Counterparties: Deutsche’s hope and “uncomfortable change”

January 31, 2013

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Today, Europe’s biggest bank posted a $3 billion net loss, but it insists it’s embarking on “deliberate”, “uncomfortable change”. Deutsche Bank’s revenue up was up 14%, and the bank’s losses came from a €1.9 billion writedown on assets and €1 billion put aside for litigation (read: likely Libor scandal-related) costs.

But analysts, including KBW’s Andrew Stimpson, agreed that “the big thing is the capital” that the bank is amassing to comply with future regulations. DB’s Tier 1 capital ratio — the amount of money its regulators require it to hold against losses — jumped to 8%, higher than its target of 7.2%, and the stock market promptly loved it.

The WSJReuters and Bloomberg each suggest much of this capital boost was due to the bank tweaking its internal risk models — changing the way it values assets rather than, say, selling them off. To David Weidner, this kind of dial-fiddling means the bank could be reaching “the limits of financial engineering”. Dominic Elliott argued earlier this month that DB has a long way to go on its capital: “investors want big universal banks with sizable exposure to capital markets to be at around 10 percent as soon as practicable.”  (For the uber-wonky, here are the Basel guidelines for tweaking this sort of formula).

DB has been very busy lately thinking about the future: it’s shrinking and “undergoing the most radical surgery of its global peers”; it’s being asked to simulate its own breakup while possibly facing a version of the Volcker Rule; and its own executives have been actively pushing the industry’s most aggressive messaging campaign. In the bank’s earnings release, co-CEO Anshu Jain said he wants to “place Deutsche Bank at the forefront of cultural change,” a process that will take “years not months”. (Hence, the bank calling this “Strategy 2015+”, which will, likely, mean fewer employees getting paid less).

DB’s main problem, Lex writes, is more mundane: it simply needs to stop paying its employees more than its competitors. On that, Deutsche says it’s making progress. The bank deferred more compensation for senior execs, and it has eliminated multi-year bonus guarantees. Sarah Butcher finds a murkier picture — pay per employee in the investment and corporate banking division is actually up, despite variable compensation (aka bonuses), as a percentage of revenue, falling by 60% since 2006. — Ryan McCarthy

On to today’s links:

Inside network TV’s biggest musical/comedy/critically acclaimed train wreck – BuzzFeed

Long Reads
How North Dakota produced one of the world’s biggest oil booms – NYT

Chinese hackers “stole the corporate password for every NYT employee” – NYT

New Normal
Government is hurting the economy by spending too little – Ezra Klein

Welcome To Adulthood
The latest subprime boom: student loans – WSJ
FICO: Student loan bubble “simply unsustainable” – Zerohedge

Just saying that the deficit is a really big number “isn’t much of an economic argument” – Neil Irwin

White House petitions aren’t about change – Time

Regulatory enforcement is a “positive thing… to a point” – Matt Taibbi

Citi decides that Pakistan, Paraguay, Uruguay and Romania aren’t part of its consumer banking plans – Reuters

National Emergencies
America now only producing 30,000 lawyers a year – NYT

Facebook’s revenue rises 40% over last year – Facebook

5 years of writing the “Is There A Bond Bubble Coming?” story – Matt Phillips

It’s Academic
Fair wages increase productivity – Chris Dillow


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