(ZH) There is a reason James Simons’ RenTec is the world’s best performing hedge fund – it spots trends (even if they are glaringly obvious) well ahead of almost everyone else, and certainly long before the consensus.
That’s what happened with Deutsche Bank, when as we reported two weeks ago, the quant fund pulled its cash from Deutsche Bank as a result of soaring counterparty risk, just days before the full – and to many, devastating – extent of the German lender’s historic restructuring was disclosed, and would result in a bank that is radically different from what Deutsche Bank was previously (see “The Deutsche Bank As You Know It Is No More“).
In any case, now that RenTec is long gone, and questions about the viability of Deutsche Bank are swirling – yes, it won’t be insolvent overnight, but like the world’s biggest melting ice cube, there is simply no equity value there any more – everyone else has decided to cut their counterparty risk with the bank with the €45 trillion in derivatives, and according to Bloomberg Deutsche Bank clients, mostly hedge funds, have started a “bank run” which has culminated with about $1 billion per day being pulled from the bank.
As a result of the modern version of this “bank run”, where it’s not depositors but counterparties that are pulling their liquid exposure from DB on fears another Lehman-style lock up could freeze their funds indefinitely, Deutsche Bank is considering how to transfer some €150 billion ($168 billion) of balances held in it prime-brokerage unit – along with technology and potentially hundreds of staff – to French banking giant BNP Paribas.
One problem, as Bloomberg notes, is that such a forced attempt to change prime-broker counterparties, would be like herding cats, as the clients had already decided they have no intention of sticking with Deutsche Bank, and would certainly prefer to pick their own PB counterparty than be assigned one by the Frankfurt-based bank. Alas, the problem for DB is that with the bank run accelerating, pressure on the bank to complete a deal soon is soaring.
Here are the dynamics in a nutshell, (via Bloomberg): Deutsche Bank CEO Christian Sewing is pulling back from catering to risky hedge-fund clients, i.e. running a prime brokerage, as he attempts to radically overhaul the troubled German lender while BNP CEO Jean-Laurent Bonnafe wants to expand in the industry. A deal of this magnitude would be a stark example of the German firm’s retreat from global investment banking while potentially transforming its French rival from a small player in the so-called prime-brokerage industry to one of Europe’s biggest.
Of course, publicly telegraphing that DB is in dire liquidity straits and needs an in-kind transfer of its prime brokerage book would spark an outright panic, and so instead the story has been spun far more palatably, i.e., “BNP is providing “continuity of service” to Deutsche Bank’s prime-brokerage and electronic-equity clients as the two companies discuss transferring over technology and staff“, according to a July 7 statement. The ultimate goal of the talks is for BNP to take over the vast majority of client balances, which are slightly less than $200 billion currently.
There is just one problem: nothing is preventing those clients who would be forcibly moved from a German banking giant to a French banking giant from redeeming their funds. And that’s just what they are doing. Or rather, nothing is preventing them from moving their exposure for now, which is why they are suddenly scrambling to do it before they are suddenly gated.
Which is why the final shape of the deal remains, pardon the pun, fluid, and it is unclear how it will proceed, facing a multitude of complexities, including departing clients.
In an attempt to stop the bank run, BNP executives are meeting with U.S. hedge-fund clients this week to convince them to stay following similar sit-downs with European funds last week, Bloomberg sources said.
However, if this gambit fails, and hedge funds keep moving their business elsewhere, officials at the German bank may just relegate its assets tied to the prime finance division into the newly formed Capital Release Unit, i.e. the infamous “bad bank” which is winding down unwanted assets totaling 288 billion euros ($324 billion) of leverage exposure, and the prime brokerage is responsible for much of the 170 billion euros of leverage exposure that’s coming from the equities division into the division, also known as CRU a presentation shows.
It also means that countless hegde funds are suddenly at risk of being gated on whatever liquid exposure they have toward Deutsche Bank.
To be sure, Deutsche Bank’s hedge fund balances have been declining throughout the year as speculation swirled around Sewing’s intentions for the prime brokerage, but the rate of redemptions was far lower than $1 billion per day. Now that the bank jog has become a bank run, the next question is how much liquidity reserves does DB really have and what happen if hedge funds clients – suddenly spooked they will be the last bagholders standing – pull the remaining €150 billion all at once.
We are confident we will get the answer in a few days if not hours, until then please enjoy this chart which compares DB’s stock decline to that of another bank which was gripped by a historic liquidity run in its last days too…
(Reuters) – The U.S. Justice Department is investigating whether Deutsche Bank AG (DBKGn.DE) violated foreign corruption or anti-money-laundering laws in its work for state fund 1Malaysia Development Berhad (1MDB), the Wall Street Journal said on Wednesday.The logo of Deutsche Bank is pictured on a company’s office in London, Britain July 8, 2019. REUTERS/Simon Dawson
The news comes after the bank announced plans to scrap its global equities unit, cut some fixed-income operations and slash 18,000 jobs globally in a 7.4-billion-euro ($8.34 billion) restructuring program.
Deutsche Bank’s work for 1MDB included helping to raise $1.2 billion in 2014 as concerns about the fund’s management and financials had begun to circulate, the newspaper said, citing unidentified people familiar with the matter.
Prosecutors are mainly looking into the role of Tan Boon-Kee, a colleague of a former Goldman Sachs Group Inc executive, Tim Leissner, who worked with him on 1MDB-related business, the paper said.
She left Goldman to become Asia-Pacific head of banking for financial institutions clients at Deutsche Bank, where she was involved with further 1MDB dealings, it added.
