The price of Deutsche deviance

Deutsche Bank's confession of Libor rigging, and initiation of a massive structural and cultural overhaul, comes as its peers take giant steps to pay the costs of risky behaviour, both legal and criminal.

This week has been a glum one for investment bankers, as they’ve watched a succession of big global banks swear off risky activities, and pledge to shrink their high-paid investment banking divisions.

Overnight, the giant German bank Deutsche Bank unveiled its €3 billion cost-saving plan, which involves cutting 1,900 jobs – 1,500 of which will come from the group’s investment banking division. Anshu Jain, Deutsche’s new co-chief executive, vowed to reform the culture in the group’s investment banking division, including reducing remuneration levels.

The big global banks have all seen their investment banking profits shrink, as growing gloom over the global economy has discouraged risk taking and shrunk trading volumes. At the same time, the big global banks are facing hefty fines for their previous misbehaviour.

Overnight, Deutsche confirmed for the first time that a "limited number” of its employees had been implicated in the Libor rate-rigging scandal. However, in a letter to staff, the bank emphasised that "no current or former member of the management board had any inappropriate involvement.”

Deutsche’s admission clears the way for the giant German bank to be drawn into the scandal now rocking the City of London. The trouble first erupted in late June when Barclays agreed to pay £290 million fine ($US450 million) to settle an inquiry by US and UK authorities that revealed the bank’s traders blatantly manipulated Libor to disguise the high cost of the bank’s own funding and to boost the profits of certain traders. The scandal has already claimed the scalps of three of Barclay's top officials, including boss Bob Diamond.

Deutsche’s confession follows that of the biggest British bank, HSBC, which on Monday revealed that it had set aside set aside $2 billion to cover various fines for previous wrongdoing.

This included a $700 million charge to cover the cost of US fines for money laundering. In early July, the US Senate published a scathing report about the bank’s alleged failure to prevent Mexican drug cartels laundering money through HSBC accounts in Miami, before eventually being sent through to tax havens.

HSBC also said it was setting aside a further $1.3 billion to cover the cost of compensating customers following the misleading sale of loan insurance and interest rate protection products in the United Kingdom.

However, the bank said it was not making any provisions against the continuing probes into Libor manipulation by US and UK authorities. According to the bank, "it is not practicable at this time” to predict the results of the investigations and the litigation, or how much it will end up costing the bank.

Meanwhile, the Swiss banking giant UBS saw half of its second-quarter profits evaporate as a result of the $350 million loss it suffered on the ill-fated Facebook IPO.

The Facebook IPO – one of the biggest in US history – turned into a disaster, as trading glitches on Nasdaq left millions of trades unconfirmed for hours. UBS said that its automatic trading system kept entering and re-entering orders, and that when Nasdaq eventually processed these orders, the bank ended up holding far more shares than its clients had ordered.

But UBS – which has previously announced plans to downsize its investment bank and to cut 2,000 jobs – was relatively confident regarding the Libor probe. The bank’s boss, Sergio Ermotti, said it was "crystal clear” that UBS was not in the centre of anything. "We’re waiting to see the results of the investigation. But there is no evidence at this stage that we have a particular position in that matter.”

UBS has previously said that it received conditional immunity or leniency for cooperating with US and other authorities. Still, the bank will likely be anxiously awaiting the high profile trial of its former trader, Kweku Adoboli, which is expected to begin next month. The 32-year old Adoboli has pleaded not guilty to unauthorised trading following revelations of a massive $2.25 billion loss at the Swiss bank last year.

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