Category Archives: Banks

P.O. (FT) Why Goldman Sachs should buy Deutsche Bank


Personally i would love it to happen.
We would get rid of two evils:
The Vampires of Wall Street and the eternally broke Deutsche Bank.
DB problems, particularly the litigation problems,would eat the Vampires of Wall Street’s (Goldman Sachs) capital in no time.
As the French would say:
Bon debarras!
(Good riddance!)

Francisco (Abouaf) de Curiel Marques Pereira

(FT) Why Goldman Sachs should buy Deutsche Bank

US group wants growth in transaction banking and a German deal could help achieve that

(CNBC) Barclays, Citigroup and JP Morgan among banks fined $1.2 billion for forex rigging


  • Barclays, Citigroup, J.P. Morgan, MUFG and Royal Bank of Scotland have been fined a total of 1.07 billion euros ($1.2 billion) by EU antitrust regulators for rigging the spot foreign exchange market for 11 currencies.
  • Swiss bank UBS was exempted from a 285 million euro fine since it alerted the existence of two cartels to the European Commission.
  • A similar case with the U.S. regulators is ongoing where Barclays, BNP Paribas, Citigroup, J.P. Morgan, Royal Bank of Scotland and UBS have entered related guilty pleas, and been collectively fined more than $2.8 billion.
Reusable: Citigroup

Citi and HSBC banks dominate the skyline of Canary Wharf, London.

BarclaysCitigroupJ.P. Morgan, MUFG and Royal Bank of Scotland have been fined a total of 1.07 billion euros ($1.2 billion) by EU antitrust regulators for rigging the spot foreign exchange market for 11 currencies.

Swiss bank UBS was exempted from a 285 million euro fine since it alerted the existence of two cartels to the European Commission. The financial industry has been hit with billion euro fines worldwide in the last decade for rigging key benchmarks.

“Companies and people depend on banks to exchange money to carry out transactions in foreign countries. Foreign exchange spot trading activities are one of the largest markets in the world, worth billions of euros every day,” EU Commissioner Margrethe Vestager said in a press release Thursday.

“Today we have fined Barclays, The Royal Bank of Scotland, Citigroup, J.P. Morgan and MUFG Bank and these cartel decisions send a clear message that the Commission will not tolerate collusive behavior in any sector of the financial markets. The behavior of these banks undermined the integrity of the sector at the expense of the European economy and consumers,” Vestager added.

The EU investigation that has been ongoing for the past six years revealed that some individual traders from various banks in charge of forex trading — a form of trading executed on an intra-day basis — exchanged sensitive information and trading plans through various online professional chat rooms.

“The information exchanges…..enabled them to make informed market decisions on whether to sell or buy the currencies they had in their portfolios and when,” the Commission said in its report. 

It further stated that most of the traders knew each other on personal basis and logged into multilateral chatrooms on Bloomberg terminals for the whole day, engaging in extensive conversations about a variety of subject, including updates on their trading activities.

Barclays declined to comment when contacted by CNBC. Meanwhile, a spokesperson from RBS told CNBC the bank is happy to reach a settlement with the regulators. 

“Today’s fine is a further reminder of how badly the bank lost its way in the past and we absolutely condemn the behaviour of those responsible. This kind of behaviour has no place at the bank we are today; our culture and controls have changed fundamentally during the past ten years,” the spokesperson said.

A similar case with the U.S. regulators is ongoing where Barclays, BNP Paribas, Citigroup, J.P. Morgan, Royal Bank of Scotland and UBS have entered related guilty pleas, and been collectively fined more than $2.8 billion.

U.S. regulators said the foreign exchange rate rigging was allegedly done through chat rooms with such names as “The Cartel,” “The Mafia” and “The Bandits’ Club,” through tactics with such names as “front running,” “banging the close,” “painting the screen” and “taking out the filth.”

Shares of Barclays and RBS were trading lower, but UBS edged a bit higher on the news. Meanwhile, J.P. Morgan and Citigroup shares were down slightly in pre-market trading.

(Reuters) Exclusive: UniCredit advances toward bid for Germany’s Commerzbank – sources


FRANKFURT/LONDON (Reuters) – UniCredit has stepped up preparations for a potential bid for Germany’s Commerzbank by drafting in investment bankers including a former top German official, three people familiar with the matter said.FILE PHOTO: A sign for an ATM of Commerzbank is seen next to the headquarters of Deutsche Bank (R) in Frankfurt, Germany, March 19, 2019. REUTERS/Kai Pfaffenbach/File Photo

The Italian bank had engaged Lazard and its banker Joerg Asmussen, the former German deputy finance minister, along with JP Morgan for a possible takeover, the sources said, raising the prospect of a deal that could allow UniCredit to pivot away from its struggling domestic market.

UniCredit said in statement responding to the Reuters report that it wanted to clarify that no banking mandate had been signed in relation to any potential market operation.

The bank reiterated that its current business plan is based on organic growth and a new plan will be unveiled on Dec. 3.

Although it is unclear whether and when a bid could be made, UniCredit has long been interested in expanding in Germany, said several sources familiar with management’s thinking. It already owns HVB, a large German lender based in Munich.

But the Italian bank, which has been concentrating on its own turnaround plan, had been waiting on the outcome of merger talks between Commerzbank and its larger Frankfurt neighbor, Deutsche Bank.

Those talks unraveled in recent weeks, placing Commerzbank back on the agenda for UniCredit Chief Executive Jean Pierre Mustier, who will be running the rule over a target worth about 9.3 billion euros ($10.4 billion) compared with UniCredit’s market capitalization of 24.4 billion euros.

Commerzbank shares rose on the news, climbing 4.7% by 1400 GMT, with UniCredit shares down 2.4%.

UniCredit’s advances come as Dutch bank ING Groep has also shown interest in Commerzbank, sources familiar with the matter said. One person with knowledge of those informal talks described them as “intensive”.

Mustier has hired Lazard in the hope that Asmussen can lobby for the deal with finance minister Olaf Scholz. Both have roots in the German Social Democrat Party.

Asmussen, who studied business administration at Milan’s Bocconi University, has previously served on the executive board of the European Central Bank (ECB) and as state secretary at the Federal Ministry of labor and social affairs.

UniCredit, JPMorgan, Lazard, Commerzbank and Germany’s finance ministry declined to comment while Asmussen did not immediately respond to a request for comment.

ING also declined to comment.


The success of any approach will hinge in part on the German government, which owns a 15 percent stake in Commerzbank, stemming from a bailout during the financial crisis. Some officials had hoped to keep Commerzbank in German hands, which is why they pushed for a deal with Deutsche Bank.

One German official said the government would be open to a merger between Commerzbank and a foreign European rival, such as UniCredit.Slideshow (2 Images)

But a deal that would tie one of Germany’s biggest banks to debt-laden Italy could ultimately prove hard to sell in Berlin.

If a takeover does emerge, it would be one of the largest deals involving banks across European borders since the financial crisis. Such mergers are still hard to pull off because laws and regulations still vary from country to country despite the single market, bankers say.

However, any initiation of talks is sure to ruffle feathers at Commerzbank, where employees – fearful for their jobs – had overwhelmingly opposed a tie-up with Deutsche Bank. Unions had forecast as many as 30,000 lost jobs.

Analysts at Citi said that any tie up with UniCredit could make it cheaper for the bank to refinance its operations and trigger other cost savings.

UniCredit last week announced that it was reducing its exposure to Italy to boost its financial strength, with measures including cuts to its portfolio of Italian government bonds.

That move could strengthen prospects for an acquisition in Germany, where UniCredit’s high exposure to Italy is seen as a barrier to a deal, several bankers said.

UniCredit had 54 billion euros of Italian government bonds at the end of March.

Italian UniCredit shareholders are in favor of any deal that can boost its market value, but some want the bank to retain its Italian identity, a person close to the matter said.

Mustier last week said that the bank was very proud of being listed and headquartered in the euro-zone’s third-biggest economy.

(ECO) Lucro do BCP sobe 80% para 153,8 milhões. Resultado em Portugal duplica

(ECO) O lucro, que compara com a estimativa média dos analistas de 106 milhões de euros, beneficiou dos investimentos em dívida pública. Em sentido contrário, as comissões contribuíram menos.

