A $541 Million Loss Haunts Deutsche Bank And Former Trader Dixon

Troy Dixon

Troy Dixon Photographer: Shahar Azran/Getty Images

Troy Dixon had hit the big time: he’d gone, as they say in his old neighborhood, from “Hollis to Hollywood.”

It was a June night last year at the Apollo Theater, the legendary Harlem spot that’s helped launch stars from Billie Holiday to Michael Jackson, and Dixon was back-slapping his way through the annual spring gala.

Dixon, a member of the Apollo’s celebrity-studded board, is a star of a different sort. First at Deutsche Bank AG and now at his own hedge fund, he’s become one of the most powerful -- and controversial -- figures in the $6 trillion market for government-backed mortgage bonds.

The story of his journey from Hollis, a working- and middle-class neighborhood in Queens, to the pinnacles of finance is a tale of outsize trades and power plays. In the arcane world of mortgage securities, no one was bigger, no one bolder. At one point, Dixon built up a $14 billion position, among the largest anywhere at the bank. Word spread that he effectively controlled a quarter of his target market, inspiring awe and ill-will among rivals, even within his own bank, and raising eyebrows at the Federal Reserve Bank of New York.

Trading Loss

Only now, more than two years after Dixon struck out on his own, the story of his meteoric rise has become something else too: a tale of a half-billion-dollar trading loss that has belatedly drawn the attention of federal authorities.

At issue is who is ultimately responsible for losses that Deutsche Bank ran up in the aftermath of the 2008 financial crisis, when Dixon, now 44, ran a mortgage-backed trading desk there. The Securities and Exchange Commission wants to know what happened and, specifically, how the German bank accounted for certain bonds as they lost value. A whistle-blower has filed a complaint with the SEC claiming the bank inflated some of the values, according to people with knowledge of the complaint.

Neither Dixon nor Deutsche Bank has been accused of wrongdoing by authorities. Representatives for Dixon and the bank declined to comment about the inquiry, as did a spokeswoman for the SEC. Deutsche Bank has said it’s cooperating with the SEC.

It’s a remarkable turn of events for Dixon, who has been hailed as one of the most powerful African-Americans on Wall Street by Black Enterprise magazine.

‘Market Leader’

“He was a market leader -- always a market leader,” says Sachin Jhangiani, a former colleague.

Charismatic and confident, Dixon exudes an aura of success, friends and acquaintances say. Malick Fall, executive director of Boys Hope Girls Hope of New York, a charity Dixon is involved in that helps at-risk children, recalls meeting Dixon on the Deutsche Bank trading floor in Lower Manhattan in 2011.

“He’d just come back from the gym and had sweat pants on. Everyone else was in a suit and tie, and everyone you saw was white,” Fall says. “To see this young African-American guy, not much older than me, just walking around in his sweat pants and running the whole floor was just amazing.”

Hollis Park

The name of Dixon’s $280 million hedge-fund firm, Hollis Park Partners, traces the arc of his life, from his old Queens neighborhood of Hollis, birthplace of the seminal hip-hop group Run-DMC, to Duane Park, a wedge of green in Manhattan’s fashionable TriBeCa, where he lives today.

Monte Chandler, a lawyer who has known Dixon since high school, says he realized how far his friend had come when the rapper Derrick Jones, known as D-Nice, performed at Dixon’s 42nd birthday party at the trader’s home in the Hamptons, the summer playground of moneyed Manhattan.

“We used to run around listening to D-Nice,” Chandler says. “And there he was, in Troy’s living room.”

For Deutsche Bank, the questions swirling around the old losses in many ways exemplify how far the bank has fallen. Rocked by one scandal after another on both sides of the Atlantic, the bank is confronting one of the most turbulent transformations in its 146-year history. Many investors doubt John Cryan, the chief executive officer, will restore the bank to its former glory any time soon. Over the past year, the stock has lost nearly half its value.

Structured Credit

Dixon, meantime, has sailed higher at Hollis Park, which specializes in structured credit. His fund posted a return of more than 7 percent in 2015, according to a person with knowledge of the firm, besting the average return of about 2 percent in its class.

Wall Street seemed like another planet when Dixon was growing up in Hollis, as the only child in a working-class family from Harlem, people who know him say. But even then Dixon commanded instant respect. Recruited to play football at College of the Holy Cross, a prestigious Jesuit college in Worcester, Massachusetts, he initially wanted to become a doctor. Then a former teammate who worked in finance showed him around the trading floor of Kidder, Peabody & Co.

Dixon was hooked. In 1994, he joined Salomon Brothers, an early pioneer in mortgage securities. From there he worked at several other banks, including Credit Suisse Group AG, where he cultivated a reputation as a savvy risk taker, according to Jhangiani, who worked with him at the Swiss bank. Dixon then moved on to UBS Group AG and finally landed at Deutsche Bank in 2006, just as the subprime era was approaching its denouement.

Interviews with people close to Deutsche Bank and internal bank documents sketch out what happened next.

Opportunity

As the 2008 financial crisis hit, Dixon smelled opportunity. His team began buying securities backed by high interest mortgages. The bet was that these homeowners would keep paying their mortgages at those high rates and have a hard time refinancing amid the tumult. By 2009, his team had acquired a staggering $14 billion of the government-backed bonds. That year, those investments helped Dixon generate about $467 million in gains, according to an internal presentation.

But the returns proved wildly volatile. The group lost more than $292 million in 2010 and then made $109 million in 2011.

Deutsche Bank pared its holdings to comply with strict new regulations, but by January 2013 was still sitting on about $3 billion of the securities. Top risk officers at the bank told colleagues they were worried about the positions.

Fed Concerns

The trades were enough to draw the attention of the New York Fed, according to a person close to the matter. The Fed, worried about the potential impact on the broader market, summoned Dixon and the bank’s head of North American corporate banking and securities, Jeff Mayer, to discuss the matter. No action was taken. A spokeswoman for the New York Fed declined to comment, as did Mayer, now at Cerberus Capital Management.

Inside Deutsche Bank, the big trade was looking shaky. World bond markets were turning skittish in 2013 as the Fed hinted that it might start to taper its extraordinary efforts to ignite growth. Investors were also worrying that new government policies might make it easier for homeowners to refinance the high-rate mortgages behind the investments.

Disagreements broke out over how to value the bonds. Such valuations are part art, part science: estimates can, and often do, vary. One point of contention was whether the bank should value the bonds as if they were held to maturity, or if it should instead assign valuations based on prices the bonds would fetch if they were sold immediately.

Large Positions

Dixon argued against using fire-sale prices, people familiar with the matter say. Other market players knew Deutsche Bank was holding large positions and would invariably try to turn a quick sale to their advantage by low-balling the prices. In the end, the question was left to Dixon’s supervisors.

Tensions on the trading floor were soon strained to the breaking point. That June, Dixon told the bank he was ready to leave. He was asked to stay to help wind down the trades. By the time he left that October, Deutsche Bank was still holding about $2 billion of the bonds.

With Dixon gone, and Deutsche Bank selling assets worldwide to comply with tightening capital rules, the bank largely exited the position. In 2013, Dixon’s once high-flying trading group, which traded what are known as government-backed pass-through mortgage bonds, lost $541 million, despite hedges designed to cushion the blow, according to internal documents.

Three years on, Deutsche Bank is being asked to account for what happened. The whistle-blower claims the bank masked the losses and should have reported them sooner, people close to the matter say.

Dixon, meantime, is making money on the same kinds of bonds that he was trading at Deutsche Bank, fueling his returns at Hollis Park.

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