It is a human tendency to stereotype. Who knows whether is it a scociobiological survival trait or if it is just the by product of the way our brains evolved other function but it is there in each and everyone of us to one level or another.
Knowing this I try to resist the impulse as much as possible. It feels like intellectual laziness, to draw a circle around a group of people and say “they are all X”. Still there are times when a subset of the population acts in ways that so confirm the common stereotype about them that you can’t deny it is true, at least for those specific people.
The group who is doing that for me today is bankers. Specifically the Bank of New York Mellon. Yesterday Virginia AG Ken “the Cooch” Cuccinelli filed suit against BNYM for fraud. He is looking to collect nearly a billion dollars in penalties interest and punitive damages (those are the extra punishment intended to hurt a company enough that they won’t commit similar acts in the future).
You might recognize the name of BNYM from recent news stories. They are the ones that both the New York and Delaware A.G.’s are suing for the way they have handled their trusteeship of the Countrywide mortgage pools and the negotiations on a settlement for them between Bank of America and the investors that bought the mortgage backed securities from Countrywide.
In that case the two A.G.’s assert that BNYM is not the fair representative of the investors they are supposed to be. This is bolstered by both the sweetheart deal they brokered and the fact that B of A agreed to pay all of their expenses and (more importantly) cover all of their liabilities in negotiating the deal. Your basic conflict of interest based on money.
In this new suit A.G. Cuccinelli is claiming that BNYM defrauded the six local and state pension funds that the bank manages. The claim is that when BNYM would trade on the currency market it would look for the best spread between currencies and make the trade its highest level. Then it would report to the funds the lowest trade spread and pocket the difference.
The funds still made money, let’s be clear on that, but they did not make all the money that they should have based on these trades. While it is acceptable for banks managing such funds to profit from their work it is not okay for them to use the funds money to invest and reap the profit for the bank.
Now, someone who wanted to be extra-super fair to the bank might say that they these are only indictments and even if they are true they are only two examples from a business that handles a lot of other banking and financial services without complaint.
That would be true if it were not for the other two cases filed against BNYM for exactly the same thing. The Florida AG has also filed a similar suitand a class action suit, also out of Florida alleges the same facts.
When you take the Foreign Exchange cases, the Bank of America/Countrywide case and other cases like the Russian money laundering case (which the Federal government allowed them to settle in a non-prosecution agreement and a payment of 14 million) the evidence that this bank is a bad actor is piling up pretty high.
It is hard to prove criminality against companies. When you get down to it, even though they are nominally treated as people under the law, they are really a conglomeration of people. This always allows the claim of “a few bad apples”.
However, at a certain point when there are so many accusations that share common features you can no longer accept that it was rogue employees and have to say that it is the culture of the business. This is what is bringing down News Corp slowly but surely and it is starting to look like the same for BNYM.
Do I think that all bankers are corrupt venial jackasses that would force their own mothers into prostitution if the margin was high enough? No, but that does not mean that there are not some who are that bad. BNYM is sure starting to look as though it has a bunch in that category in at the highest levels of the bank.
Whether or not they are guilty of skimming profits from the funds they invest is going to turn on a lot of technical details. The instructions they have received from pension funds when they were entrusted with the money are going to be key.
If they were still on the white side of gray then they may not have committed actual fraud. Which is not to say that they have not been scumbags by looking out for their own interests ahead of the interests of the pension funds, they clearly have, but they might not have committed a crime.
In a larger sense this ought to be a wake up call for any kind of investors. Between BNYM’s willingness to accept payment from B of A in a clear conflict of interest, and the way they have handled the investments of Florida and Virginia’s pension funds they have proven that they are not going to be trustworthy custodians of assets or investments.
While it might be hard to find a truly trustworthy trustee in the financial industry, there have to be some. What is critical is that pension funds and others stop doing business with any firms that show, over and over, that they are not worthy of that trust. It is one of the only tools available to force these highly profitable organizations to act as they should.
The floor is yours.