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.