In an emailed statement, Deutsche Bank said it had fully cooperated with all regulatory and law enforcement agencies that made inquiries about the fund.
“As stated in asset forfeiture complaints filed by the U.S. Department of Justice, 1MDB made ‘material misrepresentations and omissions to Deutsche Bank officials’ in connection with 1MDB’s transactions with the bank,” the bank told Reuters.
“This is consistent with the bank’s own findings in this matter,” it added.
A U.S. DoJ civil asset-forfeiture complaint repeatedly describes Deutsche Bank as being misled by 1MDB officers, the WSJ said.
Tan left Deutsche Bank last year, after it discovered communications between her and Jho Low, the Malaysian financier the Justice Department has described as the central player in the 1MDB scandal, it added.
A representative of insurance company FWD Group, Tan’s current employer, said the company and Tan declined to comment.
The DoJ did not immediately respond to a request for comment from Reuters.
At the end of the day, all of the frenzied whispers in the press about Deutsche Bank CEO Christian Sewing’s sweeping restructuring hardly did it justice. Instead of moving slowly, the bank started herding hundreds of employees into meetings with HR, first in its offices in Asia (Hong Kong, Sydney), then London (which got hit particularly hard) then New York City.
By some accounts, it was the largest mass banker firing since the collapse of Lehman, which left nearly 30,000 employees in New York City jobless. Although the American economy is doing comparatively well relative to Europe, across the world, DB employees might struggle to find work again in their same field.
According to Bloomberg, automation and cuts have left most investment banks much leaner than they were before the crisis, and the contracting hedge fund industry, which once poached employees from DB’s equities business, isn’t much help. Some employees will inevitably find their way to Evercore, Blackstone – boutique investment banks and private equity are two of the industry’s top growth areas – or family offices, which, thanks to the never-ending rally in asset prices (and the return of bitcoin), are also booming.
Oh, and of course, there’s always crypto. Some evidence has surfaced to suggest that many young bankers are already looking to make the leap.
For the highest-paid employees being let go this week, many will need to get used to lower pay. Some 1,100 ‘material risk takers’ have been let go. On average, they earned $1.25 million, with almost 60% of that in cash.
“A lot of these people are going to have to get used to less compensation,” said Richard Lipstein, managing director at recruiting firm Gilbert Tweed International, in a telephone interview. And “the percentage of compensation in cash is lower than it used to be.”
Many will need to leave the street, and possibly whatever city in which they are currently living, to find work elsewhere.
“A lot of the people coming out of DB are going to be very challenged to find jobs just because of the sheer change in the equity business,” said Michael Nelson, a senior recruiter at Quest Group. “When you are dispersing that many people globally, some of those people might have to leave the business.”
But although banking headcount has never returned to its pre-crisis levels…
…at least one major Wall Street institution is looking to hire some Deutsche people: Goldman Sachs.
While BBG’s piece on the layoffs focused on the difficulty these employees may face in finding new work, Reuters described the scene outside these offices, where one insider had warned about “Lehman-style” scenes. To wit, some just fired workers could be seen mulling outside, taking photos with colleagues and splitting cabs, presumably to go to the nearest pub and quaff liquor, beer and prosecco.
Staff leaving in Hong Kong were holding envelopes with the bank’s logo. Three employees took a picture of themselves beside a Deutsche Bank sign outside, hugged and then hailed a taxi.
“They give you this packet and you are out of the building,” said one equities trader.
“The equities market is not that great so I may not find a similar job, but I have to deal with it,” said another.
After weeks of looming dread, employees were called into auditoriums, cafeterias and offices, handed an envelope with the details of their redundancy package, and shown the door. Reuters’ reporters followed some of the employees at DB’s London office to the nearest pub.
Few staff wanted to speak outside the bank’s London office, but trade was picking up at the nearby Balls Brothers pub around lunchtime.
“I got laid off, where else would I go,” said a man who had just lost his job in equity sales.
Job cuts were expansive in the bank’s main support centers, where the mood was “pretty hopeless”.
A Deutsche Bank employee in Bengaluru told Reuters that he and several colleagues were told first thing that their jobs were going.
“We were informed that our jobs have become redundant and handed over our letters and given approximately a month’s salary,” he said.
“The mood is pretty hopeless right now, especially (among)people who are single-earners or have big financial burdens such as loans to pay,” he added.
Sewing’s grand restructuring plan involves shutting down Deutsche’s entire lossmaking global equities business, cutting 18,000 jobs (roughly one-fifth of the bank’s total headcount) and hiving off €288 billion ($322 billion) of loss-making assets into a bad bank for sale or run-off. The goal of the restructuring is to reorient DB away from its troubled institutional business and more toward commercial banking and asset management.
As a JP Morgan analyst pointed out, questions linger over DB’s ability to grow, its “ability to operate a corporate franchise without a European equity business.”
Investors were also taken by surprise, which is probably why DB shares sold off again on Tuesday. Closing the bank’s European equity business as a radical step that few anticipated. Most of the leaks to the media seemed to suggest that the cuts would focus on its foreign business, particularly the troubled US equities unit.
But without an equities business, some clients might lose faith in DB’s ability to win business from large corporations. Then again, there’s also the sheer enormity of what the bank is trying to do: substantially grow revenues while cutting a huge chunk of its staff and closing whole businesses, some of which are synergistic with other businesses that will remain open.
