Did Libor rigging help Deutsche Bank avoid a bailout?

Jon Macaskill

April 30, 2015

A series of reports by regulators around the German bank’s $2.5 billion fine raise more questions than answers, while serving up embarrassment to remaining senior management.

The report of the New York State Department of Financial Services as part of the multi-regulatory move to fine Deutsche Bank $2.5 billion for interest-rate fixing abuses guarantees further embarrassment for the bank's current group executive committee members.

Details provided by regulators also indicate that Libor rigging played a role in helping Deutsche Bank to avoid a government bailout during the credit crisis of 2008, and helped to keep top managers in their jobs.

The identifiers on phone and electronic message transcripts provided by other regulators – the UK’s FCA, along with the CFTC and the Department of Justice in the US – combine with the information in the DFS consent order to raise more questions about what senior Deutsche staff knew and when they knew it.

Quotes attributed to the London money markets head by the DFS and other regulators, along with the detail that he later moved to Singapore, make it clear that the trader who committed the most serious market abuse was Christian Bittar.

He left Deutsche in 2011 (and his next berth at hedge fund BlueCrest), which at least allows the bank to say that he is among the parties who have now been dismissed.

The Department of Justice said Bittar, identified as Trader 3, was owed a £90 million bonus for 2008 as part of his revenue-sharing deal, an eye-popping number that is higher than has previously been reported, even if Deutsche did not pay out all his bonuses in the end.

Let’s consider that number. It is unlikely that a trader would earn more than a 10% bonus for his desk’s revenue in any given year. So the minimum that Bittar’s desk could have generated in 2008 was £900 million. It could have been more.

Remember also that 2008 was a year when Deutsche suffered serious losses in its credit portfolios and in equities and came close to joining the ranks of banks that had to be bailed out by their governments.

Sales and trading net revenues for 2008 were negative €506 million, compared to positive €13 billion in 2007. The overall annual loss masks the scale of the losses during the fourth quarter of 2008, when the credit crisis was raging, however. Sales and trading reported losses that quarter were €4.8 billion, and Deutsche noted that credit and equity trading losses “more than counterbalanced significant year-on-year revenue growth in the bank’s money market and foreign exchange trading business”.

In its annual report for 2008 Deutsche added that “strong client business flows and favourable positioning” drove record revenues for FX and money markets to help offset losses elsewhere.

The various regulatory reports released this April show that Libor manipulation was a key part of this “favourable positioning”, which potentially kept the bank from a bailout and an overhaul of its senior management.

Forex was a bigger revenue generator than money market rates at the time, reckoned to be worth about 60% of revenues for the bank’s global finance and foreign exchange division.

So, an informed guess would suggest that Bittar’s desk was responsible for much of the rates revenues that helped partly offset the credit portfolio and equity losses.

The DoJ reported that Deutsche Bank “profited substantially” in 2008/09 from deals based on widening between one-, three- and six-month Libor, and added that “on almost every day during this time” the bank’s Libor submissions were altered to align with the trading strategy.

The prime responsibility for that strategy and its traders lay with David Nicholls, who was appointed head of global finance for Europe in December 2006 and added responsibility for FX forwards in Europe in 2007. Nicholls in turn reported to Alan Cloete, then worldwide head of global finance and foreign exchange, who remains a member of Deutsche Bank’s group executive committee and who has been co-head of Asia-Pacific for the bank since 2012.

The Department of Justice statement of facts effectively identifies Nicholls as Senior Manager 1 by use of his job titles by date, and details his receipt of an email boasting of successful co-ordination between desks in Frankfurt and London to achieve a desired rate fixing. It also cites a performance goal set for Bittar by Senior Manager 1 as increasing the relationship with Frankfurt’s money markets desk “to control the short date settings with cash and derivatives”.

Euromoney understands that Nicholls left Deutsche Bank at the end of 2012 as part of a restructuring of the management of the global FX and rates businesses. Euromoney could not reach Nicholls for comment.

The DFS consent order provides unwelcome publicity for Michele Faissola, the current head of asset and wealth management at Deutsche, and another member of its group executive committee.

Further reading

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The order notes that the then head of global rates and commodities requested a review of Deutsche’s rate setting relative to other banks in October 2008 and helpfully adds that he is now head of asset and wealth management at the bank, thus identifying him as Faissola.

There would be some irony if there were repercussions for Faissola due to Deutsche’s failure to stop rate-setting abuses for a number of years after his request, as he was not responsible for the group that traded short-term interest rates and committed the abuses detailed by regulators.

Alan Cloete, who was responsible for that group, has so far also avoided fallout, however.

Cloete and Faissola are both longstanding direct reports to Deutsche Bank’s co-CEO Anshu Jain; the culture of the global markets division headed by Jain during the period when most of the rates trading abuses took place came in for withering criticism from regulators.

That could complicate Deutsche’s attempt to portray its $2.5 billion fine in April as an end to the ramifications of its rates market abuses, just as it is battling to convince investors that the latest group restructuring headed by Jain and co-CEO Jürgen Fitschen will succeed.

Trader 3