O BCP lucrou 153,8 milhões de euros no primeiro trimestre do ano. O resultado líquido melhorou 79,7% face ao período homólogo e ficou acima do esperado pelo mercado. O negócio em Portugal ajudou a impulsionar as contas, com a atividade doméstica a mais que duplicar para 94,3 milhões de euros.

O lucro, que compara com a estimativa média dos analistas de 106 milhões de euros, beneficiou dos investimentos realizados pelo banco liderado por Miguel Maya. Os dados enviados esta quinta-feira à Comissão do Mercado de Valores Mobiliários (CMVM) indicam que os proveitos de instrumentos de capital aumentaram 171% para 68,3 milhões e tiveram um impacto nos resultados de 43,2%Tal como o Santander Totta, também o investimento em dívida pública rendeu ao BCP, tal como vendas de carteiras de ativos.

O produto bancário cresceu 11,1% para 597,7 milhões de euros, impulsionado pelo crescimento de 17,9% na margem financeira, para 362,7 milhões de euros. “Apesar da forte pressão, mantemos a taxa nos 2,2%”, destacou Miguel Maya, na apresentação de resultados.

Fundo de Resolução aumenta custos operacionais

Em sentido contrário, as comissões contribuíram menos para os lucros devido ao negócio internacional. No total, as comissões recuaram 0,7% para 166,6 milhões de euros. Em Portugal, houve um aumento de 1,7%, apesar da forte quebra de 16,3 nas comissões de mercados, o que Miguel Maya considera ser um reflexo do desempenho dos mercados financeiros no trimestre.

“Em Portugal, o crescimento do negócio bancário mais que compensa evolução menos favorável das comissões de mercados de capitais”, refere o banco. Já nas operações internacionais registaram uma redução de 5,6%.

Também os custos operacionais aumentaram, em 4,5% para 253,5 milhões de euros, “impactados pela maior contribuição para o fundo de resolução e por custos com IT”. O número de clientes do BCP atingiu os 4,9 milhões (mais 300 mil que no período homólogo) e a meta é chegar aos seis milhões em 2021.

No que diz respeito à carteira de crédito performing em Portugal, o BCP assistiu a um crescimento de 1,2 mil milhões, ou seja, 3,7%. Do total, 44% são crédito à habitação, 40% crédito a empresas e 16% em crédito pessoal.

A emissão de obrigações AT1 realizada em janeiro, a par da melhoria nos resultados levou a um reforço do rácio de capital para 15,2%. non-perfoming exposure (NPE) caiu em 1,9 mil milhões de euros e a cobertura de NPE por imparidades aumentou para 55% e da cobertura total para 110%.

(CNBC) Deutsche Bank defends risk controls after proxy adviser ISS calls for shareholder revolt


  • The influential proxy advised its members to vote against “discharging” Deutsche’s board, the vote of confidence under the German corporate code, at its AGM on May 23.
  • A vote against discharge is the strongest way for the shareholders to express their disapproval at the board’s AGM.
  • It cited the series of scandals resulting from the bank’s failure to uphold anti-money laundering controls as causing reputational and monetary damage which has been borne by shareholders.

Elliot Smith@ElliotSmithCNBCPublished 5:18 AM ET Wed, 8 May

Statues stand outside a Deutsche Bank AG branch in Frankfurt, Germany.

Krisztian Bocsi | Bloomberg | Getty ImagesStatues stand outside a Deutsche Bank AG branch in Frankfurt, Germany.

Deutsche Bank has defended its risk and control system after proxy adviser Institutional Shareholder Services (ISS) called for shareholders to vote against the board.

The influential proxy advised its members to vote against “discharging” Deutsche’s board, the vote of confidence under the German corporate code, at its AGM on May 23. A vote against discharge is the strongest way for the shareholders to express their disapproval at the board’s AGM.

It cited the series of scandals resulting from the bank’s failure to uphold anti-money laundering (AML) controls as causing reputational and monetary damage which has been borne by shareholders.

In a statement issued Wednesday, Deutsche said the ISS report “does not reflect the current situation of our bank and its control environment.”

“The vast majority of the legacy cases mentioned date back to the time prior to 2016,” the bank added.

“While we acknowledge that there is still work ahead of us, we have significantly improved our risk and control systems in the last three years and we will continue to do so.”

Deutsche also argued that its share price should not be used to indicate financial instability, claiming it has a “very robust balance sheet with a high capital ratio, ample liquidity and a strong asset quality.”

In the advisory circulated to investors, ISS had dismissed Deutsche’s claims of improving “know your customer” and AML controls, according to a report in the Financial Times on Tuesday, and disputed that the bank’s performance resulted from an unfavorable market environment.

It is the first time ISS has called for shareholders to vote against ratifying the board, and followed similar guidance from fellow proxy Glass Lewis last week.

Deutsche Bank shares traded marginally higher during the morning session. However, the shares are down more than 40 percent over a 12-month period.

(EUobserver) Danske Bank executives face money-laundering charges


Danish prosecutors have charged 10 former executives at Danske Bank, the country’s largest lender, over their role in the EU’s biggest-ever money-laundering scandal, Danish newspaper Berlingske reported Wednesday, citing anonymous sources. The Danish bank funnelled some €200bn of suspicious money, most of it from Russia, into the EU banking system, via its Estonian branch between 2007 and 2015, harming both its and Denmark’s reputation.

O.P./P.O. Port/Engl (ZeroHedge) Is Turkey The Snowflake That Unleashes The European Banking System Avalance?


Não tenho dúvida que mais tarde ou mais cedo a Turquia precisará de ajuda internacional para poder honrar os seus compromissos com o exterior.
A situação da banca turca é particularmente dramática com empréstimos concedidos em liras turcas e recursos obtidos em Euros ou USD.

Esta situação é insustentável como bem sabemos.

É uma questão de tempo…

English version written by the Author


I have no doubt that sooner or later Turkey will need international help to be able to honor its international commitements.

The situation of the Turkish banks is particularly worrying with the funding obtained in Euros or USD and the loans granted in liras.

This situation is unsustainable as we all know.

It is only a question of time.

Francisco (Abouaf) de Curiel Marques Pereira


Turkey’s Inevitable Recession, Surging Gold Demand,
Record Gold Highs and EU Bank Contagion

Turkey’s debt problem, coupled with the plummeting lira, is arguably the most important risk factor for the nation’s economy.

To make matters worse, far from it posing a threat just to Turkey itself, it also has the potential to inflict significant damage elsewhere too, starting with key economies in the Eurozone.

At first glance, the situation in Turkey might resemble many past similar scenarios of a heavily indebted nation with a plummeting currency that descends into a severe recession and eventually gets bailed out, like Greece.

However, there is one key difference that makes Turkey’s debt problem much more complicated and potentially dangerous. Unlike Greece, Italy or other seriously debt-laden economies, it’s not just government borrowing that’s the main risk here.

Instead, it’s the unsustainable and increasingly unfinanceable corporate debt that makes Turkey a ticking time bomb and renders an IMF-rescue option problematic.

Private debt to GDP stands at a staggering 170%, while, overall, over half of the borrowing is denominated in foreign currencies. Thus, the collapse of the lira has made it extremely challenging for businesses to pay off or even service their debt, while the default risk has surged. Around $179 billion in external debt is due to mature until July 2019, which amounts to almost a quarter of the country’s annual economic output, according to JPMorgan estimates. Most of that, $146 billion, is owed by the private sector and banks in particular.

However dire the current debt predicament might seem for Turkey’s businesses and economic outlook, it is important to also consider the implications for its debtholders, especially since European banks feature prominently among them. In fact, the level of exposure in some cases is so worrying that it justifiably raises concerns that what happens in Turkey won’t just stay in Turkey.

Spain’s banking sector is one of very few in the European bloc that was so far considered not to be problematic; especially in comparison to Italian or Greek banks.

However, the exposure of Spanish banks to Turkish debt means that the currency and debt woes of Europe’s neighbor have decisively challenged these assumptions. Spain’s second-biggest bank, BBVA, controls 49.9% of Turkish bank Garanti, which has already reported a rise in non-performing loans. Spanish banks also led the lending spree to Turkish businesses over the past years, rendering them vulnerable to the spiking default risk.

