Brookfield: inside the $500bn secretive investment firm

An FT investigation into the complex dealings of the group that helped out the Kushners by leasing 666 Fifth Avenue

Mark Vandevelde in New York

© FT montage / Getty

On a busy stretch of Manhattan’s Fifth Avenue a few blocks south of Trump Tower, a decaying skyscraper stands as a rebuke to the $1.8bn deal that Jared Kushner helped his family sign a decade ago, at the age of 26. It was the most expensive New York office purchase in history, and for a time it looked likely to sink the Kushners’ business. Steve Roth, the billionaire who co-owned 666 Fifth Avenue, lamented it would “be worth a lot more if it was just dirt”.

By 2016, Mr Kushner was searching for a way out. Destined for a top job in his father-in-law’s White House the following year, he found plenty of people to talk to, but no one who was buying. Discussions with Anbang, the Chinese insurance group, came to a halt some time before its flashy chairman Wu Xiaohui landed in a Chinese jail. The Qatari finance minister Ali Shareef al-Emadi met Mr Kushner’s father in 2017, although Charles Kushner has said he took the appointment “out of respect” and stressed there could be no deal.

Then, with months to go before $1.2bn of mortgage payments fell due in February 2019, the Kushners won a reprieve — one that looked nothing like a favour from a foreign state. It was an investment from financial group Brookfield, which leased the building whole, paying nearly a century of rent in advance.

Brookfield is a name that towers over the global investment industry, even if it receives less scrutiny or attention than rivals of similar size. The name adorns the skyscrapers of London’s Canary Wharf, Berlin’s reconstructed Potsdamer Platz and New York, where Brookfield dwarfs every other commercial landlord. And it reaches far beyond real estate; Brookfield’s eclectic investment portfolio includes 14,500km of railways and toll roads, about one-seventh of France’s mobile phone masts and Westinghouse, the formerly bankrupt nuclear reactor maker.

Diagram showing the structure of Brookfield

Originally an outgrowth of the Bronfman liquor dynasty, the group today attracts money from ordinary stock market investors, sophisticated public pension systems and sovereign states including Qatar, the gas-rich Middle East state whose finance minister the elder Mr Kushner appeared to spurn. “Our reputation is that if you have a large transaction, if you have a difficult transaction . . . go to Brookfield,” says chief executive Bruce Flatt.

Yet what exactly Brookfield is, and how it operates, is maddeningly difficult to ascertain.

To unpack the Canadian group’s accounts is to discover not so much a company as a giant, triangular jigsaw board that spreads across the world and covers assets worth $500bn. The pieces are hundreds of corporate entities, all locked together by elaborate contracts, which give 40 people at the top the right to rule huge sections of the puzzle almost as if it were their own.

Those insiders wield such power that the companies below them could face risks similar to those of “pyramid control companies”, according to a draft investor disclosure that Brookfield filed with the Securities and Exchange Commission in 2013. (The final version warned instead of risks “associated with a separation of economic interest from control”.)

FILE - In this June 7, 2017 file photo, President Donald Trump's White House Senior Adviser Jared Kushner, left, shakes hands with real estate developer Steve Roth as they arrive at Andrews Air Force Base, Md. The prominent New York City developer who has advised the Trump administration on infrastructure refuted reports he was cheering on the president's decision not to pay for half of the estimated $13 billion price tag for a new commuter rail tunnel between New York and New Jersey. (AP Photo/Andrew Harnik, File)
Jared Kushner and Steve Roth, the billionaire who co-owned 666 Fifth Avenue, which was leased for 100 years by Brookfield Asset Management © Andrew Harnik/AP

Over the past six months, the Financial Times has asked current and former executives, and others who know Brookfield well, to shine a light on this empire. Some refused to talk; others requested anonymity, citing non-disclosure agreements or fear of reprisals.

Even as they spoke, the Toronto-based group pushed further into US finance, completing an acquisition of Oaktree Capital Management, the private equity firm founded by Howard Marks and Bruce Karsh. Yet in interviews, securities filings, litigation records and other documents, a picture emerges of an investment group that defies convention: highly secretive, seemingly obsessed with control and susceptible to family squabbles that have few parallels among its Wall Street peers.

Brookfield began with a $15m inheritance and a family feud. The money came from Samuel Bronfman, founder of the Seagram Company, who made a fortune out of alcohol just as America turned to prohibition. The feud involved his two nephews, Peter and Edward, and it began in 1952, when Samuel locked the young brothers out of Seagram’s offices and forced them to sell their shares for less than they were worth. The key actor, though, was accountant Jack Cockwell, who teamed up with the two brothers, and whose shrewd dealmaking helped build up the group.

A turning point for the Bronfmans came with the acquisition, following a messy takeover battle, of Brascan, the former owner of a Brazilian electrical utility, which was sitting on a pile of cash after the military dictatorship nationalised its biggest asset. In Mr Cockwell’s hands, the New York-listed Brascan became a platform for controlling just about anything: breweries and sports teams, forests and mines, real estate brokers and investment banks.

Bruce Flatt, Brookfield Assest Mgmt Inc. CEO, speaks during a Bloomberg Interview in New York, U.S., on Thursday, March 21, 2019. Photographer: Christopher Goodney/Bloomberg
Bruce Flatt, Brookfield chief executive: 'Our reputation is that if you have a large transaction, if you have a difficult transaction . . . go to Brookfield.' © Christopher Goodney/Bloomberg

By the 1980s, Edward and Peter Bronfman were two of Canada’s richest men. They also presided over one of the world’s most complicated corporate structures, with booty from their acquisition spree split between dozens of public companies and hundreds more private vehicles.

Edward sold his shares in 1989, retired and took up philanthropy. Peter stayed on to orchestrate the deal that would create Brookfield.

At the centre of the transaction was Pagurian Corporation, which was controlled by executives including Mr Cockwell and shared its name with a species of crab that, having no shell of its own, steals the exteriors of dead snails.

In 1993, with real estate values falling and Brascan selling off assets, Peter Bronfman sought an exit. Pagurian ended up with a majority stake in the Bronfman empire, while Peter Bronfman, whose fortune had seeded the vast enterprise, reportedly received about $25m.

Following a series of name changes, mergers and share-swaps that brought together many of the former Bronfman companies, Pagurian is today known as Brookfield Asset Management.

Its leaders have soared in wealth and influence since the departure of the Bronfmans. Mr Cockwell still serves on Brookfield’s board, and holds shares worth about $1.6bn. Mr Flatt, who became chief executive in 2002, has accumulated stock worth another $2.5bn.

Seagrams founder Sam Bronfman in office, prob. in Seagrams bldg, prob. in New York City. (Photo by Arthur Schatz/The LIFE Images Collection via Getty Images/Getty Images)
Samuel Bronfman, founder of the Seagram whisky company and uncle of Peter and Edward Bronfman © Arthur Schatz/LIFE/Getty

Their position seems secure; BAM shareholders have earned compound annual returns of 18 per cent over the past 25 years. And even if that performance should falter, the two men would be difficult to dislodge, for they own a big piece of a lesser-known company named Partners Limited, which has the power to override the votes of every other Brookfield shareholder.

“In form, Partners is a corporation,” explains a two-page memo sent in the mid-1990s to a handful of Peter Bronfman’s employees, and seen by the FT. In substance, it sounds like something else entirely: a routine of “weekly luncheon meetings” that comes with serious financial perks.

Conceived as a way for executives to “become a financial partner with Mr Bronfman”, Partners today wields enormous power over Brookfield. Its 40 members own about one-fifth of BAM, but have enough votes to appoint nine of its 16 directors. A dual-class structure means they can also overrule shareholder motions even if they are supported by outside shareholders.

The identity of some of those “partners” is not clear. Brookfield named only a handful in its 2018 public filings, although all are said to be current or former Brookfield executives. (Among them are Mr Flatt and Mr Cockwell, who own half of Partners between them, according to Brookfield; another five executives were identified who hold about another third.) Peter Bronfman’s widow Lynda Hamilton, who later married Mr Cockwell, has been named as a shareholder in previous years, as has Mr Cockwell’s brother Ian, who once ran Brookfield’s housebuilding division. (Brookfield says neither currently own Partners shares.)

Mr Flatt likens the system to Goldman Sachs’ former partnership, with insiders promising to forgo most outside business interests, and departing executives ceding their shares to younger partners in exchange for payments stretching over 20 years.