As Daniele Brupbacher of UBS pointed out, the odds of success seem low: “Cutting costs by one-quarter while increasing revenues by 10 per cent over four years in the current market environment, while undergoing massive restructuring, could be seen as ‘challenging.'”
Restructuring costs are also probably weighing on shareholders’ minds: the restructuring is expected to produce a full-year loss. Will corporate bank head Stefan Hoops succeed in doubling the Global Transaction Bank’s pretax earnings to €2 billion over the next 2 years, and make a tangible return on equity of 15% by 2022? We guess it’s possible. We suppose it’s possible, but is it likely…
The bank which only a decade ago dominated equity and fixed income and sales trading and investment banking across the globe, and was Europe’s banking behemoth, is no more.
On Sunday afternoon, in a widely telegraphed move, Deutsche Bank announced that it was exiting its equity sales and trading operation, resizing its once legendary Fixed Income and Rates operations and reducing risk-weighted assets currently allocated to these business by 40%, slashing as many as 20,000 jobs including many top officials, and creating a €74 billion “bad bank” as part of a reorganization which will cost up to €7.4 billion by the end of 2022 and which will result in another massive Q2 loss of €2.8 billion, as the bank hopes to slash costs by €17 billion in 2022, while ending dividends for 2019 and 2020 even as it hopes to achieve all this without new outside capital.
“Today we have announced the most fundamental transformation of Deutsche Bank in decades. We are tackling what is necessary to unleash our true potential: our business model, costs, capital and the management team. We are building on our strengths. This is a restart for Deutsche Bank – for the long-term benefit of our clients, employees, investors and society”, CEO Christian Sewing said in a statement.
“In refocusing the bank around our clients, we are returning to our roots and to what once made us one of the leading banks in the world. We remain committed to our global network and will help companies to grow and provide private and institutional clients with the best solutions and advice for their respective needs – in Germany, Europe and around the globe. We are determined to generate long-term, sustainable returns for shareholders and restore the reputation of Deutsche Bank.”
In what has been dubbed a “radical overhaul”, the biggest German lender, unveiled one of the most comprehensive banking restructurings since the financial crisis, closing most of its trading unit and splitting off €74bn of its assets as the struggling German lender calls time on its “20-year attempt to break into the top ranks of Wall Street.”
“These actions are designed to allow Deutsche Bank to focus on and invest in its core, market leading businesses of Corporate Banking, Financing, Foreign Exchange, Origination & Advisory, Private Banking, and Asset Management” the bank said in a Sunday statement.
Creating a fourth business division called the Corporate Bank which will be comprised of the Global Transaction Bank and the German commercial banking business.
Exiting the Equities Sales & Trading business and reducing the amount of capital used by the Fixed-Income Sales & Trading business, in particular Rates.
Returning 5 billion euros of capital to shareholders starting in 2022, facilitated by a new Capital Release Unit (CRU) to which the bank plans initially to transfer approximately 288 billion euros, or about 20% of Deutsche Bank’s leverage exposure, and 74 billion euros of risk weighted assets (RWA) for wind-down or disposal.
Funding the transformation through existing resources including maintaining a minimum Common Equity Tier 1 ratio of 12.5%. The bank expects to execute its restructuring without the need to raise additional capital.
As a result, the bank’s leverage ratio is expected increase to 4.5% in 2020 and approximately 5% from 2022.
Reducing adjusted costs by 2022 by approximately 6 billion euros to 17 billion euros, a reduction by a quarter of the current cost base.
Targeting a Return on Tangible Equity of 8% by 2022.
Investing 13 billion euros in technology by 2022, to drive efficiency and further improve products and services.
And the key aspects of the reorganization, in more detail as published in a company press release, include:
The exit of Global Equities and a significant reduction in Corporate and Investment Banking risk weighted assets
Deutsche Bank will exit its Equities Sales & Trading business, while retaining a focused equity capital markets operation. In addition, the bank plans to resize its Fixed Income operations in particular its Rates business and will accelerate the wind-down of its existing non-strategic portfolio. In aggregate, Deutsche Bank will reduce risk-weighted assets currently allocated to these businesses by approximately 40%.
The bank will create a new Capital Release Unit to manage the efficient wind-down of the assets related to business activities, which are being exited or reduced. These assets and businesses represented EUR 74 billion of risk-weighted assets and EUR 288 billion of leverage exposure, as of 31 December 2018.
A significant restructuring of businesses and infrastructure
Deutsche Bank will implement a cost reduction program designed to reduce adjusted costs to EUR 17 billion in 2022 and is targeting a cost income ratio of 70% in that year.
To facilitate its restructuring, Deutsche Bank expects to take approximately EUR 3 billion of aggregate charges in the second quarter of 2019, of which approximately EUR 0.2 billion would impact Common Equity Tier 1 capital. These charges include a Deferred Tax Asset write-down of approximately EUR 2 billion and impairments of approximately EUR 0.9 billion. Additional restructuring charges are expected in the second half of 2019 and subsequent years. In aggregate, Deutsche Bank currently expects cumulative charges of EUR 7.4 billion by the end of 2022.
Managing the transformation through existing resources
Deutsche Bank management intends to fund its transformation from its existing resources without requiring additional capital. This reflects the bank’s current strong capital position as well as management’s confidence in the high quality and low risk nature of the assets, which it is exiting. In connection with these decisions, the Management Board intends to recommend no common equity dividend be paid for the financial years 2019 and 2020. The bank expects to have capacity for payments on additional tier 1 securities throughout the transformation phase.