Although Spanish banks were by far the greatest lenders for Turkey, French, Italian and German banks also have significant exposure to Turkish debt. This already became problematic from the onset of the Turkish woes this past summer, when investors dumped Eurozone bank shares and prices suffered significant blows. Among the worst hit were BBVA, Unicredit, and PNB Paribas. Yet still, a blow to the stock price is nothing compared to the damage that a sustained currency crisis and rising default risk can inflict to the already vulnerable European banking sector.

Key lessons

Overall, Turkey’s woes are yet another important and timely reminder of the frailty of the current monetary system and of the banking sector, as well as of the systemic weaknesses and inevitable unsustainability of a centrally planned economy and of fiat money.

After all, the lira’s value, as that of any other fiat currency, depends on the trust the people place in its issuer. Once that is lost or even shaken, no measures and no force applied by the central planners can stabilize it. We saw that play out over the last months in Turkey, with the government trying a wide variety of approaches to control the currency’s fall, to no avail. That clearly demonstrated the flimsy and fickle nature of the entire system.

As the Turkish currency collapsed, demand for gold more than doubled in the country, while gold priced in lira reached all-time highs, as is to be expected in times of crisis.

Erdogan’s public calls for citizens to sell the “gold under their pillows” and buy lira to help defend the country against the “economic attacks” from the outside were clearly ignored. Consumers flocked to the precious metal in response to the deteriorating fiat currency and gold imports to Turkey increased eightfold last December, while the Turkish central bank itself also dramatically increased its official reserves over the last two years.

As the country now joins the long list of nations that came to regret reckless interventionism and aggressive monetary manipulation, it also sends a strong message to those investors who are wise enough to heed it. In order to effectively prepare for the upcoming economic slowdown and all that it will bring, one needs to hedge against these inherent risks that are deeply embedded in our current system.

While inflation, currency depreciations, volatile stock markets or a rise in toxic debt might be all we’ll see during the next downturn, nobody can be sure what the extent of the damage will be and whether it would be contained before threatening the banking system at large. Especially in Europe, the outlook is rather grim and the odds of a timely rescue are not favorable. As the central bank is already overstretched, after so many years of QE and negative interest rates, it is likely to lack the tools to fight the next recession and to limit its impact.

Turkey’s story can arguably be seen as a warning and as a cautionary tale. While governments and central banks will dismiss it, individual investors should not. Separating the signal from the noise has always been crucial in forming solid strategies and in planning for the future.

At this stage, when the signs of a widespread economic slowdown can already be seen on the horizon, the necessity of a physical precious metals position is imperative for any responsible investor who wishes to preserve their wealth.

(ZH) When Deutsche Bank’s Crisis Becomes Our Crisis


Americans generally think of Europe first as a wonderful place to visit. They rarely ponder the economic and financial ties between the United States and European Union, but in fact these ties are extensive and significant to the stability of both economies. One area of particular connection involves the large banks and companies that provide services on both sides of the Atlantic. It is this area of commercial finance that risks are actually growing to the United States—in large part due to political gridlock in Europe stemming from the 2008 financial crisis.

Credit market professionals have been aware of problems among the European banks for many years. Their lack of profitability, combined with high credit losses and a lack of transparency have created a minefield for global investors going back decades. Whereas the United States has a bankruptcy court system to protect investors, in Europe the process of resolving insolvency is an opaque muddle that leans heavily in favor of corporate debtors and their political sponsors.

When we talk about true mediocrity among European banks, one of the leading example are, surprisingly, German institutions. Germany, after all, has a reputation for being the economic leader of Europe and a global industrial power, thus the continued failures in the financial sector are truly remarkable.

The biggest example, Deutsche Bank, Germany’s largest bank, has had problems with capital and profitability going back decades.

But Deutsche Banks’s problems are not unique.

What is troubling and indeed significant for American policy makers, however, is the nearly complete failure of our friends in Europe to address their banking sector, either in terms of cleaning up bad assets or raising capital to enable the cleanup.

One of the political understandings that came out of the Basel III process (a regulatory regime first introduced in 2013 to promote stability in the international financial system) was that the United States would take a harder view on mortgage related exposures and particularly intangible assets like mortgage servicing rights. The Europeans, it is said by participants, agreed to take a tougher line on bad assets loitering inside banks and to particularly require banks to take a reserve against bad credits immediately.

Prior to 2018, when the president of the European Central Bank, Mario Draghi, directed EU banks to start recognizing bad credits, international accounting rules essentially allowed EU banks to ignore bad credits. Indeed, EU banks could pretend that loan payments were still being received. Loans that defaulted prior to 2018 were not included in the directive. Thus Europe has a decade of detritus sitting in the loan portfolios of many banks that is neither disclosed nor properly valued. Whereas in the United States banks must charge-off bad assets down to some expected recovery value, in Europe we extend and pretend.

Many observers were surprised several years ago when Chinese airline conglomerate HNA arrived on the scene as the new shareholder of Deutsche Bank, a significant global investment bank that provides a range of services in the United States. The German lender had been marketing an offering of new equity shares for years without luck, thus the arrival of the high-flying and highly-leveraged HNA was greeted with quiet gratitude in European capitals. No European politician wants to be caught dead talking about large banks in anything but the most responsible tones, thus nobody asked any questions about HNA or its owners.

Sadly the HNA equity investment in Deutsche Bank was financed with a lot of debt. When the Chinese firm started to literally implode two years ago due to massive debt payments on its $40 billion in obligations, it began to sell its shares in Deutsche Bank, creating the latest crisis for the chronically underperforming bank. Today HNA is being liquidated under the supervision of the Chinese government. And to this day, nobody among United States or European bank regulators really knows who owns the company that was briefly the largest shareholder of Deutsche Bank

The setback with HNA led to discussions of merging Deutsche Bank with Germany’s Commerbank, another poor performer among the country’s banking sector. Again, German politicians led by Chancellor Angela Merkel refuse to even hint at public assistance for Deutsche Bank, but the mounting troubles with banks across Europe may force Merkel’s hand as it has in Italy.

Bank earnings in Europe are weak, notes veteran bank consultant Mayra Rodriguez Valladares. As she exlains in a recent Forbes column:

Unfortunately, many of European banks’ woes are of their own making. A host of regulatory and legal fines and ongoing money laundering investigations of several banks do not bode well for European earnings. According to a Moody’s Investors Services report: ‘European banks were fined over $16 billion from 2012 to 2018 related to money laundering and trade sanction breaches.’

Rodriguez Valladares notes that U.S. and EU banks are enormously intertwined, particularly in terms of funding and derivatives—two areas of keen interest to U.S. regulators. But the fact of the matter is that the EU banking system and the EU economy are still too weak to shoulder the burden of a general cleanup of bad credits in EU banks.

The economic reality and ugly politics are both too daunting for EU leaders to engage publicly on these issues. Indeed, German Finance Minister Olaf Scholtz, who is touted as a possible successor to Merkel, was attacked by opposition politicians because of the prospective job losses in a Deutsche-Commerzbank merger.

But sadly the union of two zombie banks was not to be. “Banking giant Deutsche Bank and its crosstown rival Commerzbank ended merger talks, leaving in tatters the German government’s hope to shore up both banks and create a banking powerhouse,” The Wall Street Journal reported on April 25.

So now the German government must try to identify another politically expedient way to hide the Deutsche Bank problem without resorting to an explicit state bailout. Not only is financial help for EU banks problematic politically, but the EU simply lacks the economic resources to clean up the broader asset quality problems affecting European banks.

The tendency of EU politicians to stick their heads in the sand when it comes to these issues represents a smoldering threat to global financial stability. Troubles affecting Deutsche Bank and other EU lenders could easily explode into financial contagion if markets decide to turn away from these banks à la Lehman Brothers. For American business leaders and political leaders, the festering problems in European banks are a source of potential risk that could cause significant economic problems for all of us. Stay tuned.

(ZH) Deutsche Bank: “Have We Reached The End?”