CANADA - MARCH 20: Peter Bronfman: Chairman took care of formalities at historic annual meeting. (Photo by Tony Bock/Toronto Star via Getty Images)
Peter Bronfman with his brother Edward built an enormous conglomerate in the 1980s that formed the basis of Brookfield Asset Management © Tony Bock/Toronto Star/Getty

It is not always harmonious. In one puzzling dispute, a departing executive filed a multimillion-dollar lawsuit against Mr Flatt’s brother Gordon, who has no apparent connection to Brookfield. (The litigation took place in Bermuda and few details are public, but Gordon Flatt denied the allegations against him, and a knowledgeable person said the case had been settled.)

Yet despite an elaborate structure that vests power in insiders, Mr Flatt insists that Brookfield is run by an independent board. “That partnership does nothing,” he says. “We never have meetings, we don’t vote on anything, there is nothing to do. But it has those rights, and they’re very important.”

Two days before Brookfield bought the Kushners’ office tower last August, an executive named Brian Kingston dialled into a conference call with analysts and casually disclosed that his team had just closed a $1.4bn transaction involving a different set of New York properties. Brookfield was the seller. It was also the buyer.

More precisely, the buyer was BAM, which sits a few rows from the top of the Brookfield triangle, and is sometimes known as Brookfield for short. This was already unusual: when the Brookfield group buys an asset, the money usually comes from one of the investment funds it runs for outside investors. “BAM doesn’t do anything,” Mr Flatt confirms. “BAM never puts up any money, for anything. That’s why, if you’ve read any of our materials, we’re increasingly at the point where we generate way more cash than we need.”

CANADA - APRIL 22: Edward Bronfman (no hard hat, hands in pockets) (Photo by Frank Lennon/Toronto Star via Getty Images)
Edward Bronfman retired in 1989 and took up philanthropy © Frank Lennon/Toronto Star/Getty

But this time BAM was in fact putting up money, to buy a 28 per cent stake in a bunch of New York office towers. And it was doing more besides. The buildings were owned by Brookfield Property Partners, a separate Nasdaq-listed company that sits further down the triangle, trades under the ticker BPY and — confusingly — is also sometimes known as Brookfield for short. Because BPY does not employ any property specialists, it delegates tasks such as identifying assets to buy and sell to other parts of the Brookfield empire. As well as snapping up the New York office tower stakes, therefore, BAM was steering BPY to get rid of them.

“We very seldom sell between companies,” says Mr Flatt. (Brookfield says that “fiduciary responsibility sits at the centre of everything we do”.) The transaction was vetted by BPY’s independent governance committee, its full board and the board of BAM, Brookfield says, adding that all the directors received extensive information, and a fairness opinion from an independent adviser. BAM told investors in November 2018 that it planned to sell the property interests to outside investors “in the near term”, but more than a year later, it has yet to announce a buyer.

Even today, shareholders know little about why BPY wanted to sell 28 per cent of its core office portfolio for $1.4bn, or why BAM wanted to buy. The rationale was that BPY needed cash.

“The only reason we did that,” Mr Flatt says of the office tower deal, was that “it [BPY] needed some extra capital. And this was an easy way to do it.”

The money was needed, Mr Flatt explains, to pay for a big wager on US shopping malls — a sector that many investors have left for dead. BPY consummated the bet in August 2018 when it merged with retail landlord GGP, whose shareholders received cash payments worth $9.3bn.

Yet that was also the month when some of BPY’s cash was committed to 666 Fifth Avenue, the office lease in midtown Manhattan that is still jangling nerves from Washington DC to Doha.

Ali Shareef Al Emadi, Qatari Finance Minister, speaks at the Qatar-UK business and investment forum in London, U.K., on Monday, March 27, 2017. . Photographer: Chris Ratcliffe/Bloomberg
Ali Shareef al-Emadi, the Qatari finance minister © Chris Ratcliffe/Bloomberg

The Kushner deal was assembled from several pieces of the Brookfield empire. The lease was signed by a company named BSREP III Nero LLC, a possible allusion to the emperor who was blamed for the burning of Rome. That company is owned by a fund called BSREP III, which is managed by BAM and was, at the time, controlled by BPY — all of which placed the deal where global finance blends into geopolitics on the jigsaw.

The known links between Qatar and Brookfield all converge on the investment group’s listed property fund BPY. About one-tenth of the fund’s assets are tied up in skyscrapers in Canary Wharf and Manhattan that are co-owned by Qatar, but the connection goes further. Through a sovereign wealth fund, Doha is one of BPY’s biggest investors, holding $1.8bn worth of BPY preferred equity. The securities have a debtlike quality, and Qatar can force BAM to buy them back for $1.8bn over the next six years.

In theory, Qatar has significant influence over BPY. It is entitled to choose one person to sit on BPY’s board, and to receive confidential information that other investors never see. Brookfield says Qatar has never exercised either of those rights. (The Qatar Investment Authority declined to comment.) Both sides have previously indicated that, when Brookfield was negotiating the $1.3bn lease on 666 Fifth Avenue, a building that Charles Kushner had discussed with the Qataris in 2017, the emirate was not involved.

No matter who made the decision or knew about it, rescuing the Kushners strikes some real estate investors as ill-advised. “It was widely regarded as a very full price, in a midtown office market that’s challenging, in an asset that’s going to require substantial capex in order to make it leasable,” says a leading dealmaker. Brookfield takes such scepticism almost as a backhanded compliment. “We buy troubled, stressed, things,” says Mr Flatt. “We’re going to reskin the building, and we’re going to fill it up. It’s going to be amazing.”

In the public accounts of BPY, the listed property fund that received Qatari investment, 666 Fifth Avenue has already all but disappeared. Last January, BPY lost control of BSREP III, the private vehicle that owns the building, after reducing its stake to $1bn. New investors piled in, each taking a piece of the Kushner tower, and lifting the private fund’s firepower to $15bn.

That influx of cash has not made the tower’s ownership any more transparent. A handful of US pension funds have acknowledged their participation, but few other investors have been identified publicly. Knowledgeable people insist that no Qatari money is involved. Materials reviewed by the FT show that about $3bn of the total comes from sovereign governments, although they do not specify which ones, and $2bn of it from the Middle East, although the document does not say exactly where.

The Money Behind Trump’s Money

The inside story of the president and Deutsche Bank, his lender of last resort.

By David Enrich

Credit...Illustration by Paul Sahre

One Day in early 2017, Mike Offit went to the Yale Club in Manhattan for a lunch hosted by a group called Business Executives for National Security. Offit, who has a craggy face and shoulder-­length hair, had spent much of his career in banking, but that had ended nearly two decades earlier. Since then, he had puttered around the outskirts of finance, dabbled in journalism and even published a novel about a pair of murders at a fictional German-­owned Wall Street bank that bore a striking resemblance to the one that he worked for until 1998: ­Deutsche Bank.

These days, Offit had time on his hands, which is how he found himself at the Yale Club that afternoon. Slanting winter sunlight illuminated the white-­columned walls of the club’s dining room. Offit was chatting with an American military officer about weaponry when his iPhone buzzed. He saw an email from the White House Executive Office of the President. How strange, Offit thought.

The message contained a PDF file: a scanned printout of an email he had sent Donald Trump several months earlier, in the waning days of the presidential campaign. Offit had known Trump for decades. At ­Deutsche Bank, he had lined up huge loans to finance Trump’s construction and renovation of landmark Manhattan skyscrapers, at a time when the default-­prone real estate developer and casino magnate was no longer able to get loans from most mainstream financial institutions. The two men stayed in touch afterward. Offit’s 2014 book, “Nothing Personal,” even featured a blurb from Trump: “Michael Offit offers a colorful insight into how the big money is made — and/or taken — on Wall Street.”

In October 2016, Offit tried to return the favor. Democrats were pillorying Trump’s shaky — not to mention murky — personal finances, including his companies’ chronic bankruptcies. Offit thought he might dispense a little advice to his erstwhile client. On a Friday evening, he emailed Trump a lengthy message, explaining that the defense Trump was offering at the time — that he was simply using the bankruptcy law in an advantageous way — wasn’t resonating with voters. “I believe there is a much better answer, that may help defuse this issue, and am just arrogant enough to suggest it,” Offit wrote.

He advised Trump to claim that his companies had been forced to declare bankruptcy, the victims of greedy hedge funds so obsessed with wringing every last dollar out of him that they refused to let him renegotiate his crushing debts. Was this true? Not really. But it sounded good, and the line of attack meshed with Trump’s populist rhetoric on the campaign trail.