Updated capital and leverage targets
The Management Board believes that the future business mix is consistent with a lower capital requirement. After consultation with the bank’s regulators, the bank now intends to operate with a minimum CET1 ratio of 12.5% going forward. As a result of the significant deleveraging actions, the bank targets a fully-loaded leverage ratio of 4.5% by the end of 2020 rising to approximately 5% by 2022.
Improving broken internal controls
Deutsche Bank is committed to investing a further 4 billion euros in improving controls by 2022. The bank will combine its Risk, Compliance and Anti-Financial Crime functions to strengthen processes and controls while also increasing efficiency. To reshape and improve its long-term competitive position, the bank will undertake a restructuring of its infrastructure functions, which include back office systems and processes that support all business divisions. These functions will become leaner, more innovative and more digital.
A separate Technology function will be created which will have responsibility to further optimize Deutsche Bank’s IT infrastructure. It will also drive the digitalisation of all businesses. This is set to boost innovation as well as further strengthen the internal control environment. The bank will make targeted investments in technology and innovation, utilising a budget of 13 billion euros by 2022.
Of course, none of the above will come for free, and the bank will incur second quarter charges related to the restructuring described above, resulting in a pretax loss before income taxes of approximately EUR 500 million and a net loss of EUR 2.8 billion. The silver lining – if one excludes all these “one-time” charges – which is ironic for the bank which has been restructuring every quarter for the past few years – Deutsche Bank expects to report second quarter 2019 income before income taxes of approximately EUR 400 million and net profit of EUR 120 million.
As the FT notes, the new strategy by CEO Christian Sewing “signals a retreat from Deutsche’s global ambitions and its aim to be Europe’s main rival to Goldman Sachs”. Instead, one year ahead of Deutsche’s 150th anniversary, Sewing is refocusing the lender on its historic roots — financing German and European corporate clients and domestic retail banking.
As we noted previously, the bank with the €43.5 trillion in gross derivatives notional…
… will be hard-pressed to ringfence all of its toxic assets in a relatively modest €74 billion silo. What is just as notable is that the use of a bad bank, an artificial crutch that was prevalent during the financial crisis and shortly after as shown in the chart below…
… confirms that many if not most of Europe’s banks are just as challenged as they were a decade ago, and only the ECB’s actions prevented the market from grasping the true severity of the situation. Which, in a sense, is paradoxical because it is the ECB’s NIRP/QE policies that made Deutsche Bank’s historic restructuring inevitable.
Finally, the bank also said that the restructuring actions will include a workforce reduction of approximately 18,000 full-time equivalent employees to around 74,000 employees by 2022. In aggregate, the bank expects to reduce adjusted costs by approximately 6 billion euros to 17 billion euros in 2022, although pink slip details are likely reserved for a more intimate context.
Most of the job losses are set to come at the investment bank, particularly the underperforming operations on Wall Street and in the City of London. Not only the rank and file will be affected: as we reported yesterday, two top executives have already departed as part of the overhaul — Garth Ritchie, investment banking chief, and Frank Strauss, head of retail banking. Sylvie Matherat, chief regulatory officer, is also expected to leave, as are the bank’s debt chiefs Yanni Pipilis and James Davies.
While it is unclear if the bank can achieve its ambitious agenda in the next 3 years, one thing is certain – the Deutsche Bank that saw RenTec close out its counterparty exposure in recent weeks anticipating what was coming – is no more, and it remains to be seen if the “successor” will be any more successful.
Bank expects to exit its equities sales and trading business
Lender sees no dividend for this year or next amid overhaul
Deutsche Bank AG will exit its equities business and post a net loss of 2.8 billion euros ($3.1 billion) in the second quarter as Chief Executive Officer Christian Sewing seeks to boost profitability and shrink the German lender’s once-mighty investment banking unit.
The lender expects restructuring charges of 7.4 billion euros through 2022 to pay for the radical overhaul and will shelve the dividend this year and next, according to a statement on Sunday. About 18,000 jobs will be eliminated in the restructuring.
About 74 billion euros of risk-weighted assets will become part of a new non-core unit and the lender’s capital buffer will be reduced as part of the plan. The bank said it does not plan a capital increase to pay for the overhaul.
The bank said retail chief Frank Strauss and Chief Regulatory Officer Sylvie Matherat, both board members, will leave this month. The departure of investment bank head Garth Ritchie was announced on Friday.
The scale of the revamp underscores the failed turnarounds by Sewing and his predecessors to solve the fundamental problem: costs were too high and revenue too low. After government-brokered merger talks with Commerzbank AG collapsed in April, the CEO had few other options to bolster market confidence. His plan was approved by the board at a meeting Sunday.
The investment bank is a key focus of the overhaul. The unit, which accounts for roughly half of Deutsche Bank’s revenue and which was a major actor in its downfall, will be broken in two. The transaction bank will be lifted out and merged with the commercial clients segment that’s currently within the retail division, people familiar with the matter have said.
The change is designed to accelerate the shift away from acting as the first port of call for institutional clients such as asset managers and hedge funds toward selling cash management, trade finance and hedging products to corporate clients. The new division, to be lead by current transaction bank head Stefan Hoops, will be at the heart of the lender’s future business model.
In my opinion, and as i said countless times, Deutsche Bank does not even stand a chance of surviving.
The internal culture and practices are wrong and the legal liabilities are not even possible to put an estimate on.
I am afraid the bank has been belly up for years.
Francisco (Abouaf) de Curiel Marques Pereira
(CNBC) Deutsche Bank is considering cutting 15,000 to 20,000 jobs, or more than one in six full-time positions globally, the Wall Street Journal reported on Friday, citing people familiar with the discussions.