In recent years there has been a distinct change in the market as it relates to the “reaction function” of traders vis-a-vis volatility: whereas in the past (i.e. prior to the 2008 financial crisis) sliding volatility was a clear signal for both risk appreciation and broad market participation, ever since central banks took over both bond and equity markets over the past decade, collapsing vol has been increasingly seen as a warning sign that something is just not right, that central banks as part of their vol suppression strategy are artificially reducing the market’s perception of risk, and as such, high risk prices are artificial.

One need look no further than market action in 2019 where despite fresh record highs in the S&P – mostly the product of the Fed’s sudden tightening bias reversal and subsequent easing by both the US central bank and its global peers – equity outflows have hit an unprecedented pace, with continued stock upside attributable almost exclusively to stock buybacks, forced short squeezes and delta and gamma-imbalanced dealer books, where the higher equities rise, the greater the “forced chase” by dealer to keep bidding stocks even higher. Meanwhile, both institutional and retail investors have continued to flee global equities as the chart below from EPFR  summarizing broad asset flows shows.

Another confirmation that low vol is no longer seen as a broad participatory signal are market volumes, which continue to shrink the higher markets rise; an indirect validation of the lack of faith in record asset prices.

While not addressing this topic explicitly, in his latest note, everyone’s favorite credit derivatives post modernist, Deutsche Bank’s Aleksandar Kocic who with every subsequent analysis transforms himself ever closer to the linguistic equivalent of a financial Slavoj Zizek, look at the perception of volatility in recent years, particularly through its circular interplay with broader market leverage, and writes that in the post-central bank era, the “leverage-volatility cycle has been disrupted and its amplitudes attenuated – there are no more booms and busts, just mellow undulations around slower growth and benign inflation.

Taking a somewhat different approach than our assessment, Kocic writes that in the past, low volatility was a signal of build-up of latent risk due to vol-leverage dynamics, as “low volatility leads to excessive risk taking and misallocation of capital, which ultimately results in forced deleveraging”, and after several cycles the markets learned that these dynamics are an inherent aspect of market functioning. As a result, the vol-leverage trajectory has become “an outward spiral” and “in each subsequent  sweep, leverage is higher and risk premia compression more extreme than in the previous episode, leading, naturally, to a deeper crisis and a need for an even more extreme policy response.” Then, resorting to every Austrian’s favorite Schumpeterian “creative destruction” analogy, Kocic writes that if stability is indeed destabilizing, then the main challenge lies not in how to avoid the mistakes, but instead in how to control their costs, and answers that “post-2008, this has been addressed by regulations, and policy adjustments.” In short, central banks step in every time the cycle of vol-leverage dynamics threatens to spiral out of control.

Perhaps as a result of this now constant “Fed put”, which emerged so vividly in late December 2018, Kocic writes that while “in the past, fear has had bad reputation — it stood as a sign of incompleteness, something one needs to outgrow”, the “post-2008 period can be seen effectively as an exoneration of fear”: 

Fear has become a sign of wisdom, elevated to a new heuristic or cognitive principle. On the back of this shift in attitude, the resulting excessive caution by both investors and policy makers led to generally lower risk tolerance and has been the leading cause of gradual collapse of market volatility.

While this does not directly address our fundamental thesis, namely that the prevailing sentiment toward low vol has been turned upside down due to central bank intervention, and is no longer a sign of “all clear, the water is warm” by investors but is rather a symbol of foreboding – confirmation that central banks are worried and are therefore artificially suppressing vol – Kocic next looks at just how the leverage-vol cycle broke down within the financial sector, where despite the collapse in vol, leverage never managed to recover.

As such, Kocic believes that the “financial sector was the center of leverage transmission pre-2008”  and was essential for converting low volatility into high leverage, which was seen as one of the main engines of growth. This is shown in the chart below, which shows the history of financial subsector of the S&P index overlaid with the levels of volatility on the inverted axis. Periods of low volatility were most profitable for financial institutions as they provided the main engine for conversion of credit into liquidity risk.

And while prior to the 2008 crisis, the “prosperity of financial sector and low volatility show high degree of coordination”, the subsequent departure is a consequence of the changes in the regulatory environment and redistribution of leverage away from the financial into corporate sector, something which Kocic shows in the next chart.

This transition of leverage away from the financial to other sectors had singificant consequences for all aspect of risk prices, and naturally, for volatility. As Kocic explains the “rationale of this maneuver” when it comes to credit risk, “corporate sector is more transparent than the combination of households and financial sectors together. By resyphoning leverage from financials and households to corporates and government, risk has been made less systemic and the margin of error in assessing and monitoring the aggregate credit risk and its misrepresentations in the markets have been reduced.”

Superficially, this is good news, because as a result of the decline in financial sector leverage, “there are no longer casualties of big “collisions”, only parking accidents” as Kocic puts it:

This redistribution of leverage has put the speed limit on possible future encounters with forced deleveraging associated with booms and busts. There are no longer casualties of big “collisions”, only parking accidents.

And yet, going back to the Schumpeter analogy above, if the system is preemptively absolved from the risk of crashes, it also remove the potential for substantial real growth, or as the DB strategist puts it, “reducing and constraining the leverage of financial sector also confines its propagation into the economy. Although stabilizing, in the existing paradigm, this appears to stifle growth — by preventing bad behavior, in the economy which is dependent on financialization, the system is deprived of one of the main engines of growth.”

How do interest rates fit into this?

While the above discussion explains the drift in the traditional relationship between leverage and volatility, there is another distinct historical correlation between the yield curve (which in recent months has gotten abnormal focus due to its inversion) and volatility surface which recently have “topologically converged to each other”, or as Kocic explains, “the curve is on the verge of inversion and the surface on the verge of disinversion” and elaborates as follows: “While Inverted curve appears ominous (at least, in the eyes of the market), disinverted vol surface is soothing — it predicts persistent and uninterrupted calm”, even though we would disagree with this simplistic assessment of the vol surface which, as most traders will admit, reflect nothing more than central bank vol suppression, and therefore the more “normal” the vol surface appears, paradoxically the greater the level of underlying angst.

In fact, we are disappointed that Kocic seems to agree with the far more simplistic explanation, on which absolves the yield curve inversion of any ominous signaling, while suggesting that the disinverted vol surface should be taken at face value, and that any lingering concerns about low vol, or the “residual (consensus) discomfort before ominously low vol” is merely a “consequence of the aftertaste of previous crises when the current regulations were absent.”

Perhaps Kocic was listening to the latest Zizek audiobook when central banks injected their $20th trillion of liquidity in the artificial “markets” or when now chair Powell was making the stunning admission in 2012 that the Fed has a “short volatility position” to appreciate just how naive such an argument is, especially when other traders see right the farce of low vol and also right through the superficial sophistry of anyone who tries to underscore just how credible low volatility is… but we digress.

What is more interesting is not Kocic’s philosophical beliefs in what vol may or may not be telling us, but his quantification of the correlation between the vol surface and the yield curve… and how this has changed over time.

As the DB strategist writes, while the shape of curve and volatility term structure have a logical connection, “their relationship has undergone structural shifts as a consequence of significant changes in the market structure and conditions.” To wit, Kocic highlights three distinct regimes between these two key market vairables.

This is shown in the next chart which highlights the interplay between inversion of the vol surface and the 10s/30s slope of the curve. When seen in this context, Kocic claims that the current flattening of the yield curve is consistent with the surface if taken for what it really is, i.e. as a result of compression of risk premia, rather than a forecast of recession.

Looking at the three temporal regimes defined by Kocic, we start with…

Pre-2008: here, in this pre-central bank time, vol and curve were unified by carry. Kocic explains: “While logically the two are related, the transmission that reinforced that bond was mortgage convexity hedging. As both recession and mortgage prepayment are low rates phenomena, bid for rates volatility was reinforced in recessionary markets as mortgage hedgers became more active. Curve moved in bull steepening and bear flattening mode. Volatile bull steepening and calm bear flatteners associated with rate hikes were the stylized facts of that period.”

Post-2008: To the DB strategist, this period marks “the period of nationalization of negative mortgage convexity and severance of the traditional transmission mechanisms as well as the structural shift between the curve and vol interaction.” The front end of the curve was anchored and the referendum on effectiveness of the monetary policy was expressed by the back end. Bull flatteners marked volatile risk-off episodes while bear steepeners, being a positive verdict on QE, were calming, risk-on modes.

