Deutsche Bank May Have Traded off Libor Rigging

Kyle is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Several news sources are reporting that an internal probe at German banking powerhouse Deutsche Bank (NYSE: DB) may have profited from trades linked to fixed Libor rates.

My previous post concluded that the ongoing probe into the Libor Rate fixing scandal could be a big factor in the banking sector in 2013. Last year Barclays PLC (NYSE: BCS) was the first to get caught with their hand on the Libor roulette wheel and suffered the consequences: a $450 million dollar global settlement with the UK’s Financial Services Authority and the CFTC and Department of Justice in the US. Moreover, three top executives were forced to resign.

As 2012 closed, UBS AG (NYSE: UBS) was nailed for $1.5 billion and more importantly, criminal charges against the big Swiss big bank are being brought as well as two persons said to be behind the rigging.

Now, Deutsche could be the next to feel the heat as a former bank employee coughed up documents to the Feds that apparently show how the firm garnered ill-gotten gains from trading off the rigged rate. While Deutsche has not been formally named in the probe, the fact that this information has floated to the surface shows how much of a problem the Libor scandal could be for the banking sector this year.

Libor, or the London interbank offered rate, is essentially a poll conducted by participating banks that is designed to measure the interest rates at which banks borrow from one another. And this is critical since upwards of $800 trillion in securities transactions and loans are linked to the rate.

This includes about $350 trillion in swaps as well as $10 trillion in loans, including home loans, and other consumer finance transactions, according to the CFTC. So investment returns and borrowing costs are affected by changes in the rate.

While it is unclear if Deutsche will be caught up in the probe, or what other big banks may be involved, this scandal is the most serious to emerge in the aftermath of the financial crisis of 2008. But the most puzzling aspect to this caper is that authorities in the UK and the US were aware of the rate rigging scheme as far back as 2008, including outgoing US Treasury Secretary Timothy Geithner.

With all the talk of the need for regulatory reform in the Dodd-Frank and Basel Accord era, one has to wonder if all of these scandals could have been prevented had authorities enforced the law as the global financial crisis unfurled. And this begs the question as to whether the damage to the global financial system could have been mitigated in the beginning.

Be that as it may, investors are now faced with making the best decisions about betting on the banking system given the fact that the Libor scandal has legs that will carry on well into 2013. In other words: Caveat Emptor.


Kyle Colona is a freelance writer in the greater New York area with extensive experience in legal and regulatory affairs. He is not currently invested in any individual stocks and he is not a financial advisor. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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