Deutsche claws back $53 million from trader who manipulated benchmark interest rates

Bloomberg is reporting that Deutsche Bank has clawed back $53 million from a trader it fired for manipulating Euribor (the European version of Libor).

What may be most interesting about this story is that Deutsche Bank claims that there is no link between the manipulation of the benchmark interest rates and the profits made by the trader.

Deutsche Bank AG (DBK)’s Christian Bittar, one of the firm’s best-paid traders, lost about 40 million euros ($53 million) in bonuses after he was fired for trying to rig interest rates, three people with knowledge of the move said. 

The lender dismissed Bittar in December 2011, claiming he colluded with a Barclays Plc (BARC) trader to manipulate rates and boost the value of his trades in 2006 and 2007, said the people, who requested anonymity because they weren’t authorized to speak publicly. 

His attempts to rig the euro interbank offered rate and similar efforts by derivatives trader Guillaume Adolph over yen Libor are the focus of the bank’s probe, the people said. Both traders declined to comment for this story. 

“Upon discovering that a limited number of employees acted inappropriately, we sanctioned or dismissed those involved and clawed back all of their unvested compensation,” Deutsche Bank spokesman Michael Golden said in a statement. “To date we have found no link between the inappropriate conduct of a limited number of employees and the profits generated by these trades.”

One might think that a trader who earns a bonus in excess of $50 million would understand how to manipulate a benchmark interest rate to their personal advantage.  One might think that the trader understand which direction to manipulate the interest rate so that it boosts the value of his trades and maximizes his bonus.

Bloomberg provides confirmation of this speculation:

Ex-traders say their firms had no rules governing how Euribor and Libor should be set and that managers were aware that traders, who stood to benefit from where the rate was fixed, were on occasions making submissions to the benchmarks.

Regular readers know that the way to permanently fix and restore confidence in the benchmark interest rates is to require the banks to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

This addresses two problems that currently exist with the benchmark interest rates.

First, it addresses the problem that the unsecured interbank lending market is frozen.  It froze at the beginning of the financial crisis and has remained frozen because the banks with deposits to lend do not have access to the information they need to assess the risk and solvency of the banks that are looking to borrow.

With ultra transparency, banks with deposits to lend will always have access to the information they need to assess the risk and solvency of the banks looking to borrow.  This unfreezes and keeps unfrozen the unsecured interbank lending market.

Second, it addresses the problem of benchmark lending rates not being set on actual transactions.  With the unsecured interbank lending market unfrozen, the benchmark lending rates can be based on all or a subset of the transactions in these markets.

The use of actual transactions that market participants can independently confirm restores trust to the benchmark interest rates.