Negotiation by headline

Although the financial crisis was eight years ago, Macro Man can still remember with great clarity how rumours would fly with alarming regularity how various financial institutions on both sides of the Atlantic were about to go to the wall.   Regardless of whether the rumours were true (and some of them were), the regulatory authorities made it very clear that they were not impressed, and sought to clamp down on some of the more egregious tale-spinning.

Fast forward to today, and it is a sign of the hegemonic role that regulation plays in driving financial markets that the regulators themselves are now the sources of rumour and innuendo that can severely damage or salvage an institution's financial standing.  The situation with Deutsche Bank is little short of remarkable, with both the "headline" fine of $14 billion and the putative settlement amount of $5.4 effectively deducting and then adding back massive amounts of capital to DB's balance sheet.   Such manufactured volatility would be unwelcome at the best of times; coming as it does with the European banking sector already on its knees, it's little short of a spectacular own goal on the part of the regulatory community.

With a holiday in Germany today, DB and the DOJ have an extra 24 hours to reach a resolution before the stock opens again (though ADRs will trade in New York, of course.)  One really does wonder about the merits of a regulator bargaining over the size of a multi-billion dollar fine like a carpet vendor at a Marrakesh souk.  Given the all-too-public nature of the to-and-fro thus far, we can piece together a pretty good picture of how the negotiations have gone:

DOJ Flunky (pictured, left):  Deutsche Bank, you have been very bad boys and girls.  You sold mortgage securities that you didn't believe in to investors who thought that there was nothing wrong with AAA rated paper that yielded 100 bps over other, non MBS credit.  You can and will be punished.   Your fine is.....14 BILLION DOLLARS! 

(smirks, puts pinky to corner of mouth, then calls friends in the press to give them an off-the-record scoop.)

John Cryan:  Well, gee Mr. Flunky, we don't exactly have that kind of scratch lying around the place these days.  If you hadn't noticed, our share price is going down faster than Sam Allardyce's reputation.  How about $5 million and a box of unused fleeces from a 2011 equity derivatives offsite?

DOJ Flunky: I am deadly serious, Mr. Cryan.  Do not think that Europe can mess with Apple and get away with it.   I will knock another dollar off your share price every day until you pay up.

John Cryan:  Crikey, that doesn't give me much time!   How about $50 million and a Kraftwerk box set?

DOJ Flunky:  Do you think this is 1999, Mr. Cryan?   Unlike then, you are powerless to stop me now.  I've just had a word with a friend at the Journal, and oh my!  There goes your share price.

John Cryan:  Yes, yes, you've made your point.  OK, let's get serious.  How about $500 million and an alumni directory for BT Sydney?   It's a little old, but you could just start picking names at random and start arresting them in your FX or LIBOR probes....

DOJ Flunky:  Already have it, sorry.   Oooh, you're almost at 10 per share now!

John Cryan:  OK, OK.  How's $5.4 billion, a signed Bastian Schweinsteiger Man United shirt (not game-used, sorry), and an original vinyl single of 99 Luftballons?

DOJ Flunky:  Done, I think.    Let me just go have a word with the boss, and get back to you.

And that's where we stand now.  You'd like to think that the global regulatory community, ostensibly concerned as they are with financial stability, would take a look in the mirror and observe their own role in destabilizing markets whilst conducting trial by headline.    You'd like to think that, but don;t go holding your breath.

Elsewhere, the other big news of the weekend was of course Theresa May's admission that Article 50 should be triggered by the end of March next year, and that Parliament will pass a bill enshrining current EU law into the statute books, so that the government can repeal various measures at their leisure once the divorce is final.

There doesn't seem much point in re-hashing the Brexit arguments, because a) this announcement doesn't really change anything; after all, we knew it was coming at some point, and b) it's hard to know what the long-term impact will be until we know what kind of deal the UK gets.  One does wonder, however, how they plan to negotiate a huge array of potentially bilateral arrangements with various EU countries/entities within two years if it takes nine months just to activate Article 50.

One can only hope that both sides take lessons in secrecy and tact from the DOJ, because it's going to be compelling viewing.

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Click here for comments
Fired Macro PM
October 3, 2016 at 8:09 AM ×

Darn, I actually didn't want things to unfold this way for Brexit. I wanted a prolonged uncertainty rather than seemingly a resolute voice that seems to be finding strength in that camp each and every day now.

Now that they've shown their hands, I'm less inclined to hold on to the GBP short and would happily exit for a profit here at the UK open (currently down about 60bps).

I'm still holding (probably foolishly) on to my SPooz and AUD shorts but given that they are small in size, I'm inclined to keep it - about breakeven on both positions.

I think with Sunday's news over Brexit, w/ DB potentially in the rearview mirror, I guess a lull levitation in risk for the month of October?

I'm also watching tomorrow NZ dairy prices (last one came in at 1% increase - a disappointment but doesnt negate the overall solid recovery in prices). Might give a hint to NZD's direction until November meeting... and continued solid clip of good news that seems to endlessly trickle out of NZ would likely result in repricing of the odds for November - right now priced at 78% in favor of a cut.

NZD sure is a resilient mo-focker.

Lastly... watch the price action on GBP. If we get an upside reversal today (a close in the green), might be worth a shot on the long side as it may be the actual start of a decent squeeze.

Phileas Fogg
October 3, 2016 at 4:30 PM ×

@ MM community

Was chatting to an accountant who works for an investment firm and I asked him what the word was.He said multi nationals have 6 Trn in cash reserves and if they invest it we'll see the biggest bull market ever. However, this won't happen for three reasons

1/ the uncertainty of Trump in power
2/ China debt - consumer ?
3/ EZ banks

He said he was selling his shares in said investment firm as financial Armageddon ( caused by Trump inn power) would happen

What's your thoughts?

October 3, 2016 at 4:39 PM ×

Yes, it's all a bit of a joke isn't it.... price discovery now rests only on central bankers and regulators.
It's a mad, mad, mad world, innit?

@Fired: We were looking at short AUD, but any spike in gold here on a bank scare will hold the AUD above water. It's the strong US, weak Asia/EMs trade that kills the AUD off, and weak China data is the real killer. We like short oil, short CAD better.

Robert in Chicago
October 3, 2016 at 8:50 PM ×

On a lighter note: the Kraftworks box set is worth more than $50 million. "Fahn fahn fahn on the autobahn..."

That's all I tuned in to say, but since Leftback brought it up, on a serious-er note: Short-oil looks like the best macro-trade set-up I have seen in a long time. Not the highest potential payoff, but the highest odds of winning. This is a microeconomic analysis more than a macro one. I have been an antitrust expert and have been paying attention to this precise "OPEC-announcement" issue for over 25 years. Decades of consistent history demonstrates that, when OPEC announces an "agreement" for an _aggregregate_ production level that does not include the specific country quotas, they haven't really agreed to anything yet, and probably won't. Even if they agree to quotas, they might need to raise the aggregate target to do so. Even if they get to quotas that sum to the announced target, members usually cheat on their quotas. And even if they don't cheat, the announced OPEC target may not lead to a reduction in global output, because other producers will increase.

October 3, 2016 at 10:25 PM ×

Where have all the commenters gone?
MM have you changed comment conditions?

Or do we have to note the comment-o-meter readings?

Not that I've got anything to add but agree re MM remarks on the pain in the arse that negotiations via press are.