Offit got no response. He wasn’t even sure that Trump had read the email. But here, months later, was Trump’s unmistakable black Sharpie scrawl across the top of the message he had sent: “Mike — Such a cool letter. Best wishes, Donald.”

“Look at this!” Offit exclaimed to the officer. “I just got a note from the president!”

“What do you mean, you got a note from the president?”

Offit handed him the iPhone so he could see for himself. The man’s eyes widened. “Wow,” he said. “That’s more of a response than we can get out of him.”

Trump International Hotel, Washington: $170 million loan (2014).Credit...Brooks Kraft/Getty Images

The officer asked what Offit’s connection was to the president. Offit replied, “I loaned him half a billion dollars.”

The roughly $425 million that Offit helped arrange for Trump back in 1998 was the start of a very long, very complicated relationship between ­Deutsche Bank and the future president.

Over the course of two decades, the bank lent him more than $2 billion — so much that by the time he was elected, ­Deutsche Bank was by far his biggest creditor.

Against all odds, Trump paid back most of what he owed the bank. But the relationship cemented ­Deutsche Bank’s reputation as a reckless institution willing to do business with clients nobody else would touch. And it has made the company a magnet for prosecutors, regulators and lawmakers hoping to penetrate the president’s opaque financial affairs.

Last April, congressional Democrats subpoenaed ­Deutsche Bank for its records on Trump, his family members and his businesses. The Trump family sued to block the bank from complying; after two federal courts ruled against the Trumps, the Supreme Court has agreed to hear the case, with oral arguments expected in the spring. State prosecutors, meanwhile, are investigating the bank’s ties with Trump, too.

The F.B.I. has been conducting its own wide-­ranging investigation of ­Deutsche Bank, and people connected to the bank told me they have been interviewed by special agents about aspects of the Trump relationship.

If they ever become public, the bank’s Trump records could serve as a Rosetta Stone to decode the president’s finances. Executives told me that the bank has, or at one point had, portions of Trump’s personal federal income tax returns going back to around 2011. (Deutsche Bank lawyers told a federal court last year that the bank does not have those returns; it is unclear what happened to them.

The Trump Organization did not respond to multiple requests for comment.) The bank has documents detailing the finances and operations of his businesses. And it has records about internal deliberations over whether and how to do business with Trump — a paper trail that most likely reflects some bank employees’ concerns about potentially suspicious transactions that they detected in the family’s accounts.

One reason all these files could be so illuminating is that the bank’s relationship with Trump extended well beyond making simple loans. ­Deutsche Bank managed tens of millions of dollars of Trump’s personal assets. The bank also furnished him with other services that have not previously been reported: providing sophisticated financial instruments that shielded him from risks and outside scrutiny, and making introductions to wealthy Russians who were interested in investing in Western real estate.

If Trump cheated on his taxes, ­Deutsche Bank would probably know. If his net worth is measured in millions, not billions, ­Deutsche Bank would probably know. If he secretly got money from the Kremlin, ­Deutsche Bank would probably know.

Until the 1990s, ­Deutsche Bank was a provincial German company with a limited presence outside Europe. Today it is a $1.5 trillion colossus, one of the world’s largest banks, with offices in 59 countries — and, thanks to its well-­documented pattern of violating laws, an international symbol of greed, recklessness and hubris.

Its rap sheet includes manipulating international currency markets; playing a central role in rigging a crucial benchmark interest rate known as Libor; whisking billions of dollars in and out of Iran, Syria, Myanmar and other countries in violation of sanctions; laundering billions of dollars on behalf of Russian oligarchs, among many others; and misleading customers, investors and American, German and British regulators.

­Deutsche Bank’s envelope-­pushing helped it become the global power player it is today, but it also left the company dangerously frail. Its books remain stuffed with trillions of dollars of risky derivatives — the sort of instruments that many other banks have disposed of since the 2008 financial crisis but that persist as a kind of unexploded ordnance in ­Deutsche Bank’s accounts, threatening to inflict severe damage on the bank and the broader financial system if something were to cause them to detonate.

Its financial cushions to absorb future shocks are threadbare. Its core businesses are not performing well; the bank lost $5.8 billion last year. Because of Deutsche Bank’s size and its connections with hundreds of other major banks around the world, serious problems could spread, virus­like, to other financial institutions. The International Monetary Fund a few years ago branded ­Deutsche Bank “the most important net contributor to systemic risks” in the global banking system.

­Deutsche Bank’s relationship with Trump, rather than being an odd outlier, is a kind of object lesson in how the bank lost its way. The company was hungry for growth, especially in the United States, and it was happy to cozy up to clients that better-­established players viewed as too damaged or dangerous. Along the way, it missed one opportunity after another to extricate itself from the Trump relationship or at least slow its expansion. With hindsight, the procession of miscues and bad decisions appears almost comical.

I have spent the past two years interviewing dozens of ­Deutsche Bank executives about the Trump relationship, among other subjects. Quite a few look back at the relationship with a mixture of anger and regret. They blame a small group of bad bankers for blundering into a trap that would further damage ­Deutsche Bank’s name and guarantee years of political and prosecutorial scrutiny.

But that isn’t quite right; in fact, the Trump relationship was repeatedly blessed by executives up and down the bank’s organizational ladder. The cumulative effect of those decisions is that a German company — one that most Americans have probably never heard of — played a large role in positioning a strapped businessman to become president of the United States.

Founded in 1870, ­Deutsche Bank spent most of its first 12 decades helping mighty German companies like Siemens expand internationally, as well as bankrolling infrastructure projects — primarily railroads — in Europe, Asia and North America. (Before and during World War II, the bank was a leading financier of the Nazis, helping to pay for projects including the construction of Auschwitz.) As the Iron Curtain fell, ­Deutsche Bank executives saw an opportunity to surf the tide of globalization and become a truly global institution.

The modern multinational corporation — operating in dozens of countries; buying and selling products and raw materials in a slew of different currencies; seeking to protect itself from volatile prices, fluctuating foreign-­exchange rates and sundry unforeseeable risks — needed banks that would provide much more than run-of-the-mill loans.

Now financial institutions were expected to underwrite stock and bond offerings, enable seamless transactions across international borders and in multiple currencies and create financial instruments known as derivatives that customers could use to insulate themselves from big swings in interest rates, dairy prices, the weather and the like. Top Wall Street banks were beginning to offer these services to German companies and even the German government.

To defend its turf, ­Deutsche Bank needed to learn to compete with the Americans.

In 1989, the bank took its first small step into this new financial world by acquiring a venerable British investment bank, Morgan Grenfell. Then, in 1995, ­Deutsche Bank hired a small crew of traders from Merrill Lynch — at the time one of Wall Street’s leading firms — led by a charismatic and impulsive salesman named Edson Mitchell.

The American and British governments were rolling back regulations on the banking industry, and the giants of Wall Street were getting bigger, fast. ­Deutsche Bank needed to act quickly to have any chance of catching up. Over the next couple of years, Mitchell’s team spent billions of dollars hiring thousands of bankers and traders from just about every major investment bank — perhaps the greatest mass migration in Wall Street’s history. One recruit was Mike Offit; another was Justin Kennedy, a son of the Supreme Court justice Anthony Kennedy.

Offit and Kennedy were traders at Goldman Sachs together, creating and selling mortgage bonds and working for Steven Mnuchin, now the Treasury secretary. By the time ­Deutsche Bank came knocking in the late 1990s, both men were ready for a change. (Plus, Offit claims, Mnuchin stiffed him when it came to compensation.)

The German bank lured them, as it had others, by promising them the freedom, budget and entrepreneurial culture to help establish the bank as a formidable player on Wall Street — a euphemistic way of saying that the bank had a higher tolerance for risk than many rivals. Come to ­Deutsche Bank, and you could do bigger trades. Offer larger loans. Make bolder acquisitions. Earn more money.

Offit and Kennedy were hired to build, essentially from scratch, a machine to package giant loans — for skyscrapers, hotels and other commercial real estate projects — into salable securities. At the time, selling and trading these mortgage-­backed bonds was one of the hottest businesses on Wall Street. Success would not only be remunerative; it would help burnish ­Deutsche Bank’s credentials as a serious challenger to the Wall Street elite.

