversations. Management would always argue that my bonus was “higher than expected,” and inevitably restructure it downward. Here, the bankers took real risk—but you could also argue they knew something others didn’t.

Their investment helped reassure Greengate to buy into a very risky position—one that no large institution wanted to touch. In hindsight, was their investment a show of good faith? Or a calculated move to extract profits at the bank’s expense?

LendingClub: From Disruption to Disappointment

Last week, I wrote about the strange events surrounding LendingClub and the resignation of its CEO, Renaud Laplanche. Bloomberg recently published a full narrative on LendingClub’s rise and fall. The story reads like a classic Wall Street arc: innovation, followed by hype, followed by disillusionment.

It turns out that Laplanche’s troubles began two years ago when he personally invested in a company called Cirrix. He then recommended LendingClub invest in Cirrix, without disclosing his own financial stake. That’s a major breach of ethics—and against LendingClub policy.

More recently, Laplanche lost the board’s confidence after a $22 million loan deal with Jeffries unraveled. Roughly $3 million worth of loans were based on application data that had been altered to meet investor criteria. LendingClub repurchased those loans and sold them to another buyer, but the board cited Laplanche’s lack of transparency and policy violations as the final straw. His resignation followed soon after.

Regis and the “Minor Detail” That Tanked a Stock

In other news, a recent Department of Labor rule change declared that salaried employees earning below a certain income threshold are now eligible for overtime pay. Piper Jaffray, which covers the hair salon chain Regis, initially estimated the rule change would cost the company $81 million. That estimate was based on the assumption that Regis store managers were not already receiving overtime.

But that assumption was wrong.

Turns out, Regis does pay overtime to store managers, and the actual cost of the rule change is closer to $5 million. Unfortunately, by the time the correction was made, Regis stock had already dropped 19%. The analyst explained the error as a “minor detail with major implications” in an email to Bloomberg.

Major implications indeed. At least now they know what it’s like to get a really bad “haircut.” (Sorry, I had to.)

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