Alarm! Deutsche Bank Said to Face Possible $60 Million Derivative Loss (As Hindenburg Omen Flashes Red)

Deutsche Bank is struggling with stock prices that a pale shade of levels from 2007.

Now that DB has a derivatives fiasco on their hands as well.

(Bloomberg) — Deutsche Bank AG, the German lender seeking to overhaul how it manages risks, made a bet on U.S. inflation that puts the firm on course to lose as much as $60 million, people familiar with the matter said.

The trade used derivative products tied to U.S. inflation, said the people, who requested anonymity because the details aren’t public. The Frankfurt-based lender has been examining whether Deutsche Bank traders breached risk limits on the deal, some of the people said. The case has been escalated to the bank’s supervisory board, one person said.

Such a loss would be a setback for Chief Executive Officer John Cryan, who has been trying to improve the lender’s risk and operational controls that have drawn scorn from regulators around the world. A risk limit violation could indicate a weakness in the bank’s oversight of its traders in a business that earned about $270 million in the first quarter. Just two months ago, the Federal Reserve fined the firm for failing to ensure that traders abide by the Volcker Rule, a U.S. law that restricts lenders from using their own funds to make speculative trades.

An official for Deutsche Bank in New York declined to comment.

Deutsche Bank made the trade in anticipation of how clients were going to transact and isn’t expecting the bet to reverse, one of the people said. Inflation traders buy and sell bonds linked to inflation, such as Treasury Inflation-Protected Securities, and other derivatives such as options.

In a separate case, the bank last year began a review into whether it misstated the value of derivatives used to bet on inflation, known as zero-coupon inflation swaps. The bank shared its findings with U.S. authorities, Bloomberg reported.

The German lender’s fixed-income pretax profit was driven by 2.3 billion euros ($2.6 billion) in revenue in the first quarter, an 11 percent increase on the year earlier. Revenue from products tied to interest rates was “significantly higher,” Deutsche Bank said.

Inflation?  Core prices for Personal Consumption Expenditures YoY is only 1.54% YoY and has been less than 2% since The Fed intervened in financial markets (except for Q1 2012).

I hope that DB didn’t bet on inflation rising

There are always Treasury Inflation Protected Securities (TIPS) are available.

But now the Hindenburg Omen is flashing red.



The Patsy Cline Model: Senators Said to Consider Breaking Fannie-Freddie Into Pieces

Senators Bob Corker (R-TN) and Mark Warner (D-VA) are proposing the Patsy Cline model for mortgage giants Fannie Mae and Freddie Mac.  That is, Corker and Warner are proposing that Fannie Mae and Freddie Mac fall to pieces.

(Bloomberg) -Joe Light– Two U.S. senators working on a bipartisan overhaul of Fannie Mae and Freddie Mac are seriously considering a plan that would break up the mortgage-finance giants, according to people with knowledge of the matter.

The proposal by Tennessee Republican Bob Corker and Virginia Democrat Mark Warner would attempt to foster competition in the secondary mortgage market, where loans are packaged into bonds and sold off to investors, said the people.

Corker and Warner’s push to develop a plan marks Congress’ latest attempt to figure out what to do with Fannie and Freddie, an issue that has vexed lawmakers ever since the government took control of the companies in 2008 as the housing market cratered.

The lawmakers’ plan is still being developed, and a Senate aide who asked not to be named cautioned that no decisions had been made on any issues.

The stakes of changing the housing-finance system are enormous. Fannie and Freddie underpin much of the mortgage market by buying loans from lenders, wrapping them into securities and providing guarantees in case borrowers default.

Together, the companies back more than $4 trillion in securities.

Bear in mind, the motivating factor in any Fannie/Freddie construction is the preservation of the 30 year, fixed-rate mortgage that Fannie and Freddie purchase from lenders. But do we need the 30 year fixed-rate mortgage? 

Currently, the percentage of mortgages that are adjustable rate mortgages in terms of volume is only 8.5%.

The idea behind breaking up Fannie Mae and Freddie Mac into smaller pieces is to create more competition. But it also creates more infrastructure. And would it be regionally-based by the already existing Federal Home Loan Banking system? Now FHFA, the current GSE regulator, would have to regulate n+? additional GSEs (government sponsored enterprises). Just to keep the 30 year fixed-rate mortgage as the primary mortgage product (the US has a higher percentage of fixed-rate mortgages than any other country).

As of 2010, the US had 95% 30 year fixed-rate mortgages in their economy.

Perhaps another Patsy Cline tune sums up the Corker-Warner plan: Crazy.

Home Prices Continue To Rise (+5.67% YoY) As Borrower Demand Cools And Banks Ease Credit

The Case-Shiller 20 metro index of repeat-sales home prices is out for April (although it is almost July).  The index rose 0.28% in April MoM. And the composite index rose 5.67% YoY.

The biggest “winner” for home price growth? Seattle at 12.9% YoY. The slowest growing city? Cleveland at 3.4% (although Washington DC and New York are close at 3.6% and 3.8%, respectively).

This comes on Fannie Mae’s sobering report that purchase mortgage demand has dropped to the lowest reading in the past year.

And credit standards are expected to loosen, at least for GSE eligible loans.


US Treasury 30Y-5Y Curve Slope Dips to 93.6 BPS (Lowest Level Since November 28, 2007)

With The Federal Reserve raising their Fed Funds Target rate and jawboning shrinking their almost $4.5 TRILLION balance sheet, the US Treasury 30Y-5Y yield curve slope has fallen to 93.59 basis points, the flattest curve slope since November 28, 2007.

The US Treasury yield curve slope typically inverts (slope goes below 0) prior to a recession. However, although the 10Y-2Y slope has fallen to 78 BPS (not zero quite yet).