Jay D. Franklin

Wall Street Still Running Amok

In Wall Street Running Amok, we called attention to the problem of Wall Street’s systematic abuse of state and municipal pension plans:

“Next up in our Rogue’s Gallery is the Bank of New York Mellon, which overcharged Virginia pension plans by at least $20 million through fraudulent currency trades. Specifically, whenever the pension fund needed to convert a currency to conduct a foreign transaction, BNY consistently gave them the worst price of the day and pocketed the difference. Of course, the hapless bureaucrats in Virginia could not be troubled to check the execution of their currency trades. The whistleblower was a small currency trading firm, FX Analytics. Interestingly, nobody is asking the broader question of why it should even be necessary for a state pension fund to transact in foreign markets where they are so clearly vulnerable. BNY is also charged with defrauding a Florida state pension plan, and in California, similar charges are being pursued against State Street. These cases belie the often-made claim that the dark side of Wall Street is purely on the retail end while everything is hunky dory on the institutional side.”

There is no mystery as to why this happens. Essentially, we have a huge pot of money where the gatekeepers are completely out of their depth when dealing with the cunning Wall Street sharpies who know well how to sneakily extract wealth from the unwitting. As proof, we need only look at the internal memos of State Street which referred to the state pension funds as “dumb” clients for allowing the bank to handle foreign exchange transactions for them. The “smart” clients traded directly with the bank and got better rates.

The Wall Street Journal performed an analysis of the 9,400 currency trades done by Bank of New York Mellon on behalf of the Los Angeles County Employees Retirement Association (LACERA) over the past decade. They found that 58% of these trades were within the 10% of each day’s trading range that was least favorable to the fund (which could not have happened by chance alone). “As a result, the trades cost LACERA $4.5 million more than if the average trade occurred at the middle of the trading range for each day, the analysis showed.” BNY Mellon’s response was that clients like LACERA knew—or should have known—that the bank doesn’t act in their interests when pricing the trades. Really? Now we have a better visualization of the charming Wall Street phrase, “ripping the client’s face off”. Unfortunately, in this case, the client is we, the taxpayers.

LACERA did not accept BNY Mellon’s excuse. It said in a letter to BNY Mellon that the bank was its fiduciary and therefore had an obligation to act in the fund’s interests and obtain the best possible price for trades. Technically, BNY Mellon was not in a “fiduciary” relationship with LACERA, but nevertheless, a court may find that they violated the “best execution” requirement imposed on broker/dealers. As with most of these cases, BNY Mellon will probably settle it by paying a mere fraction of their ill-gotten gains. For CALPERS, California’s largest pension plan, the damages inflicted by State Street are at least $56.6 million, according the California attorney general’s office. IFA continues to implore taxpayers to keep a close eye on government officials entrusted with public funds and to do everything in their power to help them steer clear of the sharks of Wall Street.