It is amazing what a few short months of intense regulatory scrutiny, a few multi-billion fines, and the occasional janitorial arrest can do to fraudulent bank business lines. First, recall that as we showed a week ago, and as we have been saying for the past five years, banks were recently "found" to manipulate, in a criminal sense, pretty much everything [12]. Then recall that yesterday the European Union lobbed the biggest monetary fine [13]in history against bank cartel behavior, with the guiltiest party, at least based on monetary amounts, being Deutsche Bank. So now that outsized profits as a result of illegal "trading" become virtually impossible to procure, what is a self-respectable criminal enterprise to do? Why shut down all formerly infringing lines of business of course. Which is what Deutsche Bank just did, which announced a few hours ago that it has pulled the plug on its global commodities trading business, cutting 200 jobs in the process (200 jobs that will certainly be able to find a job in a jurisdiction where criminal trading behavior is still not as intensely scrutinized).
Germany's largest bank (whose total notional derivative exposure relative to German GDP has to be seen to be believed [14]), which was one of the top-five financial players in commodities, will cease energy, agriculture, base metals, coal and iron ore trading, it said in a statement. What will DB keep? Drumroll: only precious metals alongside a limited number of financial derivatives traders. Because one always need to be able to sell "paper-backed" gold derivatives in order to keep the price of gold low while the NY Fed keeps procuring the hundreds of tons of physical gold demanded by the Bundesbank. That, and of course, because gold is the only product in the history of banking to have never been manipulated.
Reuters has more [15]:
The cuts are expected to largely fall on its main commodity desks in London and New York.
The move comes as the financial sector's role in commodity trading has been squeezed by lower margins, higher capital requirements, and growing political and regulatory scrutiny of the role of banks in the natural resources supply chain.
DB's justification for the shutdown is quite amusing:
"This move responds to industry-wide regulatory change and will also reduce the complexity of our business... The decision to refocus our commodities business is based on our identification of more attractive ways to deploy our capital and balance sheet resources," said Colin Fan, co-head of Corporate Banking & Securities at Deutsche Bank, in a statement.
Such as mortgage orgination? Just kidding. It's not as if anyone even pretends banks are anything more than just taxpayer-backed hedge funds.
Then again, Deutsche had figured out which way the wind blows as long as a year ago, when the head of global commodities trading David Silbert suddenly picked up and left:
Deutsche Bank was among the first financial firms to try and challenge the long dominance of Goldman Sachs and Morgan Stanley in commodities trading a decade ago, but suffered a series of ups and downs and personnel changes over the years, including the departure of global chief David Silbert a year ago.
Silbert's departure was the first sign that the bank was withdrawing from the one-time billion-dollar business, which had included a substantial U.S. and European power and gas book, a major market-making operation in oil options, and base metals trading.
"Silbert built up Deutsche Bank's commodity group to make it a top five contender in the space of five years and then left rather than pull down the house he built," said George Stein, managing director of New York-based recruiting firm Commodity Talent LLC.
"The destruction of the commodities business at Deutsche Bank is one more sign that the large global banks no longer see commodities as viable," Stein added.
As for everybody else...
The bank announced the decision to staff at a meeting shortly after lunch on Thursday, with around half the 200 traders affected clearing their desks and leaving immediately, according to a person familiar with the matter.
Supposedly these are the traders at high risk of being subpoenaed and with whom DB wants to cut ties as quickly as possible, so as to be able to claim full ignorance of all their actions (see: every other bank in history).
Finally, DB's loss is someone else's gain.
Not all banks are scaling back in the sector, however. London-headquartered Standard Chartered, which does a lot of its business in emerging markets, said this month it plans to double revenues from its commodities business in the next four years and plans to add 10-20 staff to its existing team of 100 in the next six months.
Global commodity merchants such as Vitol, Glencore and Mercuria, which are not as affected by growing regulation, are also looking to step into the vacuum left by the big U.S. and European financial heavyweights. Asian-Pacific and South American banks, including Australia's Macquarie and Sao Paulo-based BTG Pactual, are also expanding their commodities businesses.
Then again, since these far smaller and non-government backed entities will hardly have the balance sheet to suppress commodity prices either up or down, even as equities trade in Bernanke's lala land, commodities may soon become the only market with some semblance of normalcy.