Currency Probe A Break in the Clouds at Deutsche Bank

Deutsche Bank, beset by lawsuits and struggling with an unpopular restructuring, is expected to be spared a fine in punishments being meted out this week for currency market exchange rate manipulation.
Deutsche Bank's Anshu Jain can smile as his bank has escaped the worst of it in a currency-fixing scandal. Not smiling (clockwise): Axel Weber of UBS, Jamie Dimon of JP Morgan, Ross McEwan of RBS and Antony Jenkins of Barclays.

It hasn’t been the best of years for Deutsche Bank, legally speaking. It’s been fined a record $2.5 billion, or €2.2 billion, for its role in the Libor interest-rate fixing scandal and its co-chief executive Jürgen Fitschen is on trial in a Munich court.

But Germany’s biggest commercial bank can draw some comfort from being on the sidelines in at least one major legal case – a currency market manipulation scandal that has engulfed some of its major global rivals and could be settled later this week.

Deutsche Bank wasn’t among the “worst of the worst” offenders, one source close to the investigation said at the end of last year, when Britain’s Financial Conduct Authority and two U.S. regulatory authorities handed down the first fines to banks involved in fixing exchange rates around the world.

And Deutsche Bank will likely not be on the latest list of banks reaching multi-billion-dollar settlements in the case. The fines are expected to be announced as soon as Wednesday.

Financial sources said the settlements will total over $5 billion, most of which is expected to consist of fines imposed by the U.S. Department of Justice against five of the world’s largest banks: the U.S banks Citigroup and JP Morgan, Britain’s Barclays and Royal Bank of Scotland, and Switzerland’s UBS.

That doesn't necessarily mean Deutsche Bank will escape unpunished – a separate investigation into the German bank's activities in exchange rate markets is ongoing.

It’s not clear whether Deutsche is completely off the hook. New York’s banking watchdog is investigating whether Deutsche Bank used an algorithm for tricking in its foreign exchange operations.

People familiar with the matter said all five banks will have to plead guilty and pledge to refrain from any further wrongdoing for the next three years or face criminal prosecutions that could put the banks’ existence at risk.

The banks involved declined to comment.

Last year six banks had already paid a total of $4.3 billion to end the probe by the British regulators as well as two U.S. authorities and Switzerland’s Financial Market Supervisory Authority. The U.S. Justice Department ran a separate investigation that is now near conclusion.

Financial sources said UBS will get off more lightly this week because it alerted authorities to the rigging in foreign exchange markets. Britain’s Barclays will probably face the biggest single fine. It recently hiked its provisions for possible legal payouts to more than 2 billion pounds sterling, or €2.8 billion, mainly to cover the exchange-rate rigging case.

 

A Guide To Currency Manipulations-01

 

Deutsche Bank’s absence from the list should come as some relief to the bank, given that Mr. Fitschen, its co-chief executive, is on trial in a Munich court accused of giving misleading evidence in connection with the 2002 collapse of the Kirch media empire.

The Munich trial, the Libor fine and accusations of “systemic” misconduct at the bank in connection with the Libor case have been a damaging distraction at a time when Deutsche’s management needs to focus on the strategic overhaul it announced last month.

The overhaul, one of the largest restructurings the bank has ever undertaken, includes drastic cutbacks in its investment banking and retail operations designed to boost its profitability and capital base.

But it’s not clear whether Deutsche is completely off the hook. At the end of last year it emerged that New York’s banking watchdog, the Department of Financial Services, led by Benjamin Lawsky, was checking whether Deutsche Bank used an algorithm for tricking in its foreign exchange operations.

“Call me legend. Front-run legend,” one trader wrote, according to chatroom transcripts.

The investigation may yet reveal that Deutsche Bank is implicated. Mr. Lawsky is known as a tough investigator.

Financial sources said that so far, there is nothing to suggest there were irregular activities at Deutsche Bank in big currencies like the euro or the dollar. But the sources added that there may have been irregularities in trades in emerging markets' currencies like the Russian rubel and the Argentinan peso.

In the course of an internal investigation, the bank fired or suspended six members of staff who may have played a role or had come to attention through unsuitable comments in chat forums.

Deutsche Bank said in a statement: “We are cooperating with the investigating authorities and will if necessary take disciplinary measures against individual staff members.”

The forex scandal involved foreign exchange dealers using their knowledge about their clients’ planned buy or sell trades to generate profits for the bank. It’s called front-running in banker’s jargon, and a number of dealers made no secret of the fact that they were engaging in it.

“Call me legend. Front-run legend,” one trader wrote, according to chatroom transcripts in which employees at Switzerland’s UBS boasted to colleagues at other banks about their foreign exchange manipulation. The chat groups that communicated about it had names like “The Cartel.”

Those chats are the main source of evidence that financial regulators worldwide have used in their investigation into the currency trading manipulaton.

UBS had hoped to be able to avoid another guilty plea after its cooperated with authorities to shed light on the practices. The Japanese subsidiary UBS Securities had already been forced into a guilty declaration in 2012 in the scandal over rigging important reference rates like Libor and its Japanese equivalent Tibor.

But regulators have become increasingly reluctant over the past few years to let banks off easy. High fines for past sins are fast becoming the norm, said analysts.

“Any fine below one billion dollars would be a non-event,” said Andreas Venditti, an analyst at Switzerland’s Bank Vontobel.

This week’s fines may not be the last. The cartel authority of the European Commission, the E.U.'s executive body, hasn’t concluded its own investigation yet. And there are civil lawsuits pending.

For UBS President Axel Weber, the former head of Germany’s Bundesbank central bank, his bank's new guilty plea will likely come as he is named “Banker of the Year 2014” this week, an award bestowed by the “Group of 20 + 1,” an association of international business journalists.

“Under his leadership the crisis-plagued bank was restructured and is now well positioned again,” the group wrote in its justification for picking Mr. Weber.

His track record at UBS has been solid. He aborted the unsuccessful bid to catch up with the U.S. investment banks and refocused the bank on asset management. And he made sure that the bank cooperated swiftly and comprehensively with authorities in the Libor scandal.

As a result, the E.U. Commission waived its planned fine of €2.5 billion.

But he will be annoyed at this week’s fine and at the accusation by the Swiss banking watchdog, Finma, that the bank wasn’t rigorous enough in cleaning up its act. He knows UBS can’t afford another scandal if it wants to mend its reputation.

 

Michael Maisch is Handelsblatt’s deputy financial section editor in Frankfurt. Katharina Slodczyk covers the financial sector for Handelsblatt from London. To contact the authors: [email protected], [email protected] and [email protected]