Picture the following: You’re sitting home on a Thursday night in July watching the latest episode of Channel 4’s Gogglebox with a Horlicks in one hand while you pat the head of your faithful Labrador with the other. All of a sudden the phone rings. It’s the senior legal officer in New York who wanted to brighten up your day with the news that one of your senior FX traders has just been arrested on fraud charges.
This is a hand you’re going to have to play at the moment way off the back foot. US attorneys have far more powerful PR machinery than they ever let on. There will be perp walk pictures; there will be speculation about how someone who was headed for his posh apartment in Manhattan will now have to forgo the comfort of a great view and en suite bath for a seat-less toilet in the Federal Detention Centre in Brooklyn.
And worst of all there will be detail, nasty detail – of front running a client, of exclaiming: ‘Oh Christmas’ when the deal comes good. And one more nasty bit of the investment banking mosaic is tiled up on the wall for all the world to see and wonder how much more venial we can all be.
But instead of going deep on the travails at HSBC, I thought I would use the recent headline-grabbing incident to share with you some of the infamous scenarios I’ve had the pleasure of dealing with during my career.
I was only months out of the world of journalism when I found myself a fly on the wall of some very senior executive types at a leading investment bank. Word had just come from the compliance department that a commodities trader had been running his own private account through which he was able to funnel some of his P&L directly into his own pocket. The amount in question was just over $10 million. Any regulated bank is required by law to immediately notify their regulators when something like this is discovered. But for some reason, the bank delayed doing that.
Several days later when they got around to it, the amount in question had ballooned to just under $30 million. I naively thought that was because they discovered further wrongdoing on the part of the trader in question. But that was not the case. It turns out, the head of trading thought the incident might be a good time to scrape all the crud out of the various trading books and plop it all on the head of the unscrupulous trader.
One can only imagine the look on his face when the FBI bank fraud specialists sat him down and demanded an explanation for illegally funnelling three times more than he actually had.
Wedding bell blues
Forgive my excursion into the world of retail banking but this is one of those heart-breaking stories that has always stayed with me. When I was in New York I would regularly go shark fishing with some guys from the retail bank fraud unit. One day while we fished and drank in Long Island Sound, they told the following story.
It seems there was a branch manager on Long Island whose only daughter was getting married and, as any proud father would, he wanted to give her the most lavish wedding he could afford. The system he employed to fund the event might seem small-time and inelegant, but it actually made him a lot of dosh. At the end of each day when it came time to square up the books, he would make adjustments in the cents column in the box reflecting the day’s deposits. Now you would think that would not add up to a lot, but over the course of a year he managed to divert about $10,000 – enough to order real champagne instead of Chablis and hire a real DJ.
Sadly, the crime was ill-fated. After too many branch customers complained they were having trouble balancing their check books to the last penny, the fraud guys swooped in and discovered what was happening. Just as with the commodities trader cited above, they had to call the regulators – in this case the FDIC. The heart-breaking element of the story is the fact the not-so-savvy branch manager was arrested just two weeks before his daughter’s wedding.
Go big or don’t go at all
A rather amazing story is told in Middle Eastern banking circles that I have reason to believe is true. It seems there was a bank that specialized in developing economic zones within various emerging markets around the world. The deals had at their core a rather simple premise. The countries involved would turn over large tracts of land for next to nothing and in turn the bank would develop the infrastructure and bring in the businesses, educational institutions and other support firms to establish the economic zone.
In one particular deal involving a zone within a southeast Asian nation, the value of the land in questions was just under $500 million. When the nation conveyed the land title to the bank, it did so through what they thought was a bank subsidiary in the Caribbean.
In truth, the subsidiary turned out to be a shell company that had only one shareholder, the chairman of the bank, who after receiving the title turned around it sold it to his own bank for – you guessed it – just under $500 million.
When the story was told, a colleague of mine offered his own immediate analysis: “A western banker would have taken a couple of million; a Russian banker would have taken half. But in the Middle East, you may as well go all in on this kind of thing.”