
Deutsche Bank’s $10B Scandal - doener
http://www.newyorker.com/magazine/2016/08/29/deutsche-banks-10-billion-scandal
======
chollida1
Not surprisingly Matt Levine has already summarized the article in his
succinct style.

[https://www.bloomberg.com/view/articles/2016-08-22/mirror-
tr...](https://www.bloomberg.com/view/articles/2016-08-22/mirror-trades-and-
tax-tricks)

If you are into Michael Lewis like books, there is a good book called the
Quants that follows the path of 5 people in finance. One of them is Boaz
Weinstein who became the youngest director ever at Deutsche and whose group
made over billion one year as derivatives traders. The bank has been cleaning
up the mess he left ever since.

It failed last years banking stress test in no small part to Deutsche's
involvement in the derivatives market. The IMF just named them as the most
important net contributor to systemic risks, followed by HSBC and Credit
Suisse. So next time someone tells you that american banks are responsible for
screwing up the world. Point them at the Germans and the Swiss :)

[http://www.zerohedge.com/news/2016-06-29/imf-deutsche-
bank-p...](http://www.zerohedge.com/news/2016-06-29/imf-deutsche-bank-poses-
greatest-risk-global-financial-system)

~~~
oxryly1
So, how _do_ they move the stock? Bags of stock certificates on international
flights? It seems that shifting stock between business units might incur taxes
or other regulatory concerns.

~~~
JumpCrisscross
> _So, how do they move the stock?_

In all likelihood, they never do. Russia Account buys $10MM of Stock in
rubles; England Account sells $10MM of Stock in pounds sterling. Presumably
England Account sold short, meaning it pays interest on its borrowed stock.
Other than that, there is no carrying cost to maintaining the arrangement.
Worst case: you deal with it if you're caught in a short squeeze.

If these securities were bought on different exchanges, _e.g._ Russia Account
bought the Russia-listed stock and England account bought the UK-listed
version, they may never be directly reconcilable. One would have to negotiate
"special delivery" off exchange with willing counterparties [1].

Otherwise, one could demand stock certificates in Russia, mail them to the UK,
and deposit them in England Account to close out the short position. That
seems like a lot of trouble to avoid paying short interest. Worst case: after
withdrawing funds from England Account let it default on its short obligation
if the price goes up, thus leaving Deutsche Bank to sort out the mess of
reconciling England Account's loss with Russia Account's offsetting
(hopefully) gain.

[1] Actually, doing this on exchange seems sloppy. Sure, you get a bit more
liquidity. But that doesn't seem like something you'd be worried about when
putting in place a structure you expect to leave be into perpetuity. Doing
this in the private, _i.e._ un-registered securities, markets would leave less
of a paper trail and make moving the securities easier.

~~~
oxryly1
Do they ever close out their short positions? It seems like they'd quickly
wind up borrowing too much for any brokerage to help them take on more...

------
jseliger
This does not seem particularly bad to me, or maybe it is not bad at all:
Russia wishes to unfairly restrict the ability of its citizens to do with
their money what they please. The state itself is more of a gangster than a
state in the European / American sense:

 _Many businesses in the Russian Federation avoid taxes by using offshore
jurisdictions, such as Cyprus, for their headquarters. Rich Russians,
meanwhile, often funnel their private fortunes offshore, in an effort to hide
their assets from the capricious and predatory Russian state._

Going round Russian restrictions seems if anything to be positive: When the
rules themselves are wrong one should not feel bad violating them.

The other day in response to an HN comment I dug up this link:
[http://www.institutionalinvestor.com/article/3427198/banking...](http://www.institutionalinvestor.com/article/3427198/banking-
and-capital-markets-emerging-markets/bill-browder-puts-putin-on-notice-with-
expos-of-corruption.html#/.V60PVI7NATk). If I had a large amount of money in
Russia I too would be looking for ways to get it places where it is unlikely
to be seized. One does not have to closely follow the case of Khodorkovsky, or
for that matter Kasparov's advocacy, to be convinced that Russia is an ill
place for long-term investments.

~~~
rhizome
_When the rules themselves are wrong one should not feel bad violating them._

Prisons are full of people who think this; just because you don't like a law
doesn't mean it's not illegal.

Which perspective should take precedence in a functioning society?

~~~
cloudjacker
"Which perspective should take precedence in a functioning society?"

The consequences, or lack thereof.

~~~
rhizome
I don't get it, is "consequences" a perspective?

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loeg
Mostly unrelated, but this reminds me of Norbert's Gambit[0]. (A method for
converting USD <-> CAD at market rates using dual-listed stocks. By other
methods, Canadians face relatively high add-on fee percentages for USD<->CAD
conversions.)

