45: Why A Whistleblower Walked Away From Over $8 Million

SPEAKER_1 (0:00)

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Tracy Alloway (0:24)

Let Hello, and welcome to another edition of Odd Lots. I'm Tracy Alloway, executive editor of Bloomberg Markets.

Joe Weisenthal (0:30)

And I'm Joe Weisenthal, managing editor of Bloomberg Markets.

Tracy Alloway (0:34)

So, Joe, on last week's episode, we were talking about money, and I rather glibly said that money was the thing that everybody wanted. But what if I told you today that we are going to speak with someone who turned down $8.5 million?

Joe Weisenthal (0:50)

I wouldn't believe it. I wouldn't believe that such a person would exist, or that a person would do such a thing.

Tracy Alloway (0:57)

Well, we are going to talk to someone who turned down $8.5 million. That person is Eric Ben-Arzi. You might remember him from some recent headlines.

He used to work at Deutsche Bank as a risk manager, and basically blew the whistle on the way the bank was accounting for a big position in derivatives.

Since then, Deutsche Bank got fined by the Securities and Exchange Commission in the US., and part of that fine goes out to pay the whistleblowers. And Eric was just one of, well, I think in the end, there were two of them. So we're going to talk to him today about what it's like to be a whistleblower, and crucially, why he turned down all that money.

Joe Weisenthal (1:38)

This is so fascinating and surprising. I don't want to do any more intro. I think we should get right into it.

Tracy Alloway (1:53)

Thank Eric, thank you so much for coming on the show today.

Eric Ben-Artzi (1:57)

Thank you for having me.

Tracy Alloway (1:58)

So I guess to begin, maybe we should start with your career at Deutsche Bank, sort of ground zero for where this all started. Tell us what you were doing at the bank.

Eric Ben-Artzi (2:10)

My job as a risk officer was to oversee the risks, the market risks in the trading portfolio. We oversaw many of the businesses that the bank was in, both in New York and London.

In particular, I was looking at the credit derivatives portfolio, and that's where the problems came up.

Joe Weisenthal (2:34)

So tell us, when did you join Deutsche Bank, and what was your first indication that, in your view, something was wrong with the way derivatives were being priced internally?

Eric Ben-Artzi (2:48)

I joined Deutsche Bank in the summer of 2010, and I had quite a bit of experience before that in credit derivatives, both through my work in Citibank and also at Goldman Sachs. So the assignment to the credit derivatives portfolio was pretty natural, and I had experience with the models, with the products involved.

Gradually, as I learned more and more about the portfolio at Deutsche Bank, I had more and more concerns. And as I raised those concerns with my managers, with accountants, and eventually I went to the hotline, the responses that I got were more and more alarming to me.

Tracy Alloway (3:33)

So walk us through the problems that you discovered, because I know it can get a little bit complex, but there are some potentially big numbers involved here.

Joe Weisenthal (3:42)

And our listeners like complex details. You don't have to be afraid to get wonky.

Eric Ben-Artzi (3:49)

Okay, great. So essentially, the credit derivatives in question were synthetic credit derivatives. These were tranches on portfolios of CDS.

Initially, I was doing some stress testing, and I was tasked with assigning risk numbers to this portfolio. I wasn't quite aware of what the products underlying that were actually in the portfolio, what they were. My assumption was that these were regular tranches.

And at some point, when I started asking questions, all of a sudden I realized that I was looking at leveraged tranches, leveraged super seniors, as they were called. These were more exotic, more risky trades that were worth less. If you think of it as an insurance contract, then a leveraged tranche, if you buy insurance in a leveraged way, you have far less protection than if you have a regular tranche where you are protected for the entire amount of your portfolio.

So one analogy that people seem to like is with a parking lot full of cars. If you're a car dealer and you have a used car, a parking lot full of used Kia's, you could argue about what kind of values those used Kia's have. You can say they're worth $5,000 or $10,000, but you can't pretend that these are new Ferraris. And essentially, I realized that this is what the bank was doing. It was misrepresenting the trade in its portfolio, and I also began to realize just how huge this portfolio is. Essentially, Deutsche Bank owned the majority of this market. So as I was raising my concerns and getting answers that made less sense, I also got answers that made me more concerned about the amounts that we're talking about, the hidden losses or if you will, the inflated valuations.