Describing the post-2008 phase in other words, the post-QE period “marks a gradual and systematic curve flattening while vol remained low and surface disinverted” amid the collapse of risk premia. To make his point that the yield curve is no longer signal but merely noise, i.e., it chases vol, Kocic claims that “the curve has converged to where volatility surface has already settled. The flattening pressure was a function of the tight fiscal policy, regulations, and supply shocks in oil.” As such the post-2014 sub-period marks “a systematic compression of risk premia across the board with markets continuing to align with slower growth, lack of excitement across extended horizons and a likely shift towards more aggressive savings.”

Going back to his analogy that we no live in a period where “there are no longer casualties of big “collisions”, only parking accidents”, Kocic next argues that this mode of curve repricing is consistent with the expectations of mild shocks and their persistent effect, and that the vol market “has captured this through low mean reversion, with lower vol and surface inversion remaining in a tight range, while other risk premia collapsed (Figure).”

Assuming this take is accurate, what does it imply for the future of volatility?

In the context of the reflexive relationship between vol and yield, at this point, volatility would appear to be a prisoner of the curve. Regressing to an analogy he has repeatedly used in the past, Kocic argues that the spread between short and long rate – “the playground that defines the range of what can possibly happen” – is now so tight that it does not allow any substantial range in rates, and therefore no meaningful rise in volatility.

The logical next question is what could prompt a spike in the spread in rates, to which the “derivative(s) Zizek” writes that “outside of tail risk, the first step in creating conditions for bear steepeners is a move towards tolerating higher inflation. This could be achieved by a change of inflation targeting policy. Additional disorder could follow the relaxing of the regulatory constraints, which would free bank balance sheets and boost the credit impulse that could possibly stimulate investment and in turn lead to higher productivity growth.”

However, a problem emerges, as the demand-side has to be addressed at the same time. Indeed, the new technologies that would attract investment now destroy more jobs than they create as “the old paradigm does not seem to be capable of achieving these goals; it has failed to deliver desired results, while the new one is politically difficult to pass.” This, then brings us to the above core argument, namely that any effort in this direction is a source of further political volatility and dissipation of consensus which further stifles change. Paradoxically, one event that could restore some vol is an easier Fed, or as Kocic explains:

Adjustment of monetary policy through rate cuts would free some room for rates to move by opening the policy gap, the spread between long rate and near-term Fed expectations, from below. This is a temporary rise in realized volatility but without steepening of the long end of the curve.

Which brings us to the conclusion: barring the abovementioned “fat tail”, Kocic asks “have we reached the end” of the post-2008 phase of collapsing vol and flattening yield curve, and parallel to that “what could create conditions for volatility return?” 

The answer here is that while there are two directions of curve-vol reshaping, Kocic argues that the main boost for volatility “is to liberate the right side of the (rates) distribution” which would mean “that higher rates and steeper curve have to be allowed.”  In this mode, gamma would lead the way followed by the disinversion of the long-dated sector. The chart below shows two directions of change, i.e. curve first needs to steepen before realized volatility can rise.

This is also the “vol shift mode that could take us closer to the tail risk as concentrated risks in the corporates.” Incidentally, this takes us back full circle to what so many analysts believe will be the source of the next crisis: the wholesale prolapse of the BBB-rated investment grade space, a tsunami of “fallen angels” that would obliterate the junk bond market as it more than doubles in size overnight from $1.1 trillion, and catalyzes the next financial crash. Or, as Kocic puts it, “the global hunt for yield has encouraged investors to move down the credit spectrum to enhance returns. Within the IG universe, BBB issuance has grown significantly.” This is shown in the chart below, which shows that more than 50% of the entire IG index is now BBB-rated.

To Kocic, this is also the most negatively convex sector which is sensitive to spread wideners in steepening sell off. In other words, a possible wholesale downgrade to BB or lower would result in disorderly unwind of positions of the IG money managers which would be capable of raising volatility significantly. From there it would promptly spread to the rest of the market, and global economy, and lead to the next financial crisis. What happens to vol then should be clear to anyone.

The good news is that, at least in the near term, it appears that not much can go wrong as “there seems to be an embedded mechanism that dampens the volatility away from the upper left corner.” In fact, and ironically, at this moment it appears that the Fed seems to be the only source of shocks with their effects localized at the front end of the curve and the upper left corner of the volatility surface. For long tenor vol (gamma or vega alike) to revive, we need bear steepening of the curve.

That said, to Kocic the worst case scenario, as note above, is a bear-steepener, which “is seen as tail risk that would cause the most violent repricing in credit.” Which incidentally is precisely what we said one month ago, if with far fewer words in “Curve Inversion Is Bad, But It’s The Steepening After That Kills.”

(ZH) Deutsche Bank Back To ‘Square One’ As Commerzbank Merger Talks Collapse


Ever since it became apparent that the Deutsche Bank-Commerzbank tie-up wasn’t meant to be after all, despite incessant lobbying from the German Finance Ministry over the objections of pretty much every other stakeholder, both Deutsche Bank shareholders as well as the bank’s still-relatively-new CEO have probably been wondering: What’s next for Europe’s least-favorite perennially troubled megabank? 


Well, as DB’s management team scrambles to close a deal with UBS to merge the Swiss bank’s once-storied asset-management business with DWS, the asset-management arm that functions as a separate corporate entity controlled by Deutsche, Bloomberg and the FT have effectively confirmed what most shareholders have been hoping for: Despite Sewing and Chairman Paul Achleitner’s insistence that the investment bank is vital to Deutsche’s future, it’s probably time for Deutsche to take an axe to its long-suffering investment bank (the bank has already reportedly been considering the ring-fencing of its most toxic businesses and assets in a shadow ‘bad bank’).

Specifically, the bank’s equities business (and more specifically, it’s US equities trading business) will likely be on the chopping block.

But even a restructuring would be difficult, coming with many up-front costs, according to analysts quoted by Bloomberg:

With a Commerzbank deal gone, Deutsche Bank’s only move is “a more radical investment bank restructure, with a potential exit from the U.S. region and the equities product line,” Citigroup Inc. analysts wrote in a note on April 29. Such a move would be difficult. Restructuring costs would hit upfront, and revenue would be squeezed at first, potentially exacerbating rather than fixing Deutsche Bank’s core problem. In any case, that option seems off the table. Achleitner and Sewing say the trading and corporate finance businesses are crucial. “Every executive has to constantly adjust to a changing market environment,” Achleitner told the Financial Times. “But in this regard, we are not talking about strategy, we are talking about execution” of the existing plan.

As if the bank needed another incentive, Reuters reported a few days back that Deutsche’s US operation – which would be greatly curtailed  or shuttered entirely in a restructuring – is once again in danger of failing one of the Fed’s stress tests.

In a detailed insider account of the factors that inspired Sewing’s decision to walk away from merger talks (according to the FT, though it had been announced as a mutual decision, the idea to walk away was first broached by Sewing and his team, who argued that financing the deal would be too burdensome).

As one regulator put it:

“Calling the merger off wasn’t a strategic decision,” a top regulator said. “They could just not afford the deal.”  “Without the one-off [accounting and tax] effects the transaction would have triggered, the deal stacked up,” the person said, adding it was “unsettling…[that] both banks do not have enough firepower to bring forward a merger that makes strategic sense.” Deutsche disputes that it lacked firepower to do the deal.

But while Commerzbank’s steady corporate business will make it an ideal acquisition target for another European lender (UniCredit and ING have reportedly been weighing bids), DB has no obvious path to finally shed the mantle of ‘most hated bank in Europe’.


(EUobserver) Trump family sues Deutsche Bank over documents release


US president Donald Trump and several members of his family on Monday sued Deutsche Bank to stop it from handing over financial records to congressional subpoenas investigating his companies’ financial dealings. Trump’s lawsuit contends that demands for records by Democrat-controlled House committees have “no legitimate or lawful purpose” and were issued to harass him as president. Deutsche Bank started providing financial records to New York state’s attorney general last week.