Among the first steps was finding recipients for the loans — and that is how Donald Trump became a customer of ­Deutsche Bank. Two decades after striking out on his own in real estate, Trump was then at a low point of his career. He had recently defaulted on his debts to a number of large Wall Street banks — the consequence of many hundreds of millions of dollars of unwise, overleveraged investments in the casino and hotel industries — and was eager to find a financier willing to look past these sins. In 1998, Offit arranged to lend hundreds of millions of dollars to finance Trump’s gut renovations of an Art Deco tower at 40 Wall Street and his construction of a skyscraper next to the United Nations.

Shortly thereafter, Offit was let go — he says he fell victim to internal politics — and Kennedy soon climbed toward the top of the commercial mortgage bonds business. His specific role was finding customers to buy parts of that debt — a key component of ­Deutsche Bank’s ability to make the loans in the first place. He continued cultivating the relationship with Trump, helping to line up hundreds of millions of dollars in borrowings.

Kennedy became friendly with Trump, sometimes joining him in his luxury box at the U.S. Open tennis tournament or saying hello to him at Manhattan nightclubs, where Trump would park himself at a table in the corner, holding court. For ­Deutsche Bank, the relationship offered both money and prestige.

Trump owed interest on the loans and also had to pay millions of dollars in fees each time the bank arranged a new one. Trump’s recent history notwithstanding, the bank believed that the risks were minimal — the loans were earmarked for projects that appeared financially sound — and its executives were eager to build their brand recognition in the United States. One way to do that was to publicly align itself with a flashy businessman who, for all his recent screw-ups, was nothing if not recognizable. Trump soon became a regular at ­Deutsche Bank’s annual pro-am golf tournament.

Trump, however, had a nasty tendency to stiff his business partners and associates. There was an extensive list of Trump contractors, vendors and lawyers who had to settle for a fraction of what they were owed after Trump threatened to pay nothing at all. Banks, from Wall Street powerhouses like JPMorgan to foreign lenders like Britain’s NatWest, had fared little better. Time after time, Trump’s casino companies defaulted on their debts, filed for bankruptcy and ultimately agreed to pay back their creditors pennies on the dollar.

Merrill Lynch learned this lesson the hard way when it helped Trump sell $675 million of bonds to pay for work on his Taj Mahal casino on the Atlantic City boardwalk in 1988. The gaudy casino — the world’s largest — opened its doors two years later, bedecked with bright-­colored onion domes and laden with debt. Within months, it defaulted on the bonds.

The unpleasant task of mopping up this mess fell to a Merrill executive named Seth Waugh. Trump threatened to tie his lenders up in years of bankruptcy-­court litigation if they didn’t agree to let him largely off the hook for what he owed. Nobody doubted Trump’s litigiousness, and Waugh and his Merrill colleagues ultimately accepted what amounted to deep losses on the bonds.

In 2000, Waugh joined ­Deutsche Bank. Perma-­tanned and with long, floppy hair, Waugh developed a reputation among some ­Deutsche Bank colleagues for being a bit of a lightweight.

They derided him for spending more time on the golf course than he did in the office. (Today Waugh is the chief executive of the Professional Golfers’ Association of America.)

But he enjoyed the confidence of one of ­Deutsche Bank’s highest-­ranking executives, Josef Ackermann, who helped recruit him from Merrill Lynch. In 2001, Waugh learned that ­Deutsche Bank was planning to lend Trump about $500 million to use as he wished — basically an unrestricted cash infusion to stabilize his flagging finances. Having witnessed up close the carnage that Trump could inflict on imprudent financial institutions, Waugh was in no hurry to repeat the experience.

The loan that was being offered now wouldn’t have required Trump to put up any hard assets as collateral; he was requesting to borrow $500 million against the $1 billion of “good will” that Trump claimed was associated with his name. That made the transaction even riskier: If Trump stopped repaying, ­Deutsche Bank would have no easy way to get its money back. Waugh voiced strong objections to the loan, and the deal died.

Waugh would soon be named the head of Deutsche Bank’s American businesses, and he had the power to put a stop to the bank’s broader Trump relationship. He didn’t. And in 2003, yet another division of ­Deutsche Bank, one that focused on helping companies raise money by selling stocks and bonds to investors, agreed to work with Trump. The point man on this venture was Richard Byrne — another Merrill veteran who had also been involved in the Taj Mahal debacle. (Byrne helped sell the ill-­fated Taj bonds to investors.) Now Trump hired Byrne’s group at ­Deutsche Bank to issue bonds for his Trump Hotels & Casino Resorts company.

It would have been reasonable to expect that Waugh would have warned Byrne about the recently rejected $500 million loan, but that never happened. So Byrne pressed on, organizing a “road show” for Trump to meet with and try to win over big institutional investors. When that didn’t drum up the desired money, Byrne’s salesmen worked the phones, casting a wider net for more clients and managing to sell more than $400 million of junk bonds (albeit at a high interest rate that reflected investors’ fears that Trump might default). Trump repaid the ­Deutsche Bank team with a weekend trip to his Mar-­a-­Lago resort in Palm Beach, Fla.

The following year, with his casinos on the rocks, Trump’s company stopped paying interest on the bonds and filed for bankruptcy protection. (“I don’t think it’s a failure,” Trump said. “It’s a success.”) ­Deutsche Bank’s clients, the ones who had recently bought the junk bonds, suffered painful losses. In the future, Trump would effectively be off-­limits for Byrne’s division.

But that still didn’t render Trump persona non grata for the entire bank. This was a product, at least in part, of ­Deutsche Bank’s internal dysfunction. Many big companies are compartmentalized, but ­Deutsche Bank took it to an extreme. It wasn’t just that rival divisions of the bank didn’t communicate well; they often battled against one another to win clients and amass power for their leaders within the organization — a poisonous atmosphere that Trump, perhaps inadvertently, managed to exploit.

Trump soon went back to the commercial real estate group, asking for a loan to build a 92-­story skyscraper in Chicago. He reportedly seduced the ­Deutsche bankers with flights on the same 727 that had recently taken Byrne’s salesmen to Florida. He invited Kennedy and his colleagues to Trump Tower and lavished them with praise. He explained that his daughter Ivanka would be in charge of the Chicago development — that’s how important this project was to the Trump Organization.

Just as Waugh hadn’t warned Byrne about the rejected Trump loan, now Byrne didn’t warn Kennedy and the other commercial real estate bankers about his own recent Trump experience. “We just looked the other way,” a former executive explains. “That was the ­Deutsche Bank culture.”

In 2002, Joe Ackermann was named chief executive of ­Deutsche Bank. A reserve officer in the Swiss military and a number cruncher with a nearly photographic memory, Ackermann also had a notoriously short fuse. His staff was terrified of disappointing him.

Shortly after taking charge, he made a bold and fateful public promise: The bank would become roughly six times as profitable within a couple of years. Senior executives from that era say that in order to achieve Ackermann’s objective, they quickly shifted the priorities inside the bank.

The overriding mission became to make as much money as possible, as quickly as possible, with scant attention to the long-term consequences. A saying took hold among the bank’s leaders: “The current quarter is the most important quarter we’re ever going to have.” Shareholders now became the bank’s most important constituency.

On the surface, Ackermann’s strategy seemed successful. The bank met his lofty profitability targets on schedule, in part by increasingly using its own money — as opposed to customers’ — to shoot for the moon with speculative market bets, a strategy known as proprietary trading.

The bank’s shares climbed higher. The company was showered with industry awards.

Years later, it would become clear how ­Deutsche Bank pulled this off: by taking dangerous shortcuts and, at times, breaking the law. In its zeal to goose its profitability metrics, the bank neglected to invest enough in internal technology systems or top-tier compliance and risk-­management staffs.

When employees cooked up schemes to launder money, violate sanctions, manipulate markets, avoid taxes or mislead customers, there were few internal checks and balances to detect or stop such behavior. In the rare instances when employees voiced concerns, they were often ignored and were sometimes punished for getting in the way of the boss’s all-­important profitability directive.

Trump was among the beneficiaries of these shortcuts. Before making the Chicago loan, ­Deutsche Bank conducted an informal audit of his ­finances. Trump had declared to the bank that he was worth more than $3 billion, but ­Deutsche Bank concluded that the real number was closer to $788 million — a quarter of what Trump said it was.

For most banks, this would have been disqualifying, but ­Deutsche Bank was undeterred. Executives were so eager for growth and big deals that they managed to look past the obvious red flags. In February 2005, ­Deutsche Bank agreed to lend him $640 million for the Chicago project.

