The TCM blog entry “Stainton leaves Deutsche as CDO co-head to lead Citadel energy business??” has been unusually popular the past few days. Perhaps the news story out of London in Times Online entitled “Deutsche suspends trader over £30 million 'cover-up'” by Patrick Hosking might be an explanation.

The beginning of the article reads “A LONDON-based derivatives trader at Deutsche Bank has been suspended after allegedly covering up a shortfall of at least £30 million, The Times has learnt. The trader, Anshul Rustagi, has been ordered to stay away from the bank, pending a disciplinary hearing next week. He is alleged to have overstated profits on his own trading book, according to a Deutsche investigation, which was launched as soon as discrepancies became apparent. The full size of the alleged abuse is not known because of the esoteric nature of the derivatives that Mr Rustagi traded. Known as collateralised debt obligations (CDOs), they can be very hard to value. CDOs, once famously labelled “toxic waste” by Sir Howard Davies, the former chairman of the Financial Services Authority, have become very big business for investment banks.”

“The affair is especially sensitive because Deutsche Banks’ CDO desk is finalising its accounts ready for the annual bonus season — and millions of pounds of bonuses are at stake. There has been a very high turnover of staff on the desk in recent months, with Mark Stainton, the former desk head, recently departing for a job with a US hedge fund. The bank is understood to have notified the Financial Services Authority (FSA) but it does not regard the matter as criminal. Mr Rustagi, a relatively junior trader, is registered with the FSA. The alleged mis-marking of CDO positions is said to have been going on for about two months. Mr Rustagi, who is said to be a bright MBA graduate, has been listed as an investment adviser on the FSA register of approved City operators since August 2004.”

As a head of a trading desk who has had some experience with a rogue trader, I should comment that it is unlikely that this “shortfall of at least £30 million” only occurred in Anshul Rustagi’s accounts within the last two months. While I have no direct knowledge of the Deutsche Bank situation, losses of this magnitude are likely to have been caused by some adverse external events that were not fully disclosed (perhaps the May 2005 credit market stress or the recent bankruptcy of Delphi??) and the trader then attempted to get back to even likely further compounding the problem. Further, I have no knowledge of the reporting structure within the Deutsche Bank CDO business. However, I suspect that regulators and other concerned parties will want to know what Mark Stainton, as head of the CDO desk, knew about the situation, when he knew it and what, if anything, he did about it. Please contact Lars Toomre for further discussion.