The layoffs would probably take place over more than a year and would spread across regions and businesses, the Journal said.
Top-level talks about the restructuring took place on Thursday and Friday, but no final decisions have been made, a source close to the matter told Reuters.
Deutsche Bank is completing a plan that may eliminate hundreds of positions in equities trading and research, as well as derivatives trading, as part of a broad restructuring, Bloomberg reported on Friday, citing sources.
Sources told Reuters last week that the bank plans to cut the size of its U.S. equities business, leaving only a skeleton operation in place to service corporate and high-net-worth clients.
Members of Deutsche’s supervisory board discussed those plans on a call earlier this month and agreed that large-scale cuts were necessary in the bank’s U.S. equities and rates trading businesses, Reuters reported, citing the sources.
Chief Executive Officer Christian Sewing is trying to convince investors he can turn around Germany’s biggest bank, whose shares hit a record low this month. He told investors at the annual meeting last month that Deutsche was prepared to make “tough cutbacks” at its investment bank.
P.O. … By George! It’s Deutsche Bank again! … FCMP
(NYT) Federal authorities are investigating whether Deutsche Bank complied with laws meant to stop money laundering and other crimes, the latest government examination of potential misconduct at one of the world’s largest and most troubled banks, according to seven people familiar with the inquiry.
The investigation includes a review of Deutsche Bank’s handling of so-called suspicious activity reports that its employees prepared about possibly problematic transactions, including some linked to President Trump’s son-in-law and senior adviser, Jared Kushner, according to people close to the bank and others familiar with the matter.
The criminal investigation into Deutsche Bank is one element of several separate but overlapping government examinations into how illicit funds flow through the American financial system, said five of the people, who were not authorized to speak publicly about the inquiries. Several other banks are also being investigated.
The F.B.I. recently contacted the lawyer for a Deutsche Bank whistle-blower, Tammy McFadden, who publicly criticized the company’s anti-money-laundering systems, according to the lawyer, Brian McCafferty.
Ms. McFadden, a former anti-money-laundering compliance officer at the bank, told The New York Times last month that she had flagged transactions involving Mr. Kushner’s family company in 2016, but that bank managers decided not to file the suspicious activity report she prepared. Some of her colleagues had similar experiences in 2017 involving transactions in the accounts of Mr. Trump’s legal entities, although it was not clear whether the F.B.I. was examining the bank’s handling of those transactions.
The same federal agent who contacted Ms. McFadden’s lawyer also participated in interviews of the son of a deceased Deutsche Bank executive, William S. Broeksmit. Agents told the son, Val Broeksmit, that the Deutsche Bank investigation began with an inquiry into the bank’s work for Russian money launderers and had expanded to cover a broader array of potential misconduct at the bank and at other financial institutions. One element is the banks’ possible roles in a vast money-laundering scandal at the Danish lender Danske Bank, according to people briefed on the investigation.
The broader scope of the investigations and many details of precisely what is under scrutiny are unclear, and it is not known whether the inquiries will result in criminal charges. In addition to the F.B.I., the Justice Department’s Money Laundering and Asset Recovery Section in Washington and the United States attorney’s offices in Manhattan and Brooklyn are conducting the investigations. Representatives for the agencies declined to comment.
Deutsche Bank has said that it is cooperating with government investigations and that it has been taking steps to improve its anti-money-laundering systems.
Even so, the governmental scrutiny — from regulators, members of Congress and now the Justice Department and F.B.I. — has been a drag on the bank’s stock price, which is hovering near historic lows because of investors’ doubts about its future.
The congressional investigations are focused on Deutsche Bank’s close relationship with Mr. Trump and his family. Over the past two decades, it was the only mainstream financial institution consistently willing to do business with Mr. Trump, who had a history of defaulting on loans. The bank lent him a total of more than $2 billion, about $350 million of which was outstanding when he was sworn in as president.
Two House committees have subpoenaed Deutsche Bank for records related to Mr. Trump and his family, including records connected to the bank’s handling of potentially suspicious transactions. The president has sued to block Deutsche Bank and Capital One, where he also holds money, from complying with the subpoenas. A federal judge rejected Mr. Trump’s request for an injunction, and the president has appealed that ruling.
The Justice Department has been investigating Deutsche Bank since 2015, when agents were examining its role in laundering billions of dollars for wealthy Russians through a scheme known as mirror trading. Customers would use the bank to convert Russian rubles into dollars and euros via a complicated series of stock trades in Europe and the United States.
In early 2017, federal and state regulators in the United States and British authorities imposed hundreds of millions of dollars in civil penalties on Deutsche Bank for that misconduct, but prosecutors never brought a criminal case against the bank. That led some senior Deutsche Bank executives to believe they were in the clear, according to people familiar with their thinking.
By last fall, though, federal agents were investigating a wider range of anti-money-laundering lapses and other possible misconduct at the bank.
F.B.I. agents met this year with Val Broeksmit, whose father was a senior Deutsche Bank executive who committed suicide in January 2014. Mr. Broeksmit said he had provided the agents with internal bank documents and other materials that he had retrieved from his father’s personal email accounts.
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Until his death, William Broeksmit sat on the oversight board of a large Deutsche Bank subsidiary in the United States, Deutsche Bank Trust Company Americas, which regulators have criticized for having weak anti-money-laundering systems.