Around this time, and out of public view, ­Deutsche Bank provided a series of other services to Trump that haven’t been previously reported. It created numerous “special purpose vehicles” to make it easier for him quietly and inexpensively to acquire international properties for himself and his companies.

Trump at the time was trying to diversify his portfolio of assets outside the United States, striking deals to buy properties outright and simply slapping his name on other people’s buildings. Thanks to the magic of financial engineering, the vehicles ­Deutsche Bank created enabled Trump to do real estate deals in places like Eastern Europe and South America without putting any of his own money on the line.

Not only was he taking out loans to finance the acquisitions, but he was also using other people’s money to cover the small “equity” portion of the purchases. ­Deutsche Bank would sell investors the rights to whatever revenue the projects generated in the future in exchange for the investors’ — or the bank’s — covering the money Trump owed upfront for the acquisitions. As a result, ­Deutsche Bank and investors bore the risk, over many years, that the Trump projects would not bring in as much money as expected.

This sort of structure was hardly unheard-­of for real estate developers. “It’s a well-­seasoned financing technique,” Mark Ritter, a ­Deutsche Bank executive who was familiar with the transactions at the time, told me. It was an easy way for the bank to generate a steady stream of fees from deep-­pocketed customers. But it increased the bank’s already heavy exposure to Trump — and helped the mogul strike under-­the-­radar deals in far-flung locales, including some that were popular destinations for people looking to hide assets.

­Deutsche Bank also helped Trump find buyers for condos in his properties, according to people familiar with the arrangements. When he partnered in 2006 with a Los Angeles developer to build a Trump-­branded resort in Hawaii, ­Deutsche Bank organized get-­togethers in London and elsewhere to connect Trump and his partners with wealthy clients — including some from Russia — who used anonymous shell companies to buy units in the Waikiki hotel complex.

Some senior executives discussed the potential pitfalls of the Trump relationship. It wasn’t only the not-­insignificant risk that Trump would default on loans. The bankers also talked about Trump’s well-­documented ties to the organized-­crime world — he had done business with people in or affiliated with the mob in Atlantic City and New York — and the possibility that his real estate projects were laundromats for illicit funds from countries like Russia, where oligarchs were trying to get money out of the country. “Everyone in the real estate business was involved in ‘flight capital,’ ” a top executive told me. But the loans looked profitable, the relationship felt valuable and the concerns went unheeded.

When the 2008 financial crisis arrived, Trump still owed $334 million on ­Deutsche Bank’s loan for his Chicago skyscraper. With the economy sinking, nobody was buying the luxury apartments in the building. As the loan’s due date approached that November, Trump filed a lawsuit, trying to void the loan because of the financial crisis, which he accused ­Deutsche Bank of having helped ignite.

He sought damages of $3 billion. ­Deutsche Bank filed its own suit, seeking to recoup the $40 million portion of the loan that Trump had personally guaranteed back in 2005. Shortly after the suit was filed, Trump bumped into Justin Kennedy. “Nothing personal,” Trump said. Kennedy replied that there were no hard feelings: Business was business. (Kennedy left the bank at the end of 2009.) But the lawsuit did what the defaults somehow had not: It prompted Deutsche Bank to wash its hands of Donald Trump. In the future, he wouldn’t even be permitted to enter the bank’s golf tournament.

Relative to many of its ruined rivals, ­Deutsche Bank enjoyed a “good” financial crisis. It lost billions, but it had also placed market bets that anticipated the housing crisis, and the resulting profits largely made up for other losses. It was one of the few major international banks that seemed strong enough to avoid a direct government bailout, and many investors were pacified by the knowledge that if things got really dicey, the German government would come to the rescue.

For a brief spell, ­Deutsche Bank was the toast of the financial world. Within a few years, though, it had become one of the industry’s leading problem cases. The crisis — and the waves of new regulations that came afterward — fundamentally changed Wall Street. ­Deutsche Bank’s business model had hinged on making enormous wagers with borrowed money; in essence, the one-time icon of German sobriety had become a giant casino.

Now this proprietary trading was outlawed in the United States. Regulators around the world — deeply suspicious of the sort of adrenaline-­crazed, rule-­bending tactics that had come to define ­Deutsche Bank — also pushed banks to lessen their reliance on borrowed funds.

Cocky from their performance during the crisis, ­Deutsche Bank executives initially refused to do so. Nor did they use this moment of relative strength to rid the bank of the mountains of unwanted assets — in particular, trillions of dollars’ worth of derivatives that had the potential to saddle the bank with enormous losses — that were polluting its balance sheet.

One of the few concessions the bank did make to the new era was to start looking for safer ways to earn money. One was private banking: providing personalized services to the richest of the American rich.

To differentiate its then-­sleepy private-­banking division from the competition, ­Deutsche Bank planned to work with customers who were untouchable for rival banks and to do deals that were too risky or too complicated for others to stomach — a variation on the strategy that Offit and Kennedy’s squad had deployed a decade earlier when trying to get the commercial real estate business off the ground. And no one was more central to that project than a woman named Rosemary Vrablic.

Vrablic grew up in the Bronx and then the New York City suburb of Scarsdale and started out as a bank teller before eventually landing a job analyzing proposed loans. In 1989, a headhunter recruited her for a job in Citicorp’s private-­banking arm. Citi was widening its suite of offerings to such clients, including by making loans to finance their big real estate projects.

She quickly took advantage of this new lending service to become one of New York’s leading bankers to the superrich, first at Citi and then at Bank of America. Vrablic specialized in dealing with difficult men. “They’re successful, and they’ve earned their money by being tough,” she explained in an interview years later. “So I don’t have a problem with tough.” One of her youngest clients was Jared Kushner, who was taking over his family’s real estate company.

In 2006, Vrablic met Tom Bowers, who had joined ­Deutsche Bank the year before with a mandate to help the German bank make a name for itself among ultrawealthy Americans. Vrablic, who was 46 at the time, soon agreed to join ­Deutsche Bank, with a guaranteed salary and bonus of at least $3 million a year. She started bringing in tens of millions of dollars in annual revenue for the bank. Bowers told me she was by far the top producer in the bank’s New York offices.

The litigation between Trump and ­Deutsche Bank over the loan for his Chicago skyscraper was settled in 2010, with the bank agreeing to give Trump two years to make good on his obligations, including the $40 million that he had personally guaranteed. And if he wanted to keep expanding his empire, he would need to identify a new source of credit. The trouble, as ever, was that serious banks wouldn’t get anywhere near him. Even ­Deutsche Bank, it seemed, was now off-­limits after the Chicago fight.

In 2011, Jared Kushner invited Vrablic to visit his father-­in-­law at Trump Tower. Trump explained his situation to her and then popped the big question: Would Vrablic’s division consider lending him $40 or $50 million, with Chicago’s Trump International Hotel & Tower as collateral? That would allow him to repay what he still personally owed ­to Deutsche Bank. The whole idea — that one arm of ­the bank would lend money for the purpose of paying off defaulted debts owed to another part of the company — seemed crazy, but Vrablic was excited by the prospect of landing a major deal with a major new client. She took the proposal to Bowers, who agreed that it was worth considering.

A small team sifted through Trump’s personal and corporate financial records and tax returns. The first thing the bankers noticed was that Trump was, once again, vastly overstating his fortune, assigning absurdly high valuations to his real estate assets. In one especially egregious case, he claimed that a property he bought in Westchester County for about $7 million was now worth $291 million. The bank ended up reducing the assets’ values by as much as 70 percent.

The funny thing was that Trump’s underlying finances weren’t all that bad. He had limited debt, at least compared with his fellow real estate magnates, and cash was pouring in, apparently from TV royalties and licensing deals he had struck to put his name on properties he didn’t own.

Making the transaction more palatable for ­Deutsche Bank, Trump was willing to personally guarantee the loan, meaning that ­Deutsche Bank in theory could seize his assets if he didn’t pay it back. (The fact that a similar, albeit smaller, personal guarantee hadn’t prevented him from defaulting on the original Chicago loan did not seem to bother the bank.) Vrablic and Bowers tentatively agreed to lend him $48 million.

When top executives in ­Deutsche Bank’s investment-­banking unit heard that another division was about to rekindle the Trump relationship, they were furious. The head of that unit, Anshu Jain, rang the alarm at a meeting of the bank’s top executives: How could ­Deutsche Bank do business with Trump after he had so publicly burned the bank? What precedent would that set for other would-be deadbeats? If Trump defaulted yet again, how would ­Deutsche Bank explain that to investors and regulators?

