On Thursday, April 23rd, the U.S. Commodity Futures Trading Commission (CFTC) and UK regulators announced a settlement with Deutsche Bank regarding the long-standing rate-fixing scandal. The statements from the regulators say that Deutsche Bank engaged in acts of false reporting and attempted manipulation, and succeeded in manipulating the London Interbank Offered Rate (LIBOR) for the U.S. Dollar, Yen, Sterling and Swiss Franc. DB and other perpetrators also manipulated the Euro Interbank Offered Rate (Euribor), interest rate benchmarks.
Deutsche Bank agreed to pay a civil monetary penalty of $800 million as a part of the settlement with the CFTC, and another $1.7 billion to UK regulators for total of $2.5 billion. The bank also agreed to a cease and desist from its legal violations, and put policies in place to guarantee the integrity of its LIBOR and Euribor in the future.
Statement from CFTC Enforcement Director
The CFTC Director of Enforcement, Aitan Goelman, noted in a statement released Thursday: “Today’s action against Deutsche Bank reflects the CFTC’s unwavering commitment to protect the integrity of critical, global financial benchmarks from profit-driven traders willing to falsify market information to gain an edge over others. As reflected in the CFTC’s findings and the $800 million penalty imposed, Deutsche Bank’s culture allowed such egregious and pervasive misconduct to thrive. We will be relentless in continuing to investigate and bring benchmark manipulation cases until such time as those involved in setting these benchmarks get the message that manipulation will not be tolerated, and the public can be confident in the integrity of these benchmarks.”
More on Deutsche Bank settlement
The regulators highlight that from at least 2005 through early 2011, Deutsche Bank employees routinely considered other Deutsche Bank traders’ derivatives trading positions, as well as their own cash and derivatives trading positions, when determining the bank’s LIBOR and Euribor submissions. This self-serving conduct of Deutsche Bank’s submitters, traders, desk managers, and at least one senior manager, was pervasive, occurring across multiple trading desks and offices all across the globe.
The statements on the settlement also point out that the long-term misconduct produced significant revenues for Deutsche Bank, especially during the financial crisis of 2007 through 2009. Finally, Deutsche Bank permitted submitters and traders to prioritize profit motives over legitimate submission factors, encouraged a culture of trader self-interest and created conflicts of interest that allowed the misconduct to occur.
RBC notes that the majority of this fine will not be tax deductible and that the consensus was looking for EUR730 million of litigation costs in the first quarter, far lower than the $2.5 billion the mega-bank was forced to cough up.
Analysts from Morgan Stanley note the hit on earnings and state:
“This takes our EPS 10-15% below consensus in 2016 & 2017, despite being ahead for 2015 on stronger markets. Our work suggests Deutsche Bank has only grown book value 1% pa since 2007 vs 10% at Goldman Sachs. Whilst we hope the worst is behind us, we think DB may see just 5% TBVPS growth to 17e. We are also well below the street on DPS prior to asset sales.”
SocGen analysts believe this could just be the beginning and state (also see chart below).
LIBOR will be followed by FX and RMBS While a more optimistic view is that a line has been drawn under a major litigation concern, we take the more bearish view that this is just the first of three major litigation issues to be resolved in 2015 for DBK. Our concern is that the aggregate fines are quite likely to be much higher than the consensus for litigation costs, as we show on page 2. We think it is reasonable to assume a fine of €1.5bn for FX ‘rogue trading’ (in line with banks that are more deeply impacted by the issue). For RMBS/CDO misselling, we show how DBK could be fined a potential $4.7bn (€4.4bn) by the US DoJ.