Learning Lessons the Hard Way
Last week, BNY Mellon was accused of fraud in its currency trading activities. Today, the Wall Street Journal contained a front-page headline about the "secret informant" from within the banks own walls.
The Facts of the Case
This is very scintillating stuff. But for now I am going to focus not on the clandestine world of secret meetings and handshakes, but on a single line from the Oct. 5th WSJ article, which states:
"At the heart of the alleged scheme is how BNY Mellon priced currency costs for pension funds that allowed the bank to handle foreign exchange in a program called 'standing instruction.'"
Let's get this straight - someone set up a program with the bank whereby they could instruct the bank to convert this currency, which the bank would do, and the bank knowing full well it did not have any competition!
Should we really be surprised that these funds did not get the best pricing of the day?
The Facts of Life
Dealers make their money on a bid/ask spread. We do not know what that spread is when making a deal. Could be small or it could be big. In the same way we do not know how much margin Best Buy makes when we get that brand new computer, or the street vendor selling unlicensed t-shirts.
But do we expect to walk into Best Buy to purchase an $899 computer and have someone at the store tell us we can save $50 by going down the road to dealer B, or "by-gosh, we are making so much off this computer we are going to knock the price down by $100"?
Would any of us walk up to the street vendor for a t-shirt, give them $100 for and say "just take what is fair and give me change for the rest"?
Continued on the next page
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