Bowers and Vrablic argued that the loan was sound. They grumbled that the investment bankers were just jealous that the private bankers had figured out how to structure a loan with Trump in a way that seemed virtually risk-free for ­Deutsche Bank. The squabble made it to the top of the bank — at which point Ackermann, the chief executive, said he didn’t object to the loan. (Ackermann told me that he doesn’t recall being consulted.)

The bank’s lawyers reviewed the question of whether the company could work with Trump and declared that “this client is cleared.” Stuart Clarke, ­Deutsche Bank’s chief operating officer in the Americas, emailed Bowers a similar message: “There is no objection from the bank to proceed with the client.” Attached to that email was a PDF file containing Trump’s personal and corporate financials, to make clear that everyone who had vetted the proposed transaction was fully aware of the new client’s heavy baggage.

The spigot was open again. When Trump decided to buy the rundown Doral Resort & Spa in Miami for $150 million in 2012, one of his first phone calls was to Rich Byrne, who years earlier helped Trump’s casino company sell junk bonds. Trump’s subsequent default on those bonds ended his relationship with ­Deutsche Bank’s securities unit, which Byrne now ran, but the two men had stayed in touch. Byrne agreed to take a look at the numbers, not bothering to tell Trump that ­Deutsche Bank was unlikely to actually help him with financing.

But the private-­banking division was in the mix. Trump invited Vrablic to Florida to see the property. The day after she got back to New York, she walked into Bowers’s office. “Trump wants to go buy Doral,” she explained, and he wanted ­Deutsche Bank to lend him the money to do it.

For the second time in a matter of weeks, Bowers dispatched a team to study a possible Trump loan. They concluded that, in fact, Trump was getting the resort at a reasonable price. The bank wired $125 million to the Trump Organization. Afterward, Trump called Byrne’s office. “Rich,” he bellowed, “I’m just calling to thank you! I know you must’ve approved it, but Rosemary and her team gave me the money.”

Thinking on his feet and happy to take credit, Byrne pretended that he knew all about the loan. He congratulated Trump and then, as an aside, asked about the interest rate that Vrablic’s squad was charging on the loan. Trump said it was well under 3 percent. Byrne couldn’t believe that ­Deutsche Bank, after everything it had been through with Trump, was now extending him a nine-­figure loan at such a low interest rate.

When Trump bid roughly $1 billion for the Buffalo Bills football team in 2014, Vrablic agreed to back him. (Trump’s bid was rejected, so no loan was required.) A few months later, ­Deutsche Bank lent Trump $170 million to finance the transformation of the Old Post Office building in Washington into a Trump International luxury hotel. Vrablic’s division also lent millions of dollars to other members of the Trump and Kushner families.

Then, in the spring of 2016, Trump came looking for one more loan. It was ostensibly to pay for work on his golf course in Turnberry, Scotland. But Trump was running for president, and it was hard to avoid the suspicion that the loan he was requesting might have something to do with the fact that he was burning through gobs of his own cash on the campaign trail. 
Bowers by then had left the bank. (He died in November 2019 in what the Los Angeles County coroner said was a suicide.) Vrablic and her managers said yes to the Scotland loan, but the deal had to be reviewed up the food chain. This would once have been part of Seth Waugh’s job, but he was no longer in charge of ­Deutsche Bank’s American businesses. His successor was a veteran investment banker named Jacques Brand.

Somehow Brand hadn’t realized until now that Trump was one of his company’s most important clients. He was alarmed. He was stunned that the people in his wealth-­management division thought it would be a good idea to lend tens of millions more to Trump — especially right now, in the middle of this violent brawl of a presidential campaign. “Why are we doing business with him?” Brand fumed to his colleagues. “The answer is no.”

Brand didn’t have the power to block the loan unilaterally, but he referred it to a committee charged with safeguarding the bank’s reputation. After hearing a quick summary of the proposed loan, the committee unanimously voted to reject it. “It was an affront to all of our senses,” recalls an executive involved in the deliberations.

Vrablic and her colleagues appealed to another committee, in Frankfurt, which also rejected the proposal. The loan was dead. Nine months later, Trump was elected president. Vrablic received V.I.P. tickets to the inauguration, as well as hard-to-get accommodations in Trump’s newly opened Washington hotel that Deutsche Bank had financed.

In some respects, the association with a polarizing president has been bad for ­Deutsche Bank’s business. Executives told me it has become a bit harder to win assignments from public institutions, like government-­employee pension plans. And ­Deutsche Bank has become an enticing target for ambitious prosecutors and politicians around the world — including Democrats who, after taking control of the House of Representatives last year, swiftly issued subpoenas for the bank’s records on Trump, his family and his companies.

But remarkably, in the final accounting, the Trump relationship may have been an overall positive for both the loyal bank and its prized client. Trump got the money he needed to keep buying and building, which in turn allowed him to maintain the reputation as a respectable businessman that he eventually rode to the White House. ­

For its part, Deutsche Bank has pocketed tens of millions of dollars in fees and interest payments. The bank won’t comment on whether Trump is up-to-date with his loan payments, and Vrablic, who remains a bank employee, has declined to publicly discuss her relationship with Trump. But Trump is not known to have defaulted on any of his recent loans or otherwise burdened the bank with large losses; in fact, the overall relationship appears to be profitable.

Most likely, this reflects the bank’s luck, not skill, but some senior executives told me they view the outcome as a vindication of their work for Trump. Their attitude is reminiscent of the complacency that took hold after ­Deutsche Bank skated through the financial crisis, thanks to a combination of good fortune, well-­timed bets and the knowledge of a German government safety net.

Some optimistic ­Deutsche Bank officials even believe that because the bank has refused to publicly divulge much about its famous client, it might emerge with an enhanced reputation for probity and discretion — and for getting big things done for desperate customers.

In any case, ­Deutsche Bank, along with the rest of its industry, is benefiting from having Trump in the White House. His administration has been systematically rolling back regulations erected after the financial crisis that were designed to hem in Wall Street and the world’s largest banks. The prohibitions on proprietary trading are loosening. The requirements for how much capital banks need to have are easing.

The Consumer Financial Protection Bureau, created to shield borrowers from avaricious lenders, has been neutered. The presumption that the government needs to actively police what banks are doing has been replaced by the empirically dubious assumption that the private sector can mostly look out for itself. This hasn’t solved ­Deutsche Bank’s fundamental problems — its business model is broken, its balance sheet is littered with unwanted assets, its years of misconduct are under government investigation — but it has afforded the bank and the entire industry some much-­welcomed breathing room.

One week after the new president sent his thank-you email to Mike Offit in February 2017, Trump delivered his first address to a joint session of Congress. It was a subdued, disciplined performance in which he hewed, more or less, to the teleprompters and sounded, more or less, like a mainstream politician. After stepping down from the lectern, Trump shook hands with the dignitaries in the audience. In the front row were the Supreme Court justices.

Trump moved down the line until he got to Anthony Kennedy. As Trump pumped the justice’s hand, Kennedy congratulated him on a successful speech. “Very nice, thank you,” Trump replied. “Say hello to your boy,” he added, patting the justice’s arm. “Special guy.”

The Coronavirus Selloff Might Be Exaggerated

Bets against market volatility and an excess of confidence among investors might be amplifying the rout beyond rational calculations of the outbreak’s spread

By Jon Sindreu

Forget the 2007 collapse and the dot-com bubble bursting in 2000: The coronavirus has now officially engineered the fastest-ever correction in U.S. stocks from their peak. Investors may take solace in the fact that, if this seems a bit exaggerated, it is because it could be.

On Thursday, the S&P 500 suddenly dropped 4.4%, as fears about the viral outbreak’s impact on the global economy turned into full-blown panic. Equities are now down more than 10% from their all-time high—analysts’ definition of a correction—which was only last week.

The potential hit to corporate earnings as a result of the health crisis shouldn’t be taken lightly, but there are signs that not all of the market’s moves have been caused by such rational calculations.

The Cboe Volatility Index or VIX, also known as Wall Street’s fear gauge, rose above 44 Friday, the highest level since 2011. Most of this simply reflects the scale and speed of the selloff.

