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Libor Scandal: Deutsche Bank Went ‘All In’

Posted by Larry Doyle on January 10, 2013 8:51 AM |

“Investment capital goes where it’s welcome and stays where it’s appreciated.” Maine governor Paul LePage

The more information one holds, the better positioned he is to take increased risk. If that information were to include the ability to influence if not outright manipulate a game/market, then one’s risk profile —that is, the size of one’s position — is likely to really increase.

Can you imagine if you were playing the tables in Vegas and you had knowledge as to what the dealer held and what he was likely to pull, what would you do? 

Increase your bet, of course. We see a Wall Street iteration of this very scenario in news emanating from Deutsche Bank that Bank Made Huge Bet, and Profit, on Libor,

Deutsche Bank made at least €500 million ($654 million) in profit in 2008 from trades pegged to the interest rates under investigation by regulators world-wide, internal bank documents show.

At least $654 million? I would venture that the bank made multiples of that.

The Deutsche Bank documents, handed to investigators by a former employee of the bank and reviewed by The Wall Street Journal, show for the first time the scope and manner in which a bank painstakingly constructed a string of trades in hopes of profiting from small changes in various rates.

A former employee? Sounds like a whistleblower. Think the firm will deny the facts and discredit the information? If past is prologue that is exactly what we will see. Remember what Jack Welch said last year about whistleblowers, though.

The only way to deal with a whistleblower’s accusations — again, every single time and again often against your own instincts — is with a hyper-bias toward believing that the informant is onto something big.

What else do we learn from the WSJ article?

Mark Williams, a former Federal Reserve bank examiner, said the bets represented an “extremely large risk,” even for a company as big as Deutsche Bank.

The former employee has told regulators that some employees expressed concerns about the risks of the interest-rate bets, according to documents. He also said that Deutsche Bank officials dismissed those concerns because the bank could influence the rates they were betting on.

Is that right? Deutsche Bank officials? Smoking gun, folks. “Officials” does not typically connote a junior level trader or a desk clerk. “Officials” typically connote senior managers. What officials? Will we ever know? But what did the officials have to say about this whistleblower’s charge?

A Deutsche Bank spokesman said those allegations were “categorically false.”

Who do you believe? I think I will take my cue from Mr. Welch and believe the whistleblower.

So far, an internal inquiry by Deutsche Bank aimed at uncovering evidence of Libor manipulation has found misconduct by just a few individuals, people close to the bank said.

Right!!?? We are supposed to believe that? If this line were delivered by a late night comic, it would certainly arouse a pile of laughs from any audience. We heard the same from the crowd over at UBS. The Telegraph reported as much about the “officials” at UBS in writing,

Mr Orcel, who was grilled by the commission alongside chief risk officer Philip Lofts and global head of compliance Andrew Williams on the practice of Libor-rigging at the bank, maintained the scandal stemmed from a small subset of traders, and top management was unaware.

Tell me another one.

To think that a desk could ring up “at least” $654 million in a year and that senior management was not aware of EVERY detail as to how that revenue was generated is laughable. Wall Street does not work that way.

Regrettably “laughable” is also the appropriate description for the manner in which our financial regulators and judicial officials deal with these firms and executives.

Any wonder why trading volumes are down so much across most market sectors? Remember what Maine governor LePage says, ” “Investment capital goes where it’s welcome and stays where it’s appreciated.”

Navigate accordingly.

Sense on Cents/Libor Scandal

Larry Doyle

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I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.



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