How Deutsche Bank Made a $462M Loss Disappear
bloomberg.com
How Deutsche Bank Made a $462M Loss Disappear
1–10 of 55 posts
Re: How Deutsche Bank Made a $462M Loss Disappear
#2I wrote my feelings about how Deutsche got into this mess here. I think its still a valid take on how things unraveled.
https://news.ycombinator.com/item?id=13047056
> Essentially, the trade had little economic purpose—only an accounting one.
Yep, that's one of the first things you learn about when you take any kind of trading course. At a lower level in the cash equity markets you have something similar with wash trades.
The rule of thumb has always been, did you swap any risk, if not then consider you may have done something dubious, not always, but its a very good first pass.
> This month the bank agreed to pay $7.2 billion to resolve a U.S. probe into its subprime mortgage business, admitting it misled investors. Deutsche has paid more than $9 billion in further fines and settlements related to claims of tax evasion; violating sanctions against Iran, Libya, Syria, Myanmar, and Sudan; rigging the $300 trillion Libor market; and other alleged breaches of the law.
I think this is going to be the new normal for banks from now on until they get completely out of trading an market making, which is probably going to be never.
It's very hard to police a world wide distributed teams, who have many conflicting views, all of who get paid based on what they produce and don't have much long term incentive to see things any other way.
I mean, in this case even the risk team singed off on it. What more could a CEO do. At some level you have to trust your people to make money and do it without breaking the laws of every country you do business in, even if those laws can conflict.
Having said that, Deutsche bank is one bank that keeps coming up when fines and abuse in the baking system are in the news.
They allegedly wrote famed hedge fund Renaissance Technologies their infamous basket option put that let RenTech claim that its short term trades were actually long term captial gains instead by virtue of them owning the put written by the bank that just happend to include every single short term trade Rentech did over the year.
Deutsche got paid handsomly for writing the put and RenTech got the cliam long term capital gains vs short term capital gains.
https://www.bloomberg.com/news/articles/2014-07-21/renaissan...
Side Bar:
I've said this before, but when the tell all book about RenTech is written, their genius will be confirmed but I think you'll find they did alot more shady things like the above to juice their returns.
Re: How Deutsche Bank Made a $462M Loss Disappear
#3I wrote my feelings about how Deutsche got into this mess here. I think its still a valid take on how things unraveled. https://news.ycombinator.com/item?id=13047056 > Essentially, the trade had little economic purpose—only an accounting one. Yep, that's one of the first things you learn about when you take any kind of trading course. At a lower level in the cash equity markets you have something similar with wash tr…
At some level you have to trust your people to make money and do it without breaking the laws of every country you do business in, even if those laws can conflict.
I have the sense that in many of these cases, the laws actually don't conflict. That is, they did things that are illegal in every country they do business in, and that's without even touching SarbOx.
Re: How Deutsche Bank Made a $462M Loss Disappear
#4I wrote my feelings about how Deutsche got into this mess here. I think its still a valid take on how things unraveled. https://news.ycombinator.com/item?id=13047056 > Essentially, the trade had little economic purpose—only an accounting one. Yep, that's one of the first things you learn about when you take any kind of trading course. At a lower level in the cash equity markets you have something similar with wash tr…
>"It's very hard to police a world wide distributed teams, who have many conflicting views, all of who get paid based on what they produce and don't have much long term incentive to see things any other way."
Why is this hard for management to police their own departments? Other industries manage distributed teams just fine. I agree with your other points in that passage.
The real issues is that there exists a culture a criminality with little little fear of consequences. jail. The only way that's going to change is to start holding individuals accountable.
>"I mean, in this case even the risk team singed off on it. What more could a CEO do?"
Verify? These CEOs have insane compensation packages. They make more in a year than most people will in a lifetime. When questions about their insane pay packages arise, the party line always seems to be that they are worth it because they are "that good."
If they are that good then more should be expected of them. They should be conducting independent audits - "trust by verify" or do some innovating in the area of compliance. Their M.O. is always to blame someone else, the buck never stops with them.
Re: How Deutsche Bank Made a $462M Loss Disappear
#5I wrote my feelings about how Deutsche got into this mess here. I think its still a valid take on how things unraveled. https://news.ycombinator.com/item?id=13047056 > Essentially, the trade had little economic purpose—only an accounting one. Yep, that's one of the first things you learn about when you take any kind of trading course. At a lower level in the cash equity markets you have something similar with wash tr…
>"It's very hard to police a world wide distributed teams, who have many conflicting views, all of who get paid based on what they produce and don't have much long term incentive to see things any other way." Why is this hard for management to police their own departments? Other industries manage distributed teams just fine. I agree with your other points in that passage. The real issues is that there exists a cultur…
Companies don't want to police their own departments. This is how lots of modern companies deal with laws they don't like. They commit to obeying the law, tell everybody not to do anything illegal, but at the same time place requirements and expectations on the peons that force them to break the law. Then the peons get caught, they tell everybody how it's not their fault, they told everyone not to do that. The peons get fired or worse, the company hires replacements, tells them not to break the law, gives them unrealistic expectations, and the cycle repeats.
