A Glimpse At Deutsche's Riskless EUR68 Million DV01 Libor "Bet"

At the height of the financial crisis in 2008, Deutsche Bank made some extraordinarily large bets. As the WSJ reports, documents uncovered from the Libor rate manipulation investigation show huge outsized bets that would swing EUR68 million on a 1bps shift in the Libor rate that they have since been charged with manipulating. Sure enough, with regards the risk (which was large enough to be brought to management's attention), officials "dismissed those concerns because the bank could influence the rates they were betting on."

The bets (which made the bank at least $654 million) were a series of steepening trades (as opposed to outright positions) which were implicitly highly leveraged to provide the most bang for their manipulated and un-capitalized buck (and perhaps explains the fact that Deutsche had to hide a $12 billion loss during this period in order to avoid a government bailout) in what was a remarkably volatile time for these rates.


Given this scale of trade, it is evidently clear that risk control was entirely ignored (as these 'pairs' trades were not even included in the bank's Value-at-Risk calculations) and the comfort with such a 'bet-it-all-on-double-0' strategy implies everyone was in on the Libor manipulation.

As part of its cooperation with investigators, Deutsche Bank still is checking all the trades for any suspicious signs. Suspicious signs indeed... but another serious glimpse at the reality of the past (and today's - cough London Whale cough) hidden over-levered reality in banks.


Source: WSJ