It’s Deutsche Bank results day, and things aren't too bad (the first net profit since 2014, a fourth quarter revenue drop of just 5% in the corporate and investment bank) but the quarterly performance might not be the most important thing to think about. If you take a step back and think about the most serious issues, as Eliza Martinuzzi has, you tend to be drawn toward the balance sheet rather than the income statement. Deutsche Bank has a problem with its illiquid assets.
Irreverent commentators refer to it as “the fatberg”, because like congealed monstrosities that plague the sewer system, Deutsche's mass of illiquid assets is mainly made up of waste material and unwanted paper that should have been disposed of long ago.
We’re talking about the “Level 3” and “Level 2” assets in accounting jargon, the levels referring to the degree of assumption and modelling you have go through to get a valuation. (“Level 1” assets are those with a readily available market price). Because it was such a huge fixed income currencies and commodities (FICC) bank before the crisis – and because its leverage-hungry business model led it to build up an unprecedentedly huge inventory – Deutsche has a lot of them.
The interesting thing about the fatberg is that the assets which compose it are, according to most informed sources, not particularly bad in and of themselves. After all, unlike banks with much smaller Level 3 portfolios, Deutsche came through the financial crisis without requiring a state bailout and its trading losses were comparatively small. There are quite a lot of asset backed securities in there, but they are battle-tested and very likely to be money good. The trouble is just that there’s no market for them any more, and so they have to be valued using Deutsche’s own systems.
And those systems are ... a bit rickety. They are not, despite what a lot of people think, systematically manipulated or inaccurate. The ECB has spent a lot of last year doing onsite inspections under its “targeted review of internal models” and they did not require Deutsche to make any restatements of the value of its Level 3 assets. In all probability, the balance sheet value at which the fatberg is being carried is as close to correct as anything can be at a big bank.
But the systems are not efficient, they are not necessarily consistent and they are not necessarily joined up. They seem to need considerable intervention and TLC to produce accurate output. According to Bloomberg, Deutsche has not always been able to produce daily reports when they were requested in the past. As well as not inspiring confidence in itself, that is likely to make the regulators fear that if Deutsche’s funding ever comes under stress, it might not be able to provide the market with enough real-time transparency to allay the fears.
Ironically, this also means that the fatberg would be extremely difficult for anyone to do due diligence on, and this could well be one of the factors which has kept Deutsche independent for so long despite its falling share price. Anyone acquiring or merging with Deutsche Bank would have to effectively take the valuation of the Level 3 assets on trust, as well as assuming the risks associated with the funding market. That might be why all the talk is of a merger with Commerzbank sponsored by the German state; if you’re taking on Deutsche with all its dark spots in the trading book, you might want to have at least an implicit guarantee that you’re going to have support in the last resort.
Elsewhere in the forest, never assume your regulator is going to have a sense of humour. Standard Chartered emerging market FX traders might have found it funny to call their chatroom “Old Gits” (a very mild British profanity, presumably lost on the impressively stone-faced authors of the charge sheet), or to describe themselves as “like OPEC but poorer” and “a den of thieves”. But when you’re typing things like “I think we need an old gits meeting to discuss good ole ZAR (South African Rand) manipulation”, you ought to be aware that it’s going to look bad in a court transcript, and moving your other chatroom called “Butter The Comedian” isn’t going to raise many laughs either. The fun just isn’t there any more.
Harvard Business School has been doing detailed research into the important finance question of “should you ever accept your boss’s counteroffer rather than take a job move?”. The answer is apparently “sometimes” – the main disadvantage is that 60% of employers report that they would have less trust for you, while the main advantage is more money. (HBS Review)
The joint venture set up between JP Morgan, Amazon and Berkshire Hathaway last year with the aim of trying to get their employee healthcare costs under control is still running in stealth mode, but some detail have now leaked out as a result of a lawsuit by UnitedHealth, which wants to enforce a noncompete on one of its directors. (WSJ)
Goldman Sachs can no longer be blamed for killing turtles – the bank has discontinued single-use plastic items from its catering services (Reuters)
But GS is not so popular with a major Whole Foods supplier, which alleges it was manipulated into losing $200m during a syndicated loan transaction organised by Goldman (FT)
After the Andrea Orcel affair, Santander not only has a vacancy for CEO, it has an empty spot for the position of “number one investment banking relationship”. Tonnes of slide decks will soon be heading for Madrid (Finews)
After writing down goodwill on its Lehman and Instinet acquisitions and saying that “the limitations of the traditional balance sheet driven trading business are evident”, Nomura is launching a further review of its investment bank (Financial News)
And the plans to ban all traffic from the junction outside the Bank of England may not go ahead; good news for drivers, bad news for people in the habit of staggering back from lunches across one of London’s busiest intersections (Financial News)
22 year-old graduate's complaint about abusive interview goes viral. “I don’t want to line up with somebody who gets a kick out of attacking young women, calling them underachievers, and making them visibly uncomfortable.” (The Times)
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