(EUobserver) Jourova: Danske Bank investigation not shelved


“The case of Danske Bank is not closed for us,” EU’s justice commissioner Vera Jourova has told the Financial Times. The commission’s pledge to follow up on the money-laundering scandal came despite a vote in the European Banking Authority on 16 April rejecting that its supervision of Danske Bank had failed, and shelving an investigation into the €200bn Danske Bank scandal linked to illicit Russian money.

(Star) US Justice staff seek Goldman guilty plea in 1MDB settlement


A criminal guilty plea, considered one of the harshest penalties the Justice Department can impose on a company, could potentially expose Goldman to litigation from private parties and result in restrictions on its business, depending on the final terms of any settlement.

A criminal guilty plea, considered one of the harshest penalties the Justice Department can impose on a company, could potentially expose Goldman to litigation from private parties and result in restrictions on its business, depending on the final terms of any settlement.U.S. Department of Justice staff have made an internal recommendation that Goldman Sachs Group Inc plead guilty as part of any potential settlement over its role in a corruption scandal involving a Malaysian sovereign wealth fund, the Financial Times reported on Wednesday.

The Justice Department has not charged Goldman in relation to the state-owned fund, 1Malaysia Development Berhad, known as 1MDB. Goldman, which is being investigated by Malaysian authorities and the Justice Department for its role in bond sales for the fund, has said it has not had settlement talks.

A criminal guilty plea, considered one of the harshest penalties the Justice Department can impose on a company, could potentially expose Goldman to litigation from private parties and result in restrictions on its business, depending on the final terms of any settlement.

The Justice Department announced criminal charges against two former Goldman bankers tied to the scandal involving 1MDB, Tim Leissner and Roger Ng, last year. Goldman has consistently tried to distance itself from the scandal, saying the criminal activities of Leissner and Ng were hidden from the bank’s management.

Goldman Sachs spokesman Jake Siewert said in statement on Wednesday the bank does not believe “a charge would be warranted by the facts of the case or the law, particularly because senior management was unaware of the criminal activity by Mr. Leissner and his associate who took extraordinary efforts to hide their part in the illegal scheme from management, compliance, and legal functions at the firm.” Without a charge, no settlement would be necessary.

The staff recommendation by prosecutors is now being considered by senior officials at the Justice Department, the FT said, citing people familiar with the matter.

The Justice Department declined to comment.

Goldman’s shares closed down 1.8 percent on Wednesday.

The Justice Department does not typically pursue criminal guilty pleas from corporations. In recent years it has tended to negotiate non-prosecution or deferred prosecution agreements that are generally considered to be less damaging to companies.

Banks with criminal convictions can lose access to certain government perks, including a streamlined process to raise funds through securities offerings and the ability to manage American pension funds. They could also have a range of other critical licenses revoked by other regulatory agencies.

In the past, however, the DOJ has ensured that the relevant government regulators would grant waivers that would allow a bank to continue doing such business out of concern that a dramatic upheaval of a major firm could have a negatively affect markets.

In 2015, four large banks – Citicorp, JPMorgan Chase & Co, Barclays PLC and The Royal Bank of Scotland PLC – pleaded guilty to felony charges of trying to manipulate foreign exchange rates. UBS AG pleaded guilty to manipulating benchmark interest rates at the same time. Barclays, Citi, JPM and UBS all received certain waivers.

But such a policy has been under political pressure from Democrats – including Representative Maxine Waters, who now chairs the House of Representative’s banking committee, and Senator Elizabeth Warren, a candidate for the Democratic nomination for president who argue that banks that plead guilty should suffer consequences.

Analysts focused on Goldman had expected the bank to enter into a deferred prosecution agreement, possibly including an admission of wrongdoing. They downplayed the risks to the bank’s business, pointing to the limited overall impact such pleas had had on foreign banks.

“A guilty plea would not be ‘game over,’ in our view,” Mike Mayo, senior analyst at Wells Fargo Securities, wrote in a note on Wednesday. “There’s little chance that [Goldman Sachs] would agree to a guilty plea without waivers from government agencies that would allow them to continue to conduct regular business, albeit with better controls.”

According to prosecutors, Goldman generated about $600 million in fees for its work with 1MDB, which included three bond offerings in 2012 and 2013 that raised $6.5 billion. Leissner, Ng and others received large bonuses in connection with that revenue.

Prosecutors described the bank’s system of internal accounting controls as “easily circumvented” and said its culture in Southeast Asia was “highly focused on consummating deals, at times prioritising this goal ahead of the proper operation of its compliance functions.”

The government of former Malaysian Prime Minister Najib Razak set up the 1MDB fund in 2009. The U.S. Justice Department estimated that $4.5 billion was misappropriated by high-level fund officials and their associates between 2009 and 2014. – Reuters

(ZH) Deutsche Considering ‘Bad Bank’ Unit As Merger Talks Falter

(ZH) Thanks to the Wall Street Journal, investors won’t need to wait until later this week for a promised update on the status of merger talks between Deutsche Bank and Commerzbank. Based on reports about Deutsche’s continued contingency planning, we can surmise that the answer to the question ‘how are deal talks going?’ is clearly ‘not well’.


Fresh on the heels of reports that Deutsche CEO Christian Sewing has been scrambling to prep a ‘Plan B’ to  sell to investors should the merger between the two troubled German lenders fall through, WSJ  reported on Tuesday that part of this planning includes the possibility of forming a ‘bad bank’ to house Deutsche’s most toxic assets and unprofitable business lines.

Deutsche’s troubles have persisted for years. So why are they only discussing this now? Well, because, as WSJ reports, Deutsche’s troubled investment bank is creating more headaches during the merger talks than executives had initially anticipated, which seems more like an issue of unrealistically rosy expectations than anything else. 

Deutsche Bank for years has been retooling its strategy and management, promising to reinvigorate profits, repair compliance weaknesses and cut rising costs. Executives insisted publicly up until late 2018 that the bank should only consider deals after it heals itself. Now, deep into merger talks, it is looking at a potentially bigger cleanup effort than it previously signaled.

Planning for a possible no-deal outcome has taken on greater urgency at Deutsche Bank as merger talks have proven more complicated than proponents originally expected, the people said.

Of course, even if Deutsche follows through with these plans, it doesn’t necessarily mean that a merger will be dead in the water. It could even help facilitate a deal.

A new unit for disposing of assets and discontinued operations – a so-called bad bank – could be used flexibly, whether Deutsche Bank strikes a deal or not, some of the people said. A merger would likely require Deutsche Bank to make sizable cuts to parts of its investment bank, narrowing the scope of businesses to focus resources on more-profitable areas as part of a strategy overhaul, some of the people said.

But as major DB shareholders have demanded cuts to its investment bank, particularly its troubled US equity trading franchise, and to a lesser extent its European equity trading business, it’s looking increasingly likely that DB is going to need to find a way to quickly shed its most problematic businesses and assets – or at least find a way to cleave them from the rest of the bank.

DB has tried the ‘bad bank’ model before with its infamous ‘noncore operations’ unit. But the fact that this is again under discussion shows just how difficult it will be for Deutsche to rid itself of these assets and businesses.

A new bad-bank unit would allow Deutsche Bank to wall off business lines it intends to close or de-emphasize as well as positions that take time to sell or run down. Deutsche Bank previously had a similar unit called noncore operations that it used to dispose of unwanted assets, many of them dating to the financial crisis. That loss-making unit reported revenues and other financial details distinct from the bank’s core businesses.

Deutsche Bank closed the noncore unit in late 2016. In March 2017, the bank launched a share sale to raise €8 billion in capital. In the process, it designated a new pile of around €20 billion in risk-weighted assets as “nonstrategic.” They were earmarked to be run down within the investment bank rather than as a new separate unit.

The return of discussions about a noncore unit highlight Deutsche Bank’s continued difficulties in streamlining and cutting costs to focus on businesses where it has a competitive edge.

With more stakeholders – including the two banks’ powerful unions – opposing the deal, it’s hardly a surprise that German Finance minister Olaf Scholz’s quest to create a German ‘national champion’ to  support Germany’s exporters appears to be in serious jeopardy.

Earlier, the FT reported the UBS was in talks to fold its asset-management unit into DB’s majority-owned asset-management subsidiary DWS, the most profitable of the bank’s businesses (though it’s technically a separate company).

