Deutsche Bank Probing "Misstated" Derivative Valuations After Finding "Divergences"

Tyler Durden's picture

Perhaps the single biggest reason why Deutsche Bank's stock has been drastically underperforming most of Europe's banks, in addition to its skyhigh leverage and lack of capital buffer, is the market's concern about what is hidden on its books, namely whether the bank's billions in loans and its trillions in derivatives have been marked correctly. Which is why a just released report from Bloomberg that Deutsche Bank is reviewing whether it "misstated" the value of derivatives in its interest-rate trading business, will hardly spark optimism in the bank's critical asset marking practices; the good news is that according to the report the biggest German lender is sharing its findings with U.S. authorities, according to people with knowledge of the situation.

Zero-coupon inflation swaps are derivatives that help customers bet on, or hedge against, inflation. Two parties agree to exchange a payment in the future whose size is determined by how much an inflation index rose or fell. The issue, however, is not the underlying security, but the total notional involved, which based on the DB's latest public filings, could be in the hundreds of billions (or more), and how substantial the impact on DB's P&L any variation from true market values will be.

Specifically, DB is looking at valuations on a type of derivative known as zero-coupon inflation swaps. The reason for the probe is that, as has been a recurring case with many of its peers of the last few years, the bank found valuations that "diverged from internal models" at which point it began questioning traders.

The push to finally open its books comes after CEO John Cryan's vow in February to try to resolve his institution’s legal challenges swiftly. As Bloomberg sarcastically adds, "he is still working on it." The bank has been facing regulatory and enforcement pressure around the world, including a money-laundering investigation tied to its Russia operations, inquiries into mortgage-bond trading before and after the financial crisis and charges that the bank colluded to help falsify the accounts of Italy’s Banca Monte dei Paschi di Siena.

More importantly perhaps is the reason why DB has decided to share its internal probe with the US, whose Justice Department asked in September for a $14 billion settlement, an amount the bank said it wouldn’t pay. The figure was big enough to unleash a selling frenzy in the stock, sending it to all time lows, leading to repeating rumored discussions with outside sources, most recently of Saudi and Chinese origina, about raising capital.

The bank last year hired Steven F. Reich as its general counsel for the Americas to help navigate its legal probes. Reich is a former official at the Justice Department and attorney for former President Bill Clinton.

Perhaps it is time for Deutsche to make some donations to the Clinton Foundation?

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Soul Glow's picture

Bear Sterns, er, I mean Deutsche Bank is fine!

AlaricBalth's picture

Deutsche Bank is reviewing whether it "misstated" the value of derivatives.

Misstated is just another word for lied.

Hillary Clinton has a habit of misstating. She sets a good example for us all.

ParkAveFlasher's picture

Wake me when Cramer starts plugging it.

BaBaBouy's picture

Bankers Gone Whild ~~~

Where Is The Physical GOLD ?

Haus-Targaryen's picture

So what?  Lets say DB cooked their books to the tune of EUR 100 billion, 500 billion, etc., etc., 

You'll have every PPT the world over step in and defend 10€ a share with wreckless abandon until the shorts can no longer make money and the longs will step back in.  

Its corrupt.  Its illegeal.  Its most definitely unethical. But the idiots running our economy will keep doing it because they can get away with it.  

American Psycho's picture

Nobody on Wall Street cares about this.  The stock should be in the gutter, but it continues to gap up thanks to rumor after rumor which started about a month ago with the 4BB DOJ settlement.  When that was shown to be false, the stock continued to rally, becauase, why not.  "The market can stay irrational longer than you can stay liquid." 

JRobby's picture

The cartel wants DB gone. They tell GOV how much to fine them based on what their mole plants tell them will wreck them. Apparently, trader moles are poisoning the well too?

Haus-Targaryen's picture

"The market can stay irrational longer than you can stay liquid." 

This is patently incorrect.  I will maintain my liquidity long after the market has regained rationality.  I short both the bond and equity markets as well as every worthless fiat ponzi scheme in the world simultaneously.  

How do I do this and maintain my liquidity.  Physical AG and AU. The most liquid asset in the world. Currently dirt cheap. 

I remember Mario Draghi once said "Make my day, short the EUR" to which I thought "I already did bitch, now you make mine."  Sure enough he is, 80 Billion a month is like a spring board.  The more that is printed the more violent the bounce-back will be.  

CJgipper's picture

Uh Oh, looking for the escape goat!

(I know, I know. I just like saying it that way for the imagery)

Creative_Destruct's picture

Try this one on the wife/significant other:

"Gee honey, I didn't lie, I simply "diverged from internal models."

Laughinggrizzley's picture

Cramer: Deutsche Bank was never in much danger  Friday, 30 Sep 2016 | 6:25 PM ET | 10:00

The report of a possible settlement between Deutsche Bank and U.S Department of Justice did not shock Jim Cramer on Friday.

"The truth is Deutsche Bank was never in that much danger. So, why was everyone pretending like this company was the German Lehman, code-name for disaster?" the "Mad Money" host asked.

Bay of Pigs's picture

The stock is back to $14.50. Its gone UP for a month straight. The low of $11.48 was on Sept 29th, so Cramer is right, so far anyway.

