Monday, February 07, 2011

Just when you thought it was safe to trust a bank

These two stories just reiterate how the banks operate in some sort parallel universe where they believe there is no consequences for their actions.

1) At this point, this is merely an allegation in a lawsuit but it's so blatant it feels like there may be some truth to the story. According to the WSJ when a pension fund needed to conduct a currency transaction they would contact their bank (in this case BNY Mellon) and place an order. BNY would complete the transaction but then create fake trades around the high prices of the day and then pocket the difference between the fake trade price which they would charge the pension fund and the real trade price. In the example from the WSJ:

Virginia needs to convert $12.5 million to Canadian dollars.

BNY Mellon buys turns $12.5 million US into $13.5 million Canadian at the going rate.

Later in the day when the Canadian dollar had appreciated slightly, the fake trade is booked which would have turned $12.5 million US into just $13.35 million.

Now they tell Virginia the trade netted $13.35 million and they take the difference ($13.5 million Canadian - $13.35 million Canadian = $115k Canadian) and put it into their Foreign Currency Trading Profits.

We'll see how this plays out.
This whole article over at Vanity Fair is worth a read but I'll give you the Cliff Notes version. Back in 2008 an analyst at Merrill Lynch seems to have a good feel that the Irish banks are acting out of their minds. Lending to anything with a pulse and he has a suspicion that it won't end well. After writing a report to this effect, Merrill makes him retract the report and subsequently fires him because they were making huge fees from the banks mentioned.

Merrill was a special kind of evil even on Wall Street.

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