Yet it is also reminiscent of the highs recorded by the VIX in February 2018, when a number of exchange-traded vehicles dedicated to profiting from low volatility imploded. Until this week, it was that volatility-fuelled selloff that held the record for the fastest correction.

While no specific volatility product has taken the spotlight this time around, similar forces are likely at play.

Up to the very point when stocks started plummeting on Feb. 20, there were signs that investors were very overconfident. Their earnings expectations were too optimistic and surveys of fund managers suggested that they were foregoing precautionary cash holdings.

A data analysis by market research firm ModernIR suggests that this week’s rout was sparked by a fall in the price of derivatives, and that active fund managers have mostly followed the lead of rules-based traders and algorithms.

Indeed, the options market—on which the VIX is built—was showing signs of investors betting heavily against volatility. Data by the U.S. Commodity Futures Trading Commission showed that positioning against VIX futures was hovering around the same level as in February 2018.

By buying options, investors can protect themselves against the price of an asset going up or down too much, in exchange for paying regular premiums. But because interest rates are so low, most investors have taken to collecting the premiums rather than insuring their portfolios—thus betting against market volatility.

Unlike in home insurance, though, in financial markets the very fact of selling insurance against an event can make that event appear less frequent. That is because banks are the ones usually taking the other side of those trades, and then offsetting them by trading in the actual stock market. This can create a false sense of stability. When some unexpected factor prompts an unraveling of these wagers, investors are forced to sell, thus amplifying drawdowns.

The data was long suggesting that just such a bump was overdue, and that buying some protection was wise. Ray Dalio’s jumbo hedge fund Bridgewater Associates was prescient, having bought roughly $1.5 billion in options as insurance against a near-term equity selloff back in November.

Now, funds that target volatility or follow trends may have already taken the bulk of the hit. Their leverage is down to 20%, from about 60% at the start of the year, estimates Pravit Chintawongvanich, equity derivatives strategist at Wells Fargo.

So there may be a flip-side to this week’s market pain: Corrections exaggerated by technical factors tend to be easy to recover from. Historical data shows that most bear markets don’t start with a bang, but tend to happen over longer stretches.

Of course, the big unknown is how nasty the economic impact of the coronavirus will be. If the disease starts spreading fast in the U.S., the hit to growth may end up justifying the scale of the selloff. But investors also need to bear in mind that recent stock moves don’t offer a strictly rational reflection of the outbreak’s expected magnitude.

The Mormon Church Amassed $100 Billion. It Was the Best-Kept Secret in the Investment World.

A look inside the vast but little-known fund of the Church of Jesus Christ of Latter-day Saints: ‘We’ve tried to be somewhat anonymous.’

By Ian Lovett and Rachael Levy

A view of Salt Lake Temple, which belongs to the Church of Jesus Christ of Latter-day Saints. Lindsay D'Addato for the Wall Street Journal.

For more than half a century, the Mormon Church quietly built one of the world’s largest investment funds. Almost no one outside the church knew about it.

Some of that mystery evaporated late last year when a former employee revealed in a whistleblower complaint with the Internal Revenue Service that the fund, called Ensign Peak Advisors, had stockpiled $100 billion. The whistleblower also alleged that the church had improperly used some Ensign Peak funds. Officials of the Church of Jesus Christ of Latter-day Saints, colloquially known as the Mormon Church, denied those claims.

They also declined to comment on how much money their investment fund controls. “We’ve tried to be somewhat anonymous,” Roger Clarke, the head of Ensign Peak, said from the firm’s fourth-floor office, above a Salt Lake City food court. Ensign Peak doesn’t appear in that building’s directory.

Interviews with more than a dozen former employees and business partners provide a deeper look inside an organization that ballooned from a shoestring operation in the 1990s into a behemoth rivaling Wall Street’s largest firms.

Roger Clarke, the head of Ensign Peak Advisors. / Photo: Lindsay D'Addato for the Wall Street Journal .

Its assets did total roughly $80 billion to $100 billion as of last year, some of the former employees said. That is at least double the size of Harvard University’s endowment and as large as the size of SoftBank’s Vision Fund, the world’s largest tech-investment fund. Its holdings include $40 billion of U.S. stock, timberland in the Florida panhandle and investments in prominent hedge funds such as Bridgewater Associates LP, according to some current and former fund employees.

Church officials acknowledged the size of the fund is a tightly held secret, which they said was because Ensign Peak depends on donations—known as tithing—from the church’s 16 million world-wide members. The church is under no legal obligation to publicly report its finances.

But the whistleblower report—filed by David Nielsen, a former Ensign Peak portfolio manager—has heaped pressure on the church to be more transparent about its finances, something the church has avoided for decades.

The firm doesn’t tell business partners how much money it manages, an unusual practice on Wall Street. Ensign Peak employees sign lifetime confidentiality agreements. Most current employees are no longer told the firm’s total assets under management, according to some of the former employees; few employees understand what the money is intended for.

The Church of Jesus Christ of Latter-day Saints has 16 million members world-wide.
Photo: Lindsay D'Addato for the Wall Street Journal .

In their first-ever interview about Ensign Peak’s operations, Mr. Clarke and church officials who oversee the firm said it was a rainy-day account to be used in difficult economic times. As the church continues to grow in poorer areas of the world like Africa, where members cannot donate as much, it will need Ensign Peak’s holdings to help fund basic operations, they said.

“We don’t know when the next 2008 is going to take place,” said Christopher Waddell, a member of the ecclesiastical arm that oversees Ensign Peak known as the presiding bishopric. Referring to the economic crash 12 years ago, he added, “If something like that were to happen again, we won’t have to stop missionary work.”

During the last financial crisis, they didn’t touch the reserves Ensign Peak had amassed, church officials said. Instead, the church cut the budget.

A former employee and the whistleblower in his report said they heard Mr. Clarke refer to the second coming of Jesus Christ as part of the reason for Ensign Peak’s existence. Mormons believe before Jesus returns, there will be a period of war and hardship.

Mr. Clarke said the employees must have misunderstood his meaning. “We believe at some point the savior will return. Nobody knows when,” he said.

When the second coming happens, “we don’t have any idea whether financial assets will have any value at all,” he added. “The issue is what happens before that, not at the second coming.”

Whereas university endowments generally subsidize operating costs with investment income, Ensign Peak does the opposite. Annual donations from the church’s members more than covers the church’s budget. The surplus goes to Ensign Peak. Members of the religion must give 10% of their income each year to remain in good standing.

Dean Davies, another member of the ecclesiastical arm that oversees Ensign Peak, said the church doesn’t publicly share its assets because “these funds are sacred” and “we don’t flaunt them for public review and critique.”

Mr. Clarke said he believed church leaders were concerned that public knowledge of the fund’s wealth might discourage tithing.

“Paying tithing is more of a sense of commitment than it is the church needing the money,” Mr. Clarke said. “So they never wanted to be in a position where people felt like, you know, they shouldn’t make a contribution.”

Some members are now asking why details about the fund have been tightly held for so long, what the money is for, and whether tithing so much to the church should still be the standard practice.

Carolyn Homer, a church member who lives in Virginia, resolved to tithe less and give more to other charities after she heard about the money managed by Ensign Peak. A theme of the Book of Mormon, she said, is that God condemns churches that care more about wealth than feeding the poor. “When I hear members of the church say, ‘It’s none of your business how wealthy we are,’ that to me is echoing the very scripture we revere, and not in a good way.”

The church officials and Mr. Clarke declined to disclose the size of the church’s annual budget or to say how much money goes to Ensign Peak but gave estimates for its main areas of expenditure that, collectively, total about $5 billion.

A majority of the money held by Ensign Peak is from returns on existing investments and not member donations, according to Mr. Clarke. In recent years, the fund has gained about 7% annually, he said.

The former employees offered more details of Ensign Peak’s operations. During the bull market of the last decade, some of them said, the fund grew from about $40 billion in 2012 to $60 billion in 2014 to around $100 billion by 2019. About 70% of the money is liquid, one of the former employees said. As its assets swelled, Ensign Peak grew more secretive, said some of the former employees.

The firm doesn’t borrow money–the church warns members against going into debt. It also doesn’t invest in industries that Mormons consider objectionable—including alcohol, caffeinated beverages, tobacco and gambling. Mr. Clarke said the fund has pulled some of its money from an investment firm called Fisher Investments after firm founderKen Fishermade remarks last year that Mr. Fisher, in a newspaper column, called “inappropriate.” A spokesman for Fisher declined to comment.