And yes, I loathe DB and detest Cramer as well.


swmnguy's picture

DB will be "just fine" until TPTB decide to stop propping it up, and not one second before.  That's what makes it so hard to tell what's what in the markets and overall economy these days.  Relying on Technicals and Fundamentals and the basic rules of economics is more or less pointless in the markets.  It's very telling for the "Big Picture," and is indicative of what will happen on a long enough timeline, but useless in the short and middle term.

Dead Canary's picture

Don't sell your Douche Bank! That's just silly. DON'T BE SILLY!

Hal n back's picture

is steven reich related to robert reich?

css1971's picture


In banking terms is management speak for "OHMYFUCKINGGOD!!JESUSFUCKINGCHRIST!!"

MK13's picture

So I have to ask, will HRC step up to fix European banking crisis when it magically appears? Would Trump? That's the crux of this election as well. Down you go cleptocratic and socialist EU.

Suleyman's picture

"Nixon, briefed on the problems faced by Italy after sterling’s devaluation in 1972, could not have been less bothered. “I don’t care. Nothing we can do about it,” he said. “I don’t give a shit about the lira.”"

Jim Rickards, Currency Wars



Raffie's picture

Just do the BAIL INs.. we all know they want to do it.

Just getter' done.

deKevelioc's picture

Yeah, what a shit hole of a bank.  Creeps.

GunnerySgtHartman's picture

"Mis-stated" my ass.  More like obfuscated ...

Bill of Rights's picture

Stock should rise $10 bucks on this news


ANestIOS's picture

you think they might find that their emissions figures were doctored too?

AND what do the german citizens think about their giants of banking and industry?

gregga777's picture

Deutsche Bank marks its derivatives to fantasy. What could possibly go wrong?

williambanzai7's picture

I remind again that the former General Counsel of DB was appointed Chief of Enforcement at Obama's SEC and is now back in private practice.

gregga777's picture

The US SEC (US Swindlers Excuse Commissars) is Obamaed up (f***ed up).

gregga777's picture

Wake when the SHTF and all these banking gangster criminals are swinging from lampposts.

GoldHermit's picture

Let me guess - they were overvalued!?!

Last of the Middle Class's picture

misstated derivative valuations! Lied and sold fucking air to investors! Which is more accurate?

RawPawg's picture

start looking for eraser residue around the total lines

EmployedMillenial's picture

Aaaaaaaaaaaaaaaaaaaaaaaaaaand its gone.

css1971's picture

I've been warning some of my german colleagues... The denial is strong.


RagaMuffin's picture

Got to be a movie in here somewhere. "DB does Divergence". "DB deepthroats Divergence"......."DB DOJs Divergence,,,"DOJ does DB" ;-)

Paul Morphy's picture

This is DB beginning to justify why it can't pay DOJ $14 billion fine.

DB is broke.

Or as we say here in Ireland "All fur coat, but no knickers"


Mungo9000's picture

Only yesterday DB was saying they were looking to pay bonuses in equity rather than cash... which to me sounds like they're run out of money again. If you can't afford to pay your staff then you're broke (amiright?)

Then today they say they've discovered, "valuations that diverged from internal models," and I find myself asking, who the fuck doesn't see what's coming?

Christ on a bike, this turkey is fucked and stuffed, yet there are people out there still holding onto shares? Are they fucking stupid? 

LadiesLoveCoolJames's picture

Not stupid. If you believe in the American model of propping up failed banks and letting all the CEO's walk around like they saved the world. Would've been a great deal to buy all bankrupt US bank stocks just before the Fed miracled them to profits. Not sure if the Germans could ever approximate the appalling smugness of the their American counterparts.

vegas's picture

Fraudulent, covered up with managements blessing, derivative trading losses = "diverged from internal models". You simply can't make this shit up. George Orwell call your office immediately.

Dragon HAwk's picture

I don't think that word 

Misstated  means what you think it does

think of cooking something so long and hard, it Burns.

youngman's picture

You learn that in Goldman 101..if you cant fudge the dont make the bonus

Cthonic's picture

zero-coupon inflation-indexed swaps - some of the easiest instruments to model.  if they can't value those properly, they have no business messing with any derivatives.  whtat's the size of their book again?  $75 trillion?   lot's o' luck, counterparties.

jewish_master's picture

DB is the EU and the EU is DB. it wont fall until politcally the EU dissolve. theyll use every ounch of wealth (money printing) from italy and spain and france to prop it up. its  the j p morgan of europ , its a gov entitiy of the NWO. through it they control interest rates

tlnzz's picture

You people at ZeroHedge keep mis-spelling Deutsche Bank. It's DOUCHE BANK.

The Bell Rang's picture

Well, i believe they report earnings tomorrow, so we will see.

nakki's picture

Gotta love mark to fantasy OTC options. That's where both the buyer and the seller have winners in their P&L. They're whatever we say they're worth until reckoning day.

_ArC_'s picture

Here we go again...Just fucking crash already! My popcorn is getting stale!

NoWayJose's picture

The beauty of derivatives is that many have unlimited liability!