Meanwhile, twitter wits couldn’t help but crack a few well-deserved jokes after seeing the WSJ headline flash.

Mark B. Spiegel@markbspiegel

“Deutsche Bank Considers Forming ‘Bad Bank” … via @WSJ


HOW ABOUT “DEUTSCHE BANK”?437:49 PM – Apr 23, 2019Twitter Ads info and privacyDeutsche Bank Considers Forming ‘Bad Bank’Executives have discussed creating a new unit to house unwanted assets and businesses that could be earmarked for closure, as part of contingency planning should merger talks with Commerzbank fall…wsj.comSee Mark B. Spiegel’s other Tweets

And with DB earnings just around the corner, we imagine we’ll know more about the fate of the ‘merger of weakquals’ soon enough.

(GUA) Deutsche Bank faces action over $20bn Russian money-laundering scheme


Exclusive: in confidential internal report seen by the Guardian, bank says scandal has hurt global brand

Water spills out of a small dragon sculpture on a fountain with the headquarters of the Deutsche Bank in background in Frankfurt, Germany.
 Deutsche Bank says it has ‘reduced its footprint’ across the post-Soviet region. Photograph: Michael Probst/AP

Germany’s troubled Deutsche Bank faces fines, legal action and the possible prosecution of “senior management” because of its role in a $20bn Russian money-laundering scheme, a confidential internal report seen by the Guardian says.

The bank admits there is a high risk that regulators in the US and UK will take “significant disciplinary action” against it. Deutsche concedes that the scandal has hurt its “global brand” – and is likely to cause “client attrition”, loss of investor confidence and a decline in its market value.

Deutsche Bank was embroiled in a vast money-laundering operation, dubbed the Global Laundromat. Russian criminals with links to the Kremlin, the old KGB and its main successor, the FSB, used the scheme between 2010 and 2014 to move money into the western financial system. The cash involved could total $80bn, detectives believe.

Shell companies typically based in the UK “loaned” money to each other. Companies then defaulted on this large fictitious debt. Corrupt judges in Moldova authenticated the debt – with billions transferred to Moldova and the Baltics via a bank in Latvia.

Deutsche Bank was used to launder the money via its corresponding banking network – effectively allowing illegal Russian payments to be funnelled to the US, the European Union and Asia.

The bank was entirely unaware of the scam until the Guardian and Organised Crime and Corruption Reporting Project (OCCRP) broke the story in March 2017, the report says. The first it knew was an email from the Guardian and Germany’s Süddeutsche Zeitung newspaperasking for comment.

“Only with this intelligence received is it now possible for Deutsche Bank to start global investigations,” it notes.

In the embarrassing aftermath, the bank asked two in-house financial crime investigators – Philippe Vollot and Hinrich Völcker – to find out what had gone wrong. Their nine-page presentation was shared last year with the audit committee of the bank’s supervisory board and is marked “strictly confidential”.

The pair identified numerous “high-risk entities”. They included 1,244 in the US, 329 in the UK and 950 in Germany. These entities were responsible for nearly 700,000 transactions, the report says, involving at least £62m in the UK, $47m in the US, and €55m in Germany.

As part of its investigation, Deutsche Bank sent 149 “suspicious activity reports” to the National Crime Agency in London. Similar disclosures of potential money-laundering transactions were made to authorities in the US and elsewhere – with 30 private and corporate Deutsche Bank clients reported. Some may have been “unknowingly used”, the report says.

The affair is a further blow to Deutsche Banks’s ailing reputation. It comes amid police raids on its Frankfurt HQ over the Panama Papers, a plunging share price and talks over a possible merger with Germany’s Commerzbank. The raid last November came after German prosecutors alleged two bank employees helped clients launder money via offshore firms.

Deutsche is also under scrutiny in Washington over its financial dealings with Donald Trump. On 15 April, Democrats from the House intelligence and financial services committees issued a subpoena, demanding the bank provide documents about its lending to the president.

Over two decades, Trump borrowed more than $2bn from Deutsche. In 2008, he defaulted on a $45m loan repayment and sued the bank. Its private wealth division in New York subsequently loaned Trump a further $300m – a move that bemused insiders and which has yet to be fully explained.

In recent years, the bank has had a series of bruising encounters with international regulators. Between 2011 and 2018, it paid $14.5bn in fines, with exposure to dubious Russian money a regular theme.

In 2017, the UK’s Financial Conduct Authority imposed its largest fine – £163m – after Deutsche carried out a $10bn “mirror trade” scheme run out of its branch in Moscow. The New York Department of Financial Services (DFS) fined the bank $425m over the same case, in which roubles were converted into dollars via fake trades on behalf of VIP Russian clients.

Deutsche carried out an internal investigation into the “mirror trades” affair, “Project Square”. The leaked Global Laundromat report says there is “no systematic link” between the two Russian money-laundering schemes. However, it suggests some overlap. Two unnamed entities feature in both and 46 “mirror trade” entities “directly transacted” with 233 laundromat ones.

The leaked report says Deutsche has cleaned up its act. It says it has stopped doing business with the two banks at the centre of the Laundromat scandal – Moldova’s Moldindconbank and Latvia’s Trasta Komercbanka. Regulators in Latvia closed down Trasta in 2016 because of serial money-laundering violations.

Deutsche Bank says it has “reduced its footprint” across the post-Soviet region. It no longer has relationships with any banks in Moldova, Latvia, Estonia and Cyprus, the report says. All are favourite destinations for illicit Moscow money. The bank has scaled down its business activities in Russia and Ukraine, it says.

The bank is under investigation for its role in Europe’s biggest banking scandal, involving Denmark’s Danske Bank. Danske laundered €200bn (£178bn) of Russian money via its branch in Estonia. Deutsche provided correspondent banking services via its US subsidiary.

Deutsche Bank said it could not comment on “potential or ongoing investigations”, or on “any matters regarding our regulators”. It said it was committed to providing “appropriate information to all authorised investigations”.

The bank said: “We have considerably increased staff numbers in anti-financial crime and more than tripled our staff since 2015. Since 2016 we have invested €700m in upgrading our key control functions there.”

(Economist) A new era at Goldman Sachs starts in the shadow of a scandal


Can the bank reinvent itself?

NO ONE IS more aware of the value of a brand than Goldman Sachs. The investment bank, founded in 1869, has advised the biggest and best American companies on the value of theirs for the past 150 years. It helped F.W. Woolworth, a pioneering department store, with its initial public offering in 1912. It took Ford and Disney public in the 1950s, helped Amazon buy Whole Foods in 2017 and will take Uber public later this year. Yet these are troubling times for its own brand, tarnished by association with a fraud-ridden Malaysian state-run fund, 1MDB, and hurt by the bank’s failure to adapt after the global financial crisis.

These issues were echoed in the firm’s first-quarter results, released on April 15th. Revenues came in below expectations—13% lower than for the first quarter of 2018—largely as the result of lower trading revenues. The share price fell more than 3% and the earnings call was peppered with analysts asking questions about 1MDB.Get our daily newsletter

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The first task for David Solomon, who took over as chief executive last October, is to clean up Goldman’s reputation. In 2012 and 2013 it helped 1MDB raise $6.5bn across three bond offerings, earning $600m in fees—way above the norm for such work. American and Malaysian authorities have alleged that much of the money raised was stolen in a scheme masterminded by Jho Low, a Malaysian financier. He has denied wrongdoing (and vanished).

Last November America’s Department of Justice (DoJ) announced that a former senior partner at Goldman, Tim Leissner, had pleaded guilty to conspiracy to launder money and to violate foreign bribery laws. And they indicted Mr Low and another former Goldman banker, Roger Ng, who has also denied wrongdoing. Goldman claims that Mr Ng and Mr Leissner, who transferred embezzled funds into his personal bank account, kept the bank in the dark about their actions.

But criminal charges have been filed against the firm in Malaysia. Though Goldman is contesting the case, it is spooking shareholders, who worry about both onerous fines and what it implies about oversight at the bank. Since November its share price has underperformed an index of other bank stocks by 10.3 percentage points, suggesting that the scandal may have wiped as much as $9.1bn off its value.

