Deutsche Bank’s $10B Scandal

Not surprisingly Matt Levine has already summarized the article in his succinct style.

https://www.bloomberg.com/view/articles/2016-08-22/mirror-tr...

If you are into Michael Lewis like books, there is a good book called the Quants that follows the path of 5 people in finance. One of them is Boaz Weinstein who became the youngest director ever at Deutsche and whose group made over billion one year as derivatives traders. The bank has been cleaning up the mess he left ever since.

It failed last years banking stress test in no small part to Deutsche's involvement in the derivatives market. The IMF just named them as the most important net contributor to systemic risks, followed by HSBC and Credit Suisse. So next time someone tells you that american banks are responsible for screwing up the world. Point them at the Germans and the Swiss :)

http://www.zerohedge.com/news/2016-06-29/imf-deutsche-bank-p...

This does not seem particularly bad to me, or maybe it is not bad at all: Russia wishes to unfairly restrict the ability of its citizens to do with their money what they please. The state itself is more of a gangster than a state in the European / American sense:

Many businesses in the Russian Federation avoid taxes by using offshore jurisdictions, such as Cyprus, for their headquarters. Rich Russians, meanwhile, often funnel their private fortunes offshore, in an effort to hide their assets from the capricious and predatory Russian state.

Going round Russian restrictions seems if anything to be positive: When the rules themselves are wrong one should not feel bad violating them.

The other day in response to an HN comment I dug up this link: http://www.institutionalinvestor.com/article/3427198/banking.... If I had a large amount of money in Russia I too would be looking for ways to get it places where it is unlikely to be seized. One does not have to closely follow the case of Khodorkovsky, or for that matter Kasparov's advocacy, to be convinced that Russia is an ill place for long-term investments.

Mostly unrelated, but this reminds me of Norbert's Gambit[0]. (A method for converting USD <-> CAD at market rates using dual-listed stocks. By other methods, Canadians face relatively high add-on fee percentages for USD<->CAD conversions.)

[0]: http://www.finiki.org/wiki/Norbert's_gambit

Money laundering != systemic instability.

While this is an interesting article it seems hard to draw a direct connection between the alleged money laundering activity described and the systemic instability created by DB's gargantuan derivatives book.

Deutsche Bank's business is to facilitate financial transactions. They are not an arm of the government and their job should not be catching criminals. Imagine if a pharmacy was held liable for selling prescription drugs to clients who hold valid prescriptions. Unfortunately, banks are increasingly required to play this role, and this is not in the best interests of their clients. Thanks to FATCA, foreign banks already regularly refuse to serve American expats abroad. The end game of all this will be increasing fragmentation of the international financial industry and higher costs for cross-border commerce and trade.

The mechanics of the Russian trades in this case reminds me of another money-making scheme that I think would be highly profitable, if morally wrong.

It goes like this: You and your friend set up two separate managed funds, but the trades you make are the exact opposite of each other. When you sell USD and buy gold, your friend sells gold and buys USD. When your friend goes long GOOGL and short AAPL, you do the opposite. The size of the trades are managed such that after a year one of the funds doubles its assets under management and the other is wiped out.

Now instead of a strategy using 2 friends over 1 year, imagine a similar strategy involving 8 friends over 10 years. After a decade you have one fund that is up 700% (and 7 funds that are down 100%). You then advertise that fund to outsiders, taking a 3% commission on all assets under management. Since the fund has such stellar results its assets under management are bound to swell enormously, and that 3% is almost pure profit.

What happen to all the rubles the buyers paid Deutsche Bank to buy the stocks? Does the bank hold on to them? It seems the scheme cannot go on forever.

$10B = scandal

$54T = "too big to fail" != scandal

> Meanwhile, the market capitalization of Deutsche Bank has become a grim Wall Street joke. This summer, Deutsche Bank, which is a hundred and forty-six years old, has been valued at about eighteen billion dollars—the same as Snapchat.

Sobering.

This is similar to the way Argentinians got money in and out of the country during 2001 and 2011. There's nothing nefarious about moving money you own.

PR piece, who is paying?

This is a really big deal. We should all be really worried that A/ folks in charge of this much of the economy are acting this way B/ our culture expects the taxpayers to bail these people out.