
How Deutsche Bank Made a $462M Loss Disappear - mrkibo
https://www.bloomberg.com/news/features/2017-01-19/how-deutsche-bank-made-367-million-disappear
======
chollida1
I wrote my feelings about how Deutsche got into this mess here. I think its
still a valid take on how things unraveled.

[https://news.ycombinator.com/item?id=13047056](https://news.ycombinator.com/item?id=13047056)

> Essentially, the trade had little economic purpose—only an accounting one.

Yep, that's one of the first things you learn about when you take any kind of
trading course. At a lower level in the cash equity markets you have something
similar with wash trades.

The rule of thumb has always been, did you swap any risk, if not then consider
you may have done something dubious, not always, but its a very good first
pass.

> This month the bank agreed to pay $7.2 billion to resolve a U.S. probe into
> its subprime mortgage business, admitting it misled investors. Deutsche has
> paid more than $9 billion in further fines and settlements related to claims
> of tax evasion; violating sanctions against Iran, Libya, Syria, Myanmar, and
> Sudan; rigging the $300 trillion Libor market; and other alleged breaches of
> the law.

I think this is going to be the new normal for banks from now on until they
get completely out of trading an market making, which is probably going to be
never.

It's very hard to police a world wide distributed teams, who have many
conflicting views, all of who get paid based on what they produce and don't
have much long term incentive to see things any other way.

I mean, in this case even the risk team singed off on it. What more could a
CEO do. At some level you have to trust your people to make money and do it
without breaking the laws of every country you do business in, even if those
laws can conflict.

Having said that, Deutsche bank is one bank that keeps coming up when fines
and abuse in the baking system are in the news.

They allegedly wrote famed hedge fund Renaissance Technologies their infamous
basket option put that let RenTech claim that its short term trades were
actually long term captial gains instead by virtue of them owning the put
written by the bank that just happend to include every single short term trade
Rentech did over the year.

Deutsche got paid handsomly for writing the put and RenTech got the cliam long
term capital gains vs short term capital gains.

[https://www.bloomberg.com/news/articles/2014-07-21/renaissan...](https://www.bloomberg.com/news/articles/2014-07-21/renaissance-
avoided-more-than-6-billion-tax-report-says)

Side Bar:

I've said this before, but when the tell all book about RenTech is written,
their genius will be confirmed but I think you'll find they did alot more
shady things like the above to juice their returns.

~~~
bogomipz
>"It's very hard to police a world wide distributed teams, who have many
conflicting views, all of who get paid based on what they produce and don't
have much long term incentive to see things any other way."

Why is this hard for management to police their own departments? Other
industries manage distributed teams just fine. I agree with your other points
in that passage.

The real issues is that there exists a culture a criminality with little
little fear of consequences. jail. The only way that's going to change is to
start holding individuals accountable.

>"I mean, in this case even the risk team singed off on it. What more could a
CEO do?"

Verify? These CEOs have insane compensation packages. They make more in a year
than most people will in a lifetime. When questions about their insane pay
packages arise, the party line always seems to be that they are worth it
because they are "that good."

If they are that good then more should be expected of them. They should be
conducting independent audits - "trust by verify" or do some innovating in the
area of compliance. Their M.O. is always to blame someone else, the buck never
stops with them.

~~~
mikeash
Companies don't want to police their own departments. This is how lots of
modern companies deal with laws they don't like. They commit to obeying the
law, tell everybody not to do anything illegal, but at the same time place
requirements and expectations on the peons that force them to break the law.
Then the peons get caught, they tell everybody how it's not their fault, they
told everyone not to do that. The peons get fired or worse, the company hires
replacements, tells them not to break the law, gives them unrealistic
expectations, and the cycle repeats.

~~~
bogomipz
Wow I was downvoted for saying that management needs to be held accountable
for criminality?

The cycle repeats because there is no disincentive to stop it. How many people
went to jail after the 2008 crisis? I think you could count them on one hand
and still not use all you fingers. Nobody will go to jail for Wells Fargo
fraud either.

~~~
bradleyjg
Downvotes happen. Maybe someone fat fingered. Maybe someone doesn't like you
because of a different post. No point in dwelling on it, and in any event
often enough it swings back later.

~~~
traviscj
Gotta give everyone their fresh, daily dose of self doubt.

------
btilly
There is a subtle historical irony on this deal happening with an Italian
bank.

Italian banking, including the bank in question, got its start back in the
middle ages by getting around prohibitions on usury with similar "guaranteed
to lose" bets on currencies. The bank would give the borrower money in one
currency now, and the borrower would give the bank back a different sum of
money in another currency in 6 months. Given currency fluctuations, it was
theoretically possible for the bank to lose the bet. Given the sums involved,
this was very unlikely to happen in practice.

(Jews had the same commandment against usury, but interpreted it to only apply
to other Jews. They could lend to Christians all that they liked, and did.
That is where the connection between Jews and moneylending got its historical
start.)

A lot has changed in the intervening centuries. The prohibition on usury was
dropped, first by the Protestants and then by the Catholics during the
counter-reformation. Banks have been regulated. And now the original
workaround to allow loans at interest is seen as unacceptable. And so the
Italian bank has been taken down by a deal that is very similar to the ones
that got it started in the first place.

~~~
otoburb
The song "Everything Old Is New Again" by Peter Allen & Carole Bayer Sager
from the 1974 album _Continental American_ seems apt.

~~~
partycoder
Like Admiral Yi Sun-sin and the turtle ships.

------
mwexler
Speigel Online had a phenomenal article (Oct 2016) about the transformation of
Deutsche from a staid German bank to a crazy highflyer.
[http://www.spiegel.de/international/business/the-story-of-
th...](http://www.spiegel.de/international/business/the-story-of-the-self-
destruction-of-deutsche-bank-a-1118157.html) is in English and is an
interesting read.

------
jaclaz
Somehow I need (as an Italian) to underline how the Monte dei Paschi di Siena
was founded in 1472 (yes, that is 20 years _before_ Columbus found America
thinking to make a new route to India) and had prospered until the new
economists/geniuses took over in the 90's.

In other words "how to make five centuries (500 years!) of experience go
waste".

------
rtpg
I'm having a hard time understanding why they could not execute this as a
simple loan? Would that not have gotten around the requirements?

My reading here is that the base mechanism of the trade was "DB gives X,
receives Y% of X over Z years".

I really wonder what % of transactions are this sort of fee-generating trade

~~~
FabHK
A loan doesn't change your profit for accounting purposes - you gain $$$ in
cash (asset), but have the same $$$ as a loan (liability) on the other side of
the balance sheet.

------
valentt
So this one investigation managed to neutralise all people at Deutsche Bank
that were doing same things that most other banks are also doing - making
highly risky semi legal investments and reaping profits. So now without those
kind of people in Deutsche Bank the have no way of competing on global markets
and will loose money while other bankers reap the benefits. Nicel done.
Congrats to American bankers.

------
prirun
Whatever happened to the "Greece crisis"? Deutsche was one of the banks on the
hook for that mess, and now you hear nothing about it. Did little ole Greece
have billions of dollars in a dusty treasure chest somewhere? All this
financial crap is a scam...

------
valentt
Now I understand what american bankers meant by saying "We won".

------
cekvenich3
They used a spreadsheet.

