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Deutsche Bank had two weird little bits of gun-jumping news today, one good(ish), one bad (just bad). The good news is that Deutsche Bank has decided that it wasn’t manipulating Libor too much:
A Deutsche Bank internal probe has found that two of its former traders may have been involved in colluding to manipulate global benchmark interest rates but there was no indication of failure at the top of the organization, three people close to the investigation said.
So … great? Those two Deutsche Bank traders can look forward to possible jail, but the buck stops with them: the board-appointed probe has exonerated the board. Ha ha ha you say, but why not? Jailable Libor manipulation by traders seems conceptually distinct from approved-by-the-Fed-and-BoE Libor manipulation for the perceived good of the financial system, and while the former is worse for the traders and submitters the latter might be worse for the top officers. At Barclays, at least, senior people were not intervening to pick up half a basis point here and there on swaps trades, but they were intervening to make themselves look pretty in the eyes of markets and Paul Tucker. And now they’re gone! At Deutsche, we don’t know what this report says, but there’s at least fake statistical evidence that DB didn’t systematically skew Libor one way or another, suggesting that the einzigen Badapfel* theory might be true, or true enough for the board not to fire itself, which is a lower bar.
The bad news is that DB announced today that it expects to announce crummy earnings next week, to the tune of EUR1.0bn/700mm of pre/after-tax net income in 2Q2012, down from 1.8/1.2bn in 2Q2011 and off ~30% from analyst estimates. This puzzled me not so much in earnings being down – what else is new, new normal, etc. – but in that we’re getting a sneak preview a week before earnings. Why do that?
I don’t know, you tell me! One answer that comes readily to hand is of the form “Deutsche Bank is constantly selling securities, and we know that it is a bad idea and maybe even insider trading to sell securities when you know that market expectations about your future earnings releases are misguided.” That theory is attractive to me – today, like most days, DB is raising unsecured funding by selling a range of structured crap including these charming “airbag yield optimization notes” which I guess should be kept away from small children when they blow up? Anyway, if you sell those when you know you’re going to announce a big earnings miss, and then you announce a big earnings miss, and those notes go down in value, then someone might sue.** (But: what did you know yesterday? If you had a pretty strong inkling yesterday that you’d miss earnings, and you sell securities every day, then what? And define strong inkling, etc.)***
Other theories are possible, including that this is an effort to get out ahead of a disappointing earnings number by cherry-picking a pretty benign explanation for it. Check out that headline to their press release: the big story this quarter is “Costs impacted by currency movements”? That is a weird reason to miss expectations, since presumably (!) analysts are aware that (1) you have employees in the UK and US, (2) you pay them in pounds and dollars, and (3) the euro is down against the pound and the dollar. Analysts are less able to predict, say, your FICC trading revenues, and I’ll just guess that those tripped them up more than your fixed personnel costs. But if you announce it this way – with no call and no details for a week – you can at least insinuate that you’re missing earnings because of the pesky euro, which is beyond your control, rather than because of weak performance or, I dunno, because you accrued $1 billion for Libor manipulation penalties. There’ll be plenty of time to talk about those things later – specifically next week – when, I suppose, the headline miss will no longer be news.
Deutsche Bank’s own Libor probe clears board – sources [Reuters]
Deutsche Bank provides preliminary update on second quarter 2012 results: Costs impacted by currency movements [Deutsche Bank]
Deutsche Bank To Reduce Risk After Profit Misses Estimates [Bloomberg]
Libor Probe Expands to Bank Traders [WSJ]
* This is where I don’t care that that’s (maybe) German for “single bath apple.”
** Though it’s unlikely for a bunch of reasons including that half the fun in structured notes like this is selling them to people who forget that their value ought to depend on your earnings power as well as the particular package of weird derivatives that they reference, or otherwise can’t replicate those weird derivatives themselves, and so are insensitive to your credit.
*** A more satisfying theory would be “Deutsche Bank is pre-releasing earnings and foreshadowing its need to bolster its capital position because it is planning to sell tons of equity, and soon,” but (1) they’re not really pre-releasing earnings, just foreshadowing them, and (2) they say they’re not doing that:
It is “good news” that Deutsche Bank plans to mitigate the profit shortfall by cutting risk, said Philipp Haessler, an Equinet AG analyst. “It seems that there is no risk of a capital increase, which would be bad for investors.”