[0]:
[http://www.finiki.org/wiki/Norbert's_gambit](http://www.finiki.org/wiki/Norbert's_gambit)

~~~
tedmiston
> Choose a reasonably liquid interlisted stock. The large Canadian banks and
> resource companies are usually good choices. The simultaneous purchase of
> such a stock in one country and sale of the same stock in the other country
> will effectively convert one currency to the other at close to the spot
> rate. The investor's cost is two trading commissions and some bid-ask
> spread, which is usually much less than the standard 1% (or greater) fee at
> a bank or broker.

That's interesting. I wonder if any of the commission-free brokers like
Robinhood allow one to carry balances in multiple currencies.

How are there no capital gains tax on the sale? Is it moot because you make no
/ minimal profit?

~~~
tacostakohashi
At least from a US capital gains perspective, that would be a wash trade.

~~~
loeg
What do wash trades have to do with capital gains? A wash _sale_ relates
primarily to capital losses, and is distinct from a wash _trade_.

------
nstj
Money laundering != systemic instability.

While this is an interesting article it seems hard to draw a _direct_
connection between the alleged money laundering activity described and the
systemic instability created by DB's gargantuan derivatives book.

~~~
paganel
They mention DB financing some businesses related to Trump at the end of the
article with no apparent connection with the rest of the story, I wouldn't ask
for too much logic from a magazine like The New Yorker. Sometimes you feel
that mainstream media has become like a 1950s western movie, where you've got
the good guys on one side and the bad guys (Putin, Trump) on the other, with
the Mexican boogeymen (terrorists) ready to pinch in at anytime.

~~~
nstj
It's a shame, because common logic and good reporting should require no real
domain knowledge.

I wish there was some more level headed mainstream commentary on financial
markets beyond what Matt Levine gets down for Bloomberg.

------
KKKKkkkk1
Deutsche Bank's business is to facilitate financial transactions. They are not
an arm of the government and their job should not be catching criminals.
Imagine if a pharmacy was held liable for selling prescription drugs to
clients who hold valid prescriptions. Unfortunately, banks are increasingly
required to play this role, and this is not in the best interests of their
clients. Thanks to FATCA, foreign banks already regularly refuse to serve
American expats abroad. The end game of all this will be increasing
fragmentation of the international financial industry and higher costs for
cross-border commerce and trade.

------
MarkMc
The mechanics of the Russian trades in this case reminds me of another money-
making scheme that I think would be highly profitable, if morally wrong.

It goes like this: You and your friend set up two separate managed funds, but
the trades you make are the exact opposite of each other. When you sell USD
and buy gold, your friend sells gold and buys USD. When your friend goes long
GOOGL and short AAPL, you do the opposite. The size of the trades are managed
such that after a year one of the funds doubles its assets under management
and the other is wiped out.

Now instead of a strategy using 2 friends over 1 year, imagine a similar
strategy involving 8 friends over 10 years. After a decade you have one fund
that is up 700% (and 7 funds that are down 100%). You then advertise that fund
to outsiders, taking a 3% commission on all assets under management. Since the
fund has such stellar results its assets under management are bound to swell
enormously, and that 3% is almost pure profit.

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ww520
What happen to all the rubles the buyers paid Deutsche Bank to buy the stocks?
Does the bank hold on to them? It seems the scheme cannot go on forever.

------
joeyspn
$10B = scandal

$54T = "too big to fail" != scandal

~~~
mwfunk
I don't know why you think the $54T is any less of a scandal. Just because the
scope of the situation necessitated a different resolution doesn't mean the
whole situation wasn't one of the biggest scandals of my lifetime.

~~~
joeyspn
Your sarcasm detector needs to be repaired... ;)

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tedmiston
> Meanwhile, the market capitalization of Deutsche Bank has become a grim Wall
> Street joke. This summer, Deutsche Bank, which is a hundred and forty-six
> years old, has been valued at about eighteen billion dollars—the same as
> Snapchat.

Sobering.

~~~
smcl
IMO the joke is that Snapchat is worth $18 billion, that is pure insanity.

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eternauta3k
This is similar to the way Argentinians got money in and out of the country
during 2001 and 2011. There's nothing nefarious about moving money you own.

~~~
distances
It is well within the rights of a sovereign country to limit capital movements
in or out of the said country, the same way the movements of a citizen can be
legally limited if deemed necessary.

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Chyzwar
PR piece, who is paying?

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late2part
This is a really big deal. We should all be really worried that A/ folks in
charge of this much of the economy are acting this way B/ our culture expects
the taxpayers to bail these people out.

~~~
a3n
Bailouts are generally far between. The problem that enables your point /A is
that the only thing that happens is that banks are fined in settlements. Since
they keep doing these things, it must still be profitable, so the fines must
just be license fees to act as they want. As such, the regulators profit from
the fines; it's probably how the regulators' lawyers can afford to be paid,
and they're probably mindful of that.