Re: How Deutsche Bank Made a $462M Loss Disappear
#6There is a subtle historical irony on this deal happening with an Italian bank.
Italian banking, including the bank in question, got its start back in the middle ages by getting around prohibitions on usury with similar "guaranteed to lose" bets on currencies. The bank would give the borrower money in one currency now, and the borrower would give the bank back a different sum of money in another currency in 6 months. Given currency fluctuations, it was theoretically possible for the bank to lose the bet. Given the sums involved, this was very unlikely to happen in practice.
(Jews had the same commandment against usury, but interpreted it to only apply to other Jews. They could lend to Christians all that they liked, and did. That is where the connection between Jews and moneylending got its historical start.)
A lot has changed in the intervening centuries. The prohibition on usury was dropped, first by the Protestants and then by the Catholics during the counter-reformation. Banks have been regulated. And now the original workaround to allow loans at interest is seen as unacceptable. And so the Italian bank has been taken down by a deal that is very similar to the ones that got it started in the first place.
Re: How Deutsche Bank Made a $462M Loss Disappear
#7I wrote my feelings about how Deutsche got into this mess here. I think its still a valid take on how things unraveled. https://news.ycombinator.com/item?id=13047056 > Essentially, the trade had little economic purpose—only an accounting one. Yep, that's one of the first things you learn about when you take any kind of trading course. At a lower level in the cash equity markets you have something similar with wash tr…
>"It's very hard to police a world wide distributed teams, who have many conflicting views, all of who get paid based on what they produce and don't have much long term incentive to see things any other way." Why is this hard for management to police their own departments? Other industries manage distributed teams just fine. I agree with your other points in that passage. The real issues is that there exists a cultur…
People legitimately disagree about value. Investment horizon is a large factor. Two teams can do the opposite side of a trade and both profit on different horizons. Usually the agreement or disagreement is statistical, executed by a program in small fractions of a second. There is almost always some noise involved at the exchange, sometimes even some intentional randomness. It's not the same as getting people talk to each other about a project.
Re: How Deutsche Bank Made a $462M Loss Disappear
#8Earlier quoted context omitted.
>"It's very hard to police a world wide distributed teams, who have many conflicting views, all of who get paid based on what they produce and don't have much long term incentive to see things any other way." Why is this hard for management to police their own departments? Other industries manage distributed teams just fine. I agree with your other points in that passage. The real issues is that there exists a cultur…
Companies don't want to police their own departments. This is how lots of modern companies deal with laws they don't like. They commit to obeying the law, tell everybody not to do anything illegal, but at the same time place requirements and expectations on the peons that force them to break the law. Then the peons get caught, they tell everybody how it's not their fault, they told everyone not to do that. The peons…
The leaders need an incentive to ensure the law is followed.
Re: How Deutsche Bank Made a $462M Loss Disappear
#9Earlier quoted context omitted.
>"It's very hard to police a world wide distributed teams, who have many conflicting views, all of who get paid based on what they produce and don't have much long term incentive to see things any other way." Why is this hard for management to police their own departments? Other industries manage distributed teams just fine. I agree with your other points in that passage. The real issues is that there exists a cultur…
Companies don't want to police their own departments. This is how lots of modern companies deal with laws they don't like. They commit to obeying the law, tell everybody not to do anything illegal, but at the same time place requirements and expectations on the peons that force them to break the law. Then the peons get caught, they tell everybody how it's not their fault, they told everyone not to do that. The peons…
Wow I was downvoted for saying that management needs to be held accountable for criminality?
The cycle repeats because there is no disincentive to stop it. How many people went to jail after the 2008 crisis? I think you could count them on one hand and still not use all you fingers. Nobody will go to jail for Wells Fargo fraud either.
Re: How Deutsche Bank Made a $462M Loss Disappear
#10Earlier quoted context omitted.
>"It's very hard to police a world wide distributed teams, who have many conflicting views, all of who get paid based on what they produce and don't have much long term incentive to see things any other way." Why is this hard for management to police their own departments? Other industries manage distributed teams just fine. I agree with your other points in that passage. The real issues is that there exists a cultur…
People legitimately disagree about value. Investment horizon is a large factor. Two teams can do the opposite side of a trade and both profit on different horizons. Usually the agreement or disagreement is statistical, executed by a program in small fractions of a second. There is almost always some noise involved at the exchange, sometimes even some intentional randomness. It's not the same as getting people talk to…
Lets review the claims I was responding to:
"Deutsche has paid more than $9 billion in further fines and settlements related to claims of tax evasion; violating sanctions against Iran, Libya, Syria, Myanmar, and Sudan; rigging the $300 trillion Libor market'
None of these are a byproduct of programatic trading.