08/04/2010 09:31 am ET | Updated May 25, 2011

Did Deutsche Bank Use Goldman Sachs-Style Securities To Trade Against Clients?

Was Deutsche Bank guilty of Goldman Sachs-style conflicts of interest during the mortgage boom?

That's the question posed by a Wall Street Journal piece this morning that delves into a potentially sticky position the bank seems to have put itself in with mortgage securities it sold to clients in the pre-crisis era.

Like Goldman Sachs before them, which last month agreed to pay $550 million in penalties over its "Abacus" deals, Deutsche's tangled web of trades, hedges and credit protections may now face scrutiny from Federal authorities. Unlike Goldman, however, Deutsche could face a probe from an ex-employee. Robert Khuzami, the SEC's head of enforcement, was Deutsche's general counsel in America during the mortgage crisis.

The WSJ examines mortgages from the now defunct lender NovaStar, which Deutsche combined into complex mortgage securities and sold to various clients. But these were anything but sterling mortgages, the WSJ notes: "A promotional flier from NovaStar in 2003 said, "Ignore the Rules and Qualify More Borrowers with our Credit Score Override Program!" As housing boomed, NovaStar thrived."

Deutsche's "dual role" as a peddler of mortgage securities found it selling securities that would increase in value and as well as other bets, including a CDO called "START," that were constructed to let clients bet on a housing downturn. In short, Deutsche is portrayed as a megamarket for any possible bet on real estate.

Goldman Sachs -- and many on Wall Street -- played similar roles. The theory, that banks could act as disinterested middle men, simply brokering transactions without trading against clients, now seems naive. Despite enabling the SEC to impose a "fiduciary duty" on Wall Street broker-dealers, the Dodd-Frank bill, however, stops short of eliminating these potential conflicts of interest.

Like Goldman Sachs, Deutsche seems to have not fully disclosed that some of its CDOs were, in part, constructed by hedge fund manager John Paulson. Here's the WSJ:

Paulson & Co. helped select assets that went into the Deutsche CDO and then bet against the assets, the people said. That was a role similar to the role Paulson played at Goldman.

Deutsche, like Goldman, didn't tell investors in its CDO that Paulson had helped pick the assets and was making a bearish bet.

A key difference: Goldman told investors that the assets were picked by an independent third party; Deutsche didn't use a third party or give its investors such assurances.

In order to bet against the housing market, Paulson reportedly handpicked Goldman's Abacus securities, which would suggest Deutsche could face a similar penalty.