Deutsche Faces $60MM Derivative Loss For Inflation Bet Gone Bad

Just two months after Deutsche Bank was fined $165 million for not only still rigging FX when its currency traders were found to still be participating in banned chat boards, but for violating the Volcker rule, the chronic German recidivist bank, whose endless criminal activity cost the jobs of the entire previous management team... has violated the Volcker rule one again. And this time the bank faces a double whammy of not only breaching the terms of its latest settlement with the Fed, but is also facing a $60 million derivative loss for a TIPS-linked trade gone bad, which also happened to frontrun its clients!

As Bloomberg reports, citing "people familiar", DB made a bet on U.S. inflation that puts the firm on course to lose as much as $60 million, While the specifics of the trade are not available, it appears to have been a TIPS-linked bet on inflation rising. As everyone, and certainly the Fed knows, precisely the opposite has happened, and it is now another humiliating mark on the face of new CEO John Cryan, as he has to explain not only why the bank broke the terms of its consent order with the Federal Reserve, which stated, and we quote... 

The consent order requires Deutsche Bank to improve its senior management oversight and controls relating to the firm's compliance with Volcker rule requirements.

... but because the loss also apears to be in major breach of that particular unit's VaR limits, suggesting not only a Volcker Rule violation but also a general lack of risk oversight.  Bloomberg confirms as much, reporting that the bank has "been examining whether Deutsche Bank traders breached risk limits on the deal" and adds that "a risk limit violation could indicate a weakness in the bank’s oversight of its traders in a business that earned about $270 million in the first quarter. "

Such a loss would be a setback for Chief Executive Officer John Cryan, who has been trying to improve the lender’s risk and operational controls that have drawn scorn from regulators around the world.

In what appears to be a laughable explanation why the prop trade was not a prop trade, Deutsche Bank reportedly "made the trade in anticipation of how clients were going to transact and isn’t expecting the bet to reverse." So not only was it a prohibited prop bet, i.e., not a hedging trade which to our knowledge is the only Volcker loophole allowed, but Deutsche bank also was actively frontrunning its clients.

That's not all.

According to Bloomberg, "in a separate case, the bank last year began a review into whether it misstated the value of derivatives used to bet on inflation, known as zero-coupon inflation swaps." We assume that will be another several hundred million hit (oddly, never a benefit) to the books when it has to be unwound.

In the first quarter, DB's fixed-income pretax profit was the result of €2.3 billion in revenue, an 11% increase on the year earlier, and as the German bank said, revenue from products tied to interest rates was “significantly higher.”  The question now - as happens virtually every quarter for Deutsche Bank - is how much of its was also illegal.

Comments

OCnStiggs Tue, 06/27/2017 - 15:22 Permalink

Just another step in the globalization of all banks into one "uuuge" global bank, run by the "Godfathers."

Merkel will bail them out but in exchange, DB will sell its soul to the Devils in Brussels. The dollar will crash by years end and the SDRs will be the new world bank of banks.

We Are The Priests OCnStiggs Tue, 06/27/2017 - 15:29 Permalink

Is that really your own personal conclusion after years of research, study, and experience, or are you just parroting Jim Rickards who is a known CIA shill and, of late, newsletter writer and creator of applied probability theory; a system to which I have yet to see Rickards score an above 50% accuracy rate in his major predictions?

In reply to by OCnStiggs

We Are The Priests OCnStiggs Tue, 06/27/2017 - 18:32 Permalink

...and, by SDR's do you mean the IMF?  Because the SDR is just a market currency that the IMF issues in order to better facilitate settlements of international trade and, therefore, is used primarily at the level of sovereigns and multi-national corps, not at the consumer level.  That alone, not to mention the notion that it's highly doubtful the global masses will easily, if at all, accept another fiat currency in place of the present dying ones, is a hole in your conclussion that I can drive a semi-tracter through.Just sayin'.

In reply to by OCnStiggs

Yen Cross Tue, 06/27/2017 - 15:25 Permalink

  The very second Draghi decides to pull back any of his QE, European bonds are going to explode in yield, and he's going to have a full blown crisis on his hands. If you look at the weekly eur/usd charts, it's obvious that that trade is due for a large pullback, also European equities and macro are going south , with the exception of Germany. [ I think the German macro is suspect] Anyhow the stronger euro isn't good for German exports.

We Are The Priests Tue, 06/27/2017 - 15:45 Permalink

60 million is nothing compared to the trillions--maybe now quadrillion--in fiat based derivatives/counterparty risk at play in the global markets.  Nonetheless, it hits DB's reserves and so, there will be some level of shock felt.  Only time will tell how far that shock reverberates into the system before either being muted, or triggering another domino.

Too-Big-to-Bail (not verified) Tue, 06/27/2017 - 15:38 Permalink

It would be very close, but I think it could be that Deutsche Bank is even slimier, bottom-of-the-swamp scum than Goldman Sachs

Albertarocks Tue, 06/27/2017 - 16:01 Permalink

Does anybody have any clue what $60MM loss means?  Because the author doesn't.  If he means "60 million dollars" then at the very least he needs to stop using the symbols for millimetres.  WTF is a 60 millimetre loss?  Talk about being confused about metric. $60 million?  How many football fields is that?  And is it in Farenheit or litres?

Albertarocks gregga777 Tue, 06/27/2017 - 20:23 Permalink

Engineering is my background, which is probably why I get pissed when people don't use the proper symbols.  Actually, the symbol for millimetres is "mm" (small case)... so I even sinned myself just to make my point.'M' is also a symbol for "million" amongst the 'normal' people who write about economics.  I'd be happy with that.  But MM is just plain stupid.... and your math is correct :-)

In reply to by gregga777

blindfaith Tue, 06/27/2017 - 16:44 Permalink

  GO BACK TO GERMANY YOU FUCKING BASTARDS.  This is how a German Bank treats it's host nation.GETTING MONEY FROM THE FED LIKE THEY ARE USA CITIZENS.  REMEMBER THEY WERE IN THE MIDDLE OF THE HOUSING MESS, GOT FREE  MONEY FROM THE FED AND LENT IT TO BLACKSTONETO BUY THE HOUSES THEY FORCLOSED ON. AND...Blackstone Wins Fannie's Backing for Rental Home Debt AgreementTHERE DID I SCREAM LOUD ENOUGH?

Herdee Tue, 06/27/2017 - 18:21 Permalink

She's an international criminal organization just like the rest. Any drug money (cocaine & heroin loot) being laundered for the CIA or is that just New York banks?