1. Scandal of the Week ~ Currency-Gate
The New York Attorney General and the City of New York and have filed suit against Bank of New York Mellon seeking $2 billion in damages for allegedly defrauding customers, including multiple New York City pensions, in foreign exchange transactions. The simple version is that pensions would leave “standing instructions” to convert currency proceeds from securities transactions. The AG and pensions are alleging that the rates were consistently at or near the worst rates of the day in direct defiance of their agreement to provide “best execution” or the “best rate of the day.” Whether those terms are clearly defined will be critical to the determination. The Department of Justice has also filed suit. State Street faced similar allegations from California’s pension accounts back in 2009. I don’t think I am taking too much of a risk by forecasting that this is not the end of currency-gate.
2. Politicians Tell Customers to Get Out of America. Well…Bank Of America, at Least.
It’s safe to say that Sen. Durbin really doesn’t like Bank of America. After announcing that the bank would impose $5 monthly fees on debit card holders, the good senator wrote, in an open letter, to BofA’s CEO that the move was an “overt attempt to make even more profits off the backs of your customers.” Later from the floor of the Senate, Durbin told Bank of America customers to “get the heck out of that bank.” Even President Obama got in on the BofA bashing saying that he hoped that “you’re going to see a bunch of the banks say this is not good business practice.” Meanwhile Rep. Brad Miller, a member of the House Financial Services Committee, introduced a bill prohibiting banks from imposing fees on customers closing their accounts and requiring that the banks comply with such requests within 48 hours. Washington has a role protecting consumers from unfair consumer practices and gouging. But I hope I am not the only one that becomes concerned when the debate turns acrimonious. If the price of BofA’s stock falls on such rhetoric, do the shareholders sue management or the politicians?
3. Experiments In Fusion ~ New York Combines Its Banking and Insurance Regulator
While most states maintain independent banking and insurance supervisors, the state of New York launched its new Department of Financial Services. Since financial institutions fund the agency through their state mandated fees, the merger will reduce headcount and costs.
It’s only been a few weeks since UBS announced that a single trader had lost $2.3 billion. Last week the CEO fell on his sword and resigned. Law firms have started investigating whether there exists evidence of bank misconduct strong enough to file a lawsuit, and whether filing suit is likely to lead to a meaningful recovery. Perhaps one of the more important lessons here is that while a loss of this scale is horrific, the fallout can sometimes be worse. UBS lost market capital of $5 billion the day after the announcement of the loss. There is also the incredible loss of reputation that results from such incidents. That loss of reputation (particularly for a bank that manages a large private wealth portfolio) can potentially result in loss of future business. When measuring the risk of a rogue trader there is so much more to consider than just the money lost on the actual trade.
5. Who Knows What Evil Lurks In Sub-Accounts?
Well the SEC and FINRA want to know. The regulators are urging brokers to tighten control of their customer’s sub-accounts. Sub-accounts are commonly used for a variety of valid reasons by large asset managers. In order to keep accounts separate and minimize fees, sub-accounts have proven extremely useful. However, regulators are concerned that control and oversight of those accounts are weak and that the sub-accounts may be hiding unauthorized trading activities that is being overlooked by the broker-dealer. Expect increased scrutiny in the short term. If the regulators discover that the sub-accounts are hiding anything truly nefarious, expect more regulation and monitoring. No lurking allowed.