Many of the bank’s anti-money-laundering operations are based in Jacksonville, Fla., where Ms. McFadden was one of hundreds of employees vetting transactions that computer systems flagged as potentially suspicious.Ms. McFadden worked in Deutsche Bank’s offices in Jacksonville, Fla. Current employees there have discussed the possibility of the building’s being raided by federal agents.CreditWillie Jr. Allen for The New York Times
Ms. McFadden told The Times that she had warned in summer 2016 about transactions by the Kushner Companies involving money being sent to Russian individuals. Other Deutsche Bank employees prepared reports in 2017 flagging transactions involving legal entities associated with Mr. Trump, including his now-defunct charitable foundation, according to current and former bank employees. In both instances, the suspicious activity reports were never filed with the Treasury Department.
Deutsche Bank officials have said that the reports were handled appropriately and that it is not uncommon for managers to overrule employees and opt not to file suspicious activity reports with the government.
There is no indication that Kushner Companies is under investigation. The company said any allegations regarding its relationship with Deutsche Bank that involved money laundering were false. A Trump Organization spokeswoman said that she had no knowledge of any Deutsche Bank transactions being flagged.
The federal Bank Secrecy Act requires financial institutions to alert the government if they suspect that transactions involve criminal proceeds or are being used for illegal purposes. Banks can face civil or criminal penalties for failing to file reports about transactions that are found to be illegal. In recent years, banks like JPMorgan Chase and HSBC have incurred such penalties.
Banks argue that when they err on the side of reporting potential problems, they end up flooding the government with false leads.
Former Deutsche Bank employees, speaking on the condition of anonymity, told The Times that the company had pushed them to rush their reviews of transactions and that managers sometimes created obstacles that discouraged them from filing suspicious activity reports.
Deutsche Bank has scrambled to toughen its anti-money-laundering procedures.
To address complaints about inadequate staffing, it brought in contractors to supplement its Jacksonville work force, although some employees said that the contractors were inexperienced and lacked the appropriate training.
Deutsche Bank also recently sent letters to hundreds of companies, warning that they could be cut off from the bank’s services if they did not swiftly provide up-to-date information about the sources of their money and the names of their business partners, according to bank employees who saw the letters. Deutsche Bank officials said the letters, first reported by the Financial Times, were part of their efforts to comply with “know your customer” rules, a crucial component of any bank’s anti-money-laundering efforts.
In Jacksonville, Deutsche Bank’s anti-financial-crime staff works in a white, three-story building surrounded by palm trees. The F.B.I. has a field office just down the road, clearly visible from the bank’s campus.
Bank employees recently have taken to joking that when the F.B.I. raids their offices, they will be able to see the agents coming.
(Reuters) Deutsche Bank is planning to overhaul its trading operations by creating a “bad bank” to hold tens of billions of euros of assets and shrinking or shutting its U.S. equity and trading businesses, the Financial Times reported on Sunday.
The bad bank would house or sell assets valued at up to 50 billion euros ($56.06 billion)- after adjusting for risk – and comprise mainly long-dated derivatives, the FT reported, citing four people briefed on the plan.
With the creation of the bad bank, Chief Executive Officer Christian Sewing is shifting the German lender away from investment banking and focusing on transaction banking and private wealth management, the newspaper said.
As part of the restructuring, the lender’s equity and rates trading units outside continental Europe will be shrunk or closed entirely, the report said.
The bank is planning cuts at its U.S. equities business, including prime brokerage and equity derivatives, to win over shareholders unhappy about its performance, four sources familiar with the matter told Reuters in May.
“As we said at the AGM on May 23, Deutsche Bank is working on measures to accelerate its transformation so as to improve its sustainable profitability. We will update all stakeholders if and when required,” Deutsche Bank said in an emailed statement on Sunday in response to the FT report.
Sewing could announces announce the changes along with Deutsche Bank’s half-year results in late July, the FT reported.
Somewhere Hugo Chavez, who several years ago successfully repatriated much of Venezuela’s gold, is spinning in his grave.
It started in March, when Venezuela’s embattled leader Nicolas Maduro defaulted on a $1.1 billion gold-backed loan with Citi, in the process losing several tons of gold placed as collateral by Venezuela’s central bank after the deadline for repurchasing them expired. Now, Bloomberg reports that Venezuela has also defaulted on a gold swap agreement valued at $750 million with Deutsche Bank, prompting the German bank to seize the precious metal which was used as collateral, and close out the contract.Maduro and a stack of 12 Kilogram gold ingots.
As part of a financing agreement signed in 2016 which we profiled here, Venezuela received a cash loan from Deutsche Bank and put up 20 tons of gold as collateral. The agreement, which was set to expire in 2021, was settled early due to missed interest payments as Venezuela has now effectively run out of foreign reserves.
It was the second time this year that the Maduro’s regime has failed to make good on financing agreements which have resulted in losses at a time when gold reserves are already at a record low. As we have noted previously, for example in “Venezuela Prepares To Liquidate Its Remaining Gold Holdings To Pay Coming Debt Maturities” Venezuela’s dwindling gold holdings had become one of Maduro’s last remaining sources of cash keeping his regime afloat and his military forces loyal. Before the central bank missed the abovementioned March deadline to buy back gold from Citigroup for nearly $1.1 billion, the Bank of England refused to give back $1.2 billion worth of Venezuelan gold.
Meanwhile, as Bloomberg reports, opposition leader Juan Guaido’s parallel government has asked the bank to deposit $120 million into an account outside President Nicolas Maduro’s reach, which is the difference in price from when the gold was acquired to current levels.
