Monday, May 23, 2011

CalPERS Gets BAMBOOZLED by Wall Street Over "Mile Wide Rules" (Told To "Get Smart Fast!")


(Not just Zuma Dogg saying it!): Bank of New York Mellon Corp. has been fighting accusations that it took advantage of clients while trading currencies. A Wall Street Journal analysis of more than 9,400 trades the bank processed over the past decade for a large Los Angeles pension fund could provide ammunition to its critics.

BNY Mellon priced 58% of the currency trades within the 10% of each day's trading range that was least favorable to the fund, the analysis shows. As a result, the trades cost the pension fund, the Los Angeles County Employees Retirement Association, $4.5 million more than if the average trade occurred at the middle of the trading range for each day, the analysis showed.

This sounds kinda like a bank that takes your deposits and checks and re-orders them to create as many overdraft fees as possible, doesn't it?

But the bank said there was nothing improper about the practice. It said clients like the Los Angeles pension fund knewor should have knownthat the bank doesn't act in their interests when pricing the trades.

The currency trades at dispute in the Los Angeles pension fund case are called "indirect" or "standing-instruction" trades. In an indirect contract, clients allow banks to handle currency trades.

Doesn't this create a fiduciary relationship? The bank says no. I bet the pension fund thought otherwise.

The lawsuits allege that instead of giving the pension fund a price based on the time of day the trade was executed, bank transaction desks choose an exchange rate after the factusually one near the worst of the day for the client. The process for producing "falsified FX rates" for pension funds is called "locking the rates," according to both the Virginia and Florida complaints. The lawsuits allege that the bank would pocket the difference between the cost of the real trades and the "falsified FX rates" charged to the fund.

Wall Street drives a truck through mile-wide hole in the rules (REUTERS, not just Zuma Dogg - 5/23/11)

Point three: Basically pensions are not doing due diligence

The story that the Wall Street Journal and Felix covered relates to the Los Angeles County Employees Retirement Association (LACERA). The LACERA held $33 billion of assets at the end of 2010.

This story is a replay of the actions of State Street Bank earlier this decade. In 2009 it was revealed that State Street executed about $35 billion in foreign-exchange trades for Calpers and Calstrs, another big California pension fund, and overcharged them by $400 million between 2001 and 2008.

Eric Dash of the New York Times reported the following that October:

State Street tellingly referred to the state pension funds as “dumb” clients since they allowed the bank to handle foreign exchange transactions for them, according to a complaint filed by the whistleblowers. Smart clients, it said, traded directly with the bank and obtained better rates.

The lawsuit contends that State Street concealed fraudulent pricing practices by entering false exchange rates into electronic trading databases and reporting false prices in the account statements that it provided Calpers and Calstrs. The lawsuit also accuses State Street of deliberately failing to include time stamp data in its reports so that the pension funds could not verify the actual cost of the trade.

Calpers is the nation’s biggest public pension fund. It’s seems that the investment professionals there should be aggressively getting market quotes as a matter of due dilengce. There are many places that provide quotes for foreign-exchange trading. FXall is the leading “multibank” foreign-exchange platform where instituional investors can get competing bids for trades.

The chart at the top of the post shows data from the Bank for International Settlements and shows how smaller banks, non-financial institutions and retail investors have all jumped into the foreign-exchange market as direct trading participants.

These giant pension funds owe their pensioners at least some confirmation that the OTC trade prices they are getting are competitive. There is no room for these funds to be “dumb money” anymore. The successful retirement of their beneficiaries requires that they get smart fast.

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