A Calling

The church established the investment division, which would later become Ensign Peak, in the 1960s, during a period of economic hardship for the faith. In 1969, construction on the church’s office building was halted when the money for construction ran out.

Church leaders had long told members to put away provisions for hard times. Nathan Eldon Tanner, a counselor of the first presidency, the highest level of church leadership, said the church itself should do the same.

At first, the investment division had just three employees, and one of the church’s top three leaders had to approve every trade. By the late 1970s, the division managed about $1 billion, according to the Sovereign Wealth Fund Institute.

The investment division reported monthly to an oversight body called the investment committee, which included ecclesiastical leaders. They would compare the division’s performance against market benchmarks.

“If we were not doing as well, they’d ask, ‘How come?’” one former employee said.

In 1997, the investment division was spun off into Ensign Peak Advisors, a separate legal entity named after a hill that overlooks downtown Salt Lake. The peak has its own significance: in 1847, Brigham Young and other Mormon pioneers scaled it to survey the valley as a potential settling place.

Mr. Clarke was tapped to lead the firm and charged with “bringing the investment department into the 20th Century,” a former employee said.

Previously, Mr. Clarke had worked as a professor at Brigham Young University, which is owned by the church. He was running an investment firm in Los Angeles when the presiding bishopric called him.

“It certainly wasn’t the most attractive financial office,” Mr. Clarke said. “But you want to make a difference in your life...This was an opportunity.”

The firm has steadily grown under Mr. Clarke’s tenure. When the 2008 financial crisis hit, “We got whacked, like everybody else,” Mr. Clarke said. Ensign Peak went into a hiring freeze, but soon resumed adding staff.

It now employs about 70 people. About one in seven are women, Mr. Clarke said.

In most respects, Ensign Peak’s offices look much like those of any other investment firm. CNBC plays on the television by the entrance and newspapers are strewn across a lobby table.

But the walls hint at Ensign Peak’s religious nature. Paintings depict scenes from the Bible and Mormon history, including several that depict pioneers who trekked in the 1800s to what is now Utah.

Employees need a temple recommend—an honor, which allows them to enter the faith’s holiest spaces, that is not afforded to all members —to work at Ensign Peak. They earn far less than they would on Wall Street. One former employee said they make less than $150,000 a year, a fraction of the fortunes possible in finance.

“It was not glamorous or religious 99.9% of the time,” one of the former employees said. For most, working at the firm was “a religious calling,” he said.

Executives used to share information about the assets under management with employees. That changed in recent years; now few employees are explicitly told the number, according to Mr. Clarke and some of the former employees.

Bibles are stacked inside a church conference room. / Photo: Lindsay D'Addato for the Wall Street Journal .

The firm also created a system of more than a dozen shell companies to make its stock investments harder to track, according to the former employees and Mr. Clarke. This was designed to prevent members of the church from mimicking what Ensign Peak was doing to protect them from mismanaging their own funds with insufficient information, according to Mr. Clarke.

Neuburgh Advisers LLC, one of the shell companies, held hundreds of stocks, including Apple Inc.shares valued at more than $175 million and Inc.shares worth more than $70 million, according to a recent regulatory filing.

From time to time, church leaders in the ecclesiastical arm that oversees Ensign Peak arranged lunch meetings with Ensign Peak employees. During Q&A sessions at the end, employees sometimes asked what the money might be used for, according to one of the former employees, who attended.

Church leaders responded by saying they wanted to know that, too, according to this person.

“It was so amorphous,” the former employee said. “It was always, ‘When we have direction from the prophet.’ Everyone was waiting, as it were, for direction from God.” The prophet is the president of the church.

The Quiet Giant 

Ensign Peak’s scale went relatively unknown on Wall Street. The firm doesn’t tell business partners how much money it manages, an unusual level of secrecy in the financial world.

One outside expert said the financial industry didn’t suspect it might be approaching $100 billion. “People thought it was between $30 and $40 billion,” said Michael Maduell, president of the Sovereign Wealth Fund Institute, which tracks large pools of money.

Employees in the fund rarely shared with outsiders much of what they did, even to friends in the same line of work. A person who worked at a money management firm said when that firm sought an investment from Ensign Peak, officials at the Mormon fund declined to share how much money they managed. Ensign Peak told this person that a small investment for the fund would be about $30 million and a large investment about $350 million.

The fund invests conservatively, Mr. Clarke said, in part because it has “a longer term horizon” than many other firms. In recent years, Mr. Clarke developed a quantitative stock trading program, incorporating one of the hottest recent trends in finance.

On his office bookshelf, Mr. Clarke keeps a copy of “Principles” byRay Dalio,the founder of Bridgewater Associates. He said Bridgewater deputies have visited in the past, and that Mr. Dalio’s firm “helped us think about what’s happening kind of in the broader economy.” Bridgewater declined to comment.

Mr. Clarke of Ensign Peak keeps an ancient Roman coin in his office, a reference to the biblical story of the widow's mite, in which a poor widow donates to the temple treasury.
Photo: Ian Lovett/The Wall Street Journal .

Mr. Clarke also keeps an ancient Roman coin in his office, a reference to the biblical story of the widow’s mite, in which a poor widow donates to the temple treasury.

“It’s just a reminder of the purpose of the funds,” he said. “Many of the funds come from people who don’t make a lot of money.”

A Debate That Started In Salt Lake

Among rank-and-file members of the church, the whistleblower report unleashed an intense debate about tithing and how the church uses its vast resources.

On a recent snowy Sunday at a Salt Lake City meetinghouse, members said they trusted church leaders with their own money, and would continue to donate 10% of their income. “They use it well,” said Lasi Kioa, a 61-year-old immigrant from Tonga and a lifelong church member.

“They help other people. They build the church.

I believe in that.”

But Sam Brunson, a church member and tax law professor at Loyola University, said he wished church officials would use the $100 billion to help those in need today.

“They could go a good way to eradicating malaria, or fix Puerto Rico’s electrical grid,” he said. Alternatively, he said, the church could change what it considers tithing, allowing members to give 10% of their income to charity, rather than to the church itself.

Mr. Waddell, the member of the ecclesiastical arm that oversees Ensign Peak, said that with more than 16 million members there would always be some difference of opinion, but the vast majority of members have “expressed appreciation for the success we have had in managing the finances.”

Dean Davies, left, and Christopher Waddell, right, are members of the ecclesiastical arm that oversees Ensign Peak. Gerald Causse, center, is the presiding bishop.
Photo: Lindsay D'Addato for the Wall Street Journal .

Mr. Nielsen’s report, which was first reported by the Washington Post, stoked this debate. The report alleged the fund made no charitable contributions despite being incorporated as a tax-exempt charity. Fund and church officials said they haven’t violated any tax laws, and that the church organization as a whole, of which Ensign Peak is a part, puts nearly $1 billion a year toward humanitarian causes and charities. The IRS, which hasn’t accused the church of any wrongdoing, said it doesn’t comment on specific whistleblower claims. Mr. Nielsen didn’t respond to requests for comment.

Tax specialists familiar with the IRS’s whistleblower program said they didn’t expect the claim against Ensign Peak to be successful. The program receives many more claims than it acts on, and it has historically been reluctant to pursue tax issues involving churches, which have special status under the tax code. If the whistleblower’s claim is successful, that person could receive up to 30% of the proceeds collected by the IRS.

The whistleblower also accused Ensign Peak of illegally using tax-exempt donations to bail out two business ventures during the financial crisis—a life insurance company the church owned and construction of the City Creek Center, a Salt Lake City mall across the street from the church’s offices. Church officials confirmed to the Journal they had made these payments but denied they were illegal.

Gerald Causse, the presiding bishop, said the payouts during the financial crisis weren’t charitable disbursements at all, but investments. “It’s not an expenditure,” he said. “Tomorrow we can sell it and it will come back with a return.”

In the interview with the Journal, church officials maintained the payouts were not made with tithing funds, because, they said, most of the money in Ensign Peak doesn’t come directly from tithing but from returns on investment.

Tax lawyers have publicly debated whether Ensign Peak violated any laws as alleged by the whistleblower. Mr. Brunson, the tax law professor, doesn’t think so. But as a church member, he said he finds the lack of transparency frustrating, even if it is legal.

“I’m a stakeholder in the church, and society has some stake in the church too,” he said. “Even though I’m willing to tithe blindly, I would like to see what’s happening with that money.”

—Laura Saunders contributed to this article.