“We’re in touch with Deutsche Bank to negotiate the terms under which the difference owed to the central bank will be paid to the legitimate government of Venezuela,” said Jose Ignacio Hernandez, Guaido’s U.S.-based attorney general. “Deutsche Bank can’t risk negotiating with the central bank’s illegitimate authorities,” particularly after it was sanctioned by the U.S. government, Hernandez said, even though the military has stubbornly refused to go along with the US attempted government coup, leaving the seized gold in limbo.
While insolvent Venezuela, which defaulted on its dollar-denominated bonds in 2017, is becoming increasingly cut off from the global financial network due to sanctions, it still managed to sell $570 million in gold last month, prompting total foreign reserves to tumble to a 29-year low of $7.9 billion.
Meanwhile, Venezuela has not only become a symbol of the destructive influence of socialism and associated hyperinflation, but a case study of how to obliterate the only real hard currency left when everything else is gone: the government managed to blow through more than 40% of Venezuela’s gold reserves last year, selling to firms in the United Arab Emirates and Turkey in a desperate bid to fund government programs and pay creditors.
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!)
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.
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.
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.
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’.
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.
“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.
(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.
Exclusive: in confidential internal report seen by the Guardian, bank says scandal has hurt global brand
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.
“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.”
Christmas just came early for Maxine Waters and Adam Schiff.
As the leaders of the House Financial Services Committee and House Intelligence Committee ramp up an investigation into Deutsche Bank’s lending relationship with the Trump Organization (the first round of subpoenas has already been sent and Waters has said that DB is cooperating in the probe), Bloomberg has handed them a gift in the form of an extensive report chronicling a culture of chronic compliance failures at the bank’s US unit. At first glance, the story appears to support Waters’ claim that Deutsche is “one of the biggest money laundering banks in the country, or maybe the world.”
The report describes Deutsche’s US unit, which is headquartered inside a gleaming Wall Street tower, making it one of the few Wall Street banks still situated on Wall Street, as a “kind of legal mirage”. For years, the leaders of the US subsidiary were merely puppets, with little real power, influence or knowledge about the subsidiary’s operations. Even the distribution of bonuses was outsourced to the headquarters in Frankfurt, BBG said. Top executives couldn’t answer questions about the bank’s operations, and they had little influence over personnel decisions.
This lack of authority helped foster an atmosphere of lax compliance and AML controls, which endured even after US regulators demanded that changes be made.
After DB expanded its US presence by buying out the floundering Bankers Trust, which was mired in a scandal involving sales of shady derivatives products. But DB swiftly established a shady track record of its own:
From 1999 through 2006, it handled almost $11 billion in U.S. dollar transactions for customers in nations under sanctions: Iran, Syria, Libya, Burma and Sudan. Later, it helped rich Russians move $10 billion from their country using “mirror trades” – simultaneous stock trades in separate jurisdictions that bypassed customary hoops for transferring money.
And those were just the cases where the bank was accused of wrongdoing. Here’s a roundup of other incidents where the bank managed to escape regulatory scrutiny.
Russia’s Sberbank PJSC while the government-controlled bank was involved in a years-long scheme that funneled millions to a man in the U.S. who admitted to smuggling $65 million worth of potential nuclear technology to Russia, according to federal prosecutors;
Kenyan fraudsters who scammed U.S. income tax refunds using identities stolen from Indiana sex offenders;
and a Colombian drug cartel that received payments from the U.S. Drug Enforcement Administration as part of an undercover operation.
The payments, disguised as profits from auto-parts sales, were transferred into a Deutsche account and exhibited what a DEA undercover agent called “obvious red flags.”
Through interviews with more than a dozen former employees, as well as a review of hundreds of pages of court documents, a picture emerged of why Deutsche Bank waited so long to break off its correspondent banking relationship with Danske Bank’s Estonian branch, the epicenter for one of the biggest money laundering scandals in European banking history. JPM broke off its relationship with the unit in 2013, while BofA waited until early 2016. DB didn’t sever its ties until late in 2016.
Internal documents, court records and interviews with dozens of people – including more than 20 current and former employees of the troubled German lender – show that its U.S. unit largely resisted strict money-laundering compliance for years. The insider accounts help explain why Deutsche’s U.S. subsidiary kept handling Danske’s business after competitors quit.
Although U.S. executives routinely promised regulators they’d get tough, former staffers say such efforts were often disregarded in favor of cozy relationships with overseas customers. The suspicious billions kept flowing — not just from Danske’s Estonian branch, but from various clients that would eventually be snared in other global money-laundering scandals.
And what’s worse, the bank failed to act even after managers in the bank’s Jacksonville, Fla. office, its second-largest in the US, where most of its compliance workers were stationed, confronted executives about their concerns after more than $150 billion in suspicious funds flowed through Deutsche’s correspondent banking unit. How did the executives respond?
They told the compliance workers to shut up and worry about the work in front of them.
Years before regulators learned about what may be one of the biggest money-laundering pipelines in history, low-level bank employees in Jacksonville, Florida, sounded repeated alarms.
Compliance workers for Deutsche Bank AG flagged some of at least $150 billion in transactions that the bank’s U.S. subsidiary handled for a tiny Estonian unit of Danske Bank A/S, according to a former compliance officer.
It’s not clear how urgently the Florida team warned executives at Deutsche Bank Trust Co. Americas. But when workers sought broader scrutiny of certain clients, they got a familiar response from some higher-ups, the officer said: Shut up, focus on the transaction in front of you, file your paperwork and move on.