It is against these headwinds that Mr Solomon must try to convince investors that Goldman can reinvent itself. Its peers have already digested the fact that Wall Street’s traditional model, in which banks advise on huge corporate deals and make bold trades on their own behalf, has become less profitable. According to Michael Spellacy of Accenture, a consultancy, 90% of the economic profit made in the capital-markets industry is now earned on the buy side—that is, by those who manage assets or investments—and just 10% from sell-side investment-banking activities. A decade ago, he says, that split was closer to 50-50.

Goldman’s slowness in reacting to these structural changes has allowed its competitors to catch up. In 2010 its return on equity (ROE) was 11%, easily beating the 8% average for “bulge-bracket” American investment banks, a group including JP Morgan and Morgan Stanley. But last year that group averaged an ROE of 11.2%, placing Goldman, at 12%, near the middle of the pack. And investors are becoming concerned about the way it earns its returns. Volatile profits, like those from trading businesses, mergers and acquisitions, are considered less valuable than steady fee-based income, for example from wealth management.

In 2016 Mr Solomon’s predecessor, Lloyd Blankfein, took the first steps towards a new strategy by launching a consumer bank, Marcus. In 2017 Goldman announced a target of increasing yearly revenues by $5bn by 2020. But the focus on expanding consumer lending, which offers a relatively low return on investment, did not impress shareholders.

They have had a rough ride. Holding shares in the firm since 2010 would have earned just 13% (without adjusting for inflation), compared with an average of 71% for its bulge-bracket peers and 152% for the S&P 500. Goldman continues to trade at just 0.9 times its tangible book value, a measure of the money that might be returned to shareholders if it were liquidated. The average ratio of price to tangible book value for a bulge-bracket bank is 1.15.

As far as 1MDB is concerned, the big worry for shareholders is the size and scope of the penalties. A large fine is all but inevitable. It could be based on the $600m Goldman earned from the bond issuance—or the $2.7bn American authorities say was stolen from the proceeds. That will be multiplied by anything up to four, depending on the degree to which the firm is found culpable. That Goldman is co-operating with the DoJ will bring the multiplier down; if the DoJ decides the firm’s oversight of compliance procedures was inadequate, it will be towards the higher end. Steven Chubak of Wolfe Research, an equity-research firm, thinks the total will be somewhere between $1bn and $4bn.

When it comes to the required shift in strategy, however, Goldman’s efforts may soon start to bear fruit. Its expansion into consumer businesses is continuing apace. In 2018 it acquired Clarity Money, a personal-finance app. Last month Tim Cook, Apple’s chief executive, announced that it will launch a credit card with Goldman this summer. When Marcus launched it was as a consumer lender; since then it has added deposit-taking. Though it offers market-leading rates, deposits are still a cheap source of funding. In 2012 just 8% of Goldman’s funding came from deposits. Last year that share had risen to 19%. If it can keep replacing wholesale funding with deposits at the pace of the past five years, says Mr Chubak, it will have reduced funding costs by $500m by 2022.

The consumer space is not the only place Goldman is rolling out new technology. More than a quarter of Goldman’s employees are now engineers, says Heather Kennedy Miner, the bank’s head of investor relations. The firm has deployed a new platform, called Marquee, for institutional investors and will expand into corporate cash management in 2020, which will further increase low-cost deposits. 

The firm also seems to be planning an overdue restructuring of its fixed-income, currency and commodities (FICC) business. Revenues earned from FICC have fallen from $13.6bn in 2010, accounting for more than a third of Goldman’s revenues, to $5.9bn now, or just a sixth. Last October Stephen Scherr, Goldman’s newly appointed chief financial officer, announced a review of all its business lines, which will be published early next year. In February the Wall Street Journal reported that the commodities business would be scaled back. (Mr Scherr emphasises that Goldman has no plans to abandon commodities entirely, as some of its competitors, including JP Morgan and Morgan Stanley, have.) In March Mr Solomon announced plans to cut the number of staff in sales and trading by 5% this year.

Its new strategy will mean Goldman is competing on less familiar territory. Consumer deposits and corporate cash management are competitive markets that JP Morgan and Bank of America have dominated for decades. But they are also huge markets. Even a small slice could have a big impact on Goldman’s profits, says Mr Scherr. Compared with established banks, Goldman is able to develop and deploy new technology easily; but unlike startup digital competitors, its innovations are backed by a $925bn balance-sheet. America’s financial-services industry has been slow to adapt to technological change. An old bank with a new direction might be well-placed to disrupt it.

(CNBC) The UK has a Brexit extension and here is what the big banks think


  • Theresa May has been granted another 6 months to sort out Brexit.
  • Several options, including her own resignation, remain firmly on the table.
  • The EU has told Britain not to waste time in coming up with a compromise solution.

WATCH NOWVIDEO01:34EU leaders have agreed to a ‘flexible’ Brexit extension

U.K. Prime Minister Theresa May has returned from Brussels with a Brexit extension that pushes the next deadline out to October 31.

May has seen her preferred withdrawal from Europe rejected three times already but now has another six-and-a-half months to try to get some form of deal over the line.

Whether her government calls a snap general election, works out a softer Brexit or doesn’t even leave the European Union are all still on the table. The possibility of Britain leaving the EU with no deal whatsoever also remains very much alive.

After a long night in Brussels, CNBC rounds up the Brexit predictions from some of the biggest banks in the world.

UBS — Heading for elections

Analysts at Swiss bank UBS concluded that the most likely next step is for May to try to push through her previously rejected withdrawal agreement with opposition party support. UBS sees this plan as doomed to fail and May will be forced to resign, with a subsequent general election “likely.”

In a separate email to CNBC, UBS’s Head of U.K. Rates Strategy John Wraith said the extension will ensure economic headwinds remain for Britain, as businesses and consumers won’t feel freed to press on with investments or big-ticket purchases.

Commerzbank — No bounce for the pound

The German bank believes that Britain is now obliged to participate in the next round of EU parliamentary elections which will only increase division in the U.K. The bank says markets have largely ignored Brexit “noise” but may now start to get nervous if the U.K.’s political stability looks compromised. It assigns a low probability to a cancellation of Brexit but is almost equally uncertain of a second referendum or general election. It sees “limited scope” for any sustainable rebound in either the economy or the pound.

Societe Generale – Markets don’t know what to do

The French bank sees the extension as offering practically no change to the Brexit conundrum. Kit Juckes, who acts a macro strategist for the bank, said in a note Thursday that although there is little evidence that “pre-departure uncertainty” is hurting the U.K. economy, further vagueness over the future won’t help.

Juckes adds that markets are “staring, wide-eyed and mouth open” but have little interest in the Brexit trade. He notes that U.K. economic data isn’t bad and offers a call that sterling is likely to go higher rather than lower.

Citi – Watch the Bank of England

Christian Schulz at Citi said Thursday that a snap U.K. general election remains the logical step to restart the process. He says the Labour party is unlikely to dig May out of her hole and options for the prime minister continue to narrow. For the U.K. economy, Citi sees successive short extensions as “the worst case for business confidence and investment on both sides of the Channel.” The bank says its base case that the Bank of England will raise rates in August looks to have been weakened but the central bank’s meeting next month should offer more clues.

Rabobank — EU keen to avoid blame

The U.K. has a break clause in the extension that allows it to leave should a withdrawal agreement gain support in both Westminster and Brussels. It also requires Britain to avoid disrupting the day-to-day activities of the European Union. Rabobank labels this as another example of the “pragmatic approach” that EU heads of state have taken around Brexit deadlines. The bank says it suggests that Brussels will do all it can to prevent an impression that it’s forcing the U.K. to leave without a deal.

Deutsche Bank — One more try for May

May has said she will still try to avoid U.K. participation in the European elections. This will mean agreeing a deal by May 22. Jim Reid at Deutsche Bank says May can possibly have another tilt at gaining U.K. lawmaker support “sometime in the next 36 hours.”

Reid says whatever the outcome the odds of an early election continue to rise with the chances of a cross-party agreement looking slim. Deutsche’s analyst also notes May’s previous promise to hold binding parliamentary votes on various Brexit options and expects that to dominate headlines in the coming days.