A Conflict for Khuzami?

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Includes: DB, GS
by: Ira Stoll

The director of enforcement at the SEC, Robert Khuzami, spent from 2002 to 2009 as a top in-house lawyer at Deutsche Bank (NYSE:DB), according to his SEC biography. The Wall Street Journal's Gregory Zuckerman, in his book on John Paulson, The Greatest Trade Ever, reports that when Mr. Paulson approached banks with the idea of creating CDOs to bet against, Bear Stearns turned him down. Writes Mr. Zuckerman: "Other bankers, including those at Deutsche Bank and Goldman Sachs (NYSE:GS), didn't see anything wrong with Mr. Paulson's request and agreed to work with his team."

The Zuckerman book (or at least the Wall Street Journal excerpt) goes on:

One of the biggest losers was the bank that worked with Mr. Paulson on many of the deals: Deutsche Bank. The big bank had failed to sell all of the CDO deals it constructed and was stuck with chunks of toxic mortgages, suffering about $500 million of losses from these customized transactions, according to a senior executive of the German bank.

If the Goldman SEC case ever goes to trial, we look forward to Goldman's lawyers calling Mr. Khuzami as a witness and asking him what the disclosures were like on the CDO deals that Deutsche Bank sold. Were the disclosures better than Goldman's?

Sometimes it's good to have bankers-turned-regulators because they understand the stuff enough to know where the bodies are buried. But Mr. Khuzami sure has the potential to find himself in a seriously awkward situation if he tries to build a case related to these trades not just against Goldman, which is a politically convenient target in many ways, but against Mr. Paulson (who cost Mr. Khuzami's old employer a reported $500 million) or against Deutsche Bank.