Moving on, BBG discussed how the leaders of the bank’s US unit repeatedly broke promises to regulators to reform the bank’s AML controls. During the 2000s, the unit was led by Seth Waugh, who was later called out by the Federal Reserve Bank of New York for making “no progress” on improving the bank’s AML controls.
Employees said Waugh’s failure wasn’t surprising. They recalled how during conversations about bank operations, Waugh often couldn’t answer questions because the real decisions were made in Europe.
When that money flow began, the chief of the German lender’s US business was Seth Waugh, a perpetually tanned executive who wore his graying hair a bit long by bankers’ standards.
Waugh pledged to regulators in 2005 that he’d overhaul the bank’s money-laundering protections. But in a 2013 letter that served as a scathing review of his tenure, the Federal Reserve Bank of New York concluded that “no progress was made” on concerns first raised in 2002.
Waugh, widely described as affable and approachable, had only limited influence over staff members’ bonuses or other personnel matters – or even key points of Deutsche’s U.S. balance sheet, according to several former colleagues. Employees say he often couldn’t answer questions about bank operations or regulatory matters because the real decision-makers were sitting in Europe.
One New York executive recalled visiting Waugh’s 46th-floor office to tell him about bonus-hungry co-workers who ignored danger signs to chase risky accounts. Waugh seemed sympathetic but said he wasn’t sure what he could do, the executive recalled.
In a sign of just how much value Deutsche placed on compliance, the bank hired a former one-star general with no investment banking experience to run the locus of its compliance operations – effectively killing two birds with one stone: Showing its peers that it was serious about hiring veterans, and hamstringing its compliance operation. In a shareholder lawsuits brought against the bank in 2016, an executive who was deposed by the investors’ lawyers said compliance staff were treated as “one step above janitors.”
In 2010, Brigadier General Michael Fleming of the Florida Army National Guard began talking to Deutsche about a new career, running its veteran-recruitment program. He got a bigger job instead: running its new outpost in North Florida.
“I really didn’t have any corporate investment banking experience at that point,” the one-star general told Fox Business Network in 2013. Fleming, who left Deutsche Bank in 2014, didn’t respond to requests for comment.
Former employees said he wasn’t a hands-on leader. Before his arrival, Deutsche executives had transferred some bank functions, including anti-money-laundering efforts, to the main Jacksonville site, several low-slung concrete buildings that surround a man-made pond in a suburban office park. It grew to become the bank’s second-largest office in the U.S., with approximately 2,000 employees working in various operations. Former compliance workers there describe a disregard for their work that emanated from New York.
Throughout Deutsche Bank, compliance staff members were considered to be “one step above the janitors,” an unnamed former executive told lawyers who filed a 2016 lawsuit against the bank. The suit, in which investors claimed Deutsche Bank misled them about the effectiveness of its anti-money-laundering efforts, was later dismissed.
But in what was perhaps the most humorous detail from the story, BBG reported on how DB’s correspondent bank would hand out “excellence awards” to clients who raised the fewest number of red flags from the bank’s automated compliance system. A Cypriot bank later accused of laundering money for terrorists received one of the awards, though DB wasn’t accused of wrongdoing.
Still, some aspects of the bank’s approach raise questions. Like other correspondent banks, it relies on a largely automated system called “straight-through processing,” or STP. That system checks names and places against government risk lists and other factors. For years, executives have bestowed an “STP Excellence Award” on customers that successfully move money through Deutsche’s system while raising the fewest red flags. The awards have sometimes gone to questionable recipients.
Cyprus-based FBME Bank Ltd. won eight of them through 2013, according to news releases. The Treasury Department later accused that bank of having weak money-laundering controls that allowed customers to conduct more than $1 billion in suspicious transactions through various correspondent accounts, including one with Deutsche Bank’s U.S. unit, from 2006 to 2014. Treasury officials said FBME helped organized crime and terror groups move money, evade sanctions and develop banned weapons. Deutsche Bank wasn’t accused of wrongdoing in the case.
Ironically, though it apparently had no problem offering banking services to criminals, terrorists and sanctioned governments, DB drew the line in 2016 when it opted not to lend more money to the Trump Organization over fears of being associated with such a controversial candidate, as well as worries about being put in the awkward position of seizing assets from the president should his company default while in office.
In summary, terrorists and criminals good, Trump bad.
FRANK RUMPENHORST | DPA | Getty ImagesPicture taken on March 17, 2019 shows the headquarters of German banks Deutsche Bank (L) and Commerzbank in Frankfurt am Main, western Germany.
Commerzbank shares rose following a report that UniCredit stands ready to make a rival bid for the bank if merger talks with fellow German lender Deutsche Bank fail.
The Financial Times, citing people familiar with the matter, reported Thursday that the Italian bank was prepared to make a multibillion-euro offer for a sizable stake in Commerzbank.
Commerzbank would be merged with German Unicredit subsidiary HypoVereinsbank, the FT reported, and the combined entity would be based in Germany while UniCredit maintains its headquarters and listing in Milan.
Shares of Commerzbank were up around 3 percent in morning trade on the back of the news.
Commerzbank declined to comment. UniCredit was not immediately available when contacted by CNBC.
While the German government’s stance on this remains unclear, it has been speculated that a Deutsche Bank-Commerzbank tie-up would be seen as favorable as it would create a domestic banking champion. A deal with UniCredit would mean a foreign lender taking control of Germany’s second-largest bank.
Commerzbank’s executive board is reportedly set to decide whether to intensify discussions with Deutsche Bank — or back away from a deal — on April 9.