Sunday, June 29, 2014

The Banality of Bernie Madoff

Bernie Madoff in October 7, 1999, photographed by Jonathan Saunders.
Bernie Madoff in October 7, 1999, photographed by Jonathan Saunders.

In the years since Bernie Madoff relocated to the Butner Federal Correctional Complex, it has been difficult for prosecutors to convict co-conspirators. Many of those involved claim that they were simply doing their job.

A lawsuit brought by investors in July 2013 reveals that the banker's at Madoff's custodial bank—Westport National—were, at the very least, not doing it very well.

When president Richard T. Cummings, Jr., a 36-year banking veteran, was asked at trial how the bank maintained accurate records he replied "I can't answer that question." What due diligence did the bank perform to ensure that customer assets were safe? “I don’t know.” Mr. Cumming has a finance degree from Georgetown (just saying).

Testifying by video deposition, the bank's vice president Dennis Clark said that he sometimes reviewed Madoff's trade confirmations out of “curiosity,” but then simply filed them away. Though Mr. Clark was the manager of custody services, he did not verify prices for derivative securities because he did not understand how puts and calls were priced.

Mr. Clark did, however, make an effort to look up stock prices listed on Madoff's monthly statements, in part because fees for the bank were based on assets under management—real or imagined.

In the end, the six jurors found that the bank breached its custodian agreements when it calculated its fees based on the Madoff firm’s reports instead of on the actual assets it held, and that the two plaintiffs had proved that the bank breached its agreements when it failed to issue accurate annual statements and failed to audit or verify the existence and value of the assets, the New York Times reported.

But the jury did not agree with the plaintiffs that economic loss occurred as a result of these (in)actions. A good day, overall, for sloppy custodial banks!

Many of the disputed custody accounts at Westport National were referrals from Robert L. Silverman, a professional actuary who ran a consulting firm about half a mile from the bank. "These investors were betrayed twice," Connecticut Attorney General Richard Blumenthal said in 2010. "First by Madoff and then by their advisers."

“I live in a tormented state now, knowing of all the pain and suffering that I have created," Madoff said at his sentencing in June 2009. "I am sorry,” adding abruptly, “I know that doesn’t help you.”

Sunday, June 22, 2014

Bankers and Train Wrecks

Photo of Board Members after the PNC/National City merger announcement in 2008
Jubilant board members of PNC Bank after receiving TARP funds.

Traveling 50 miles per hour, the engineer of a empty equipment train fell asleep. Idling on the same tracks was a circus train. Upon impact, the forty sleeper cars, constructed mostly wood and lit by kerosene lamps, derailed and caught fire. The ninety-four dead were charred beyond recognition.

While there were no animals injured in the wreck, the Hagenbeck-Wallace circus was famous for its animal acts, led by trainer Carl Hagenbeck. A pioneer of rewards-based training, Hagenbeck "was convinced that far more could be achieved by gentleness and sympathy than was ever accomplished by tyrannical cruelty," he wrote in his autobiography.


It was also known for its banking. In March 1904 Ben Wallace opened his own bank, the Wabash Valley Bank and Trust, after Peru National refused to process the circus' proceeds (barrels of nickels shipped in containers labelled "nails").  For eighty years, Wabash Valley operated on the corner of Main and Broadway in Peru, Indiana, with the third floor a workshop for making circus costumes.

After the train tragedy, Wallace and Hagenbeck sold the circus to Jeremiah Mugivan and Bert Bowers who renamed it the American Circus Company, then the American Circus Corporation. In 1929, John Ringling bought the ACC, and formed the largest circus in the world at the time, the Ringling Brothers Barnum & Bailey.

So, too, the Wabash Valley Bank and Trust eventually became the First of America Bank, then the National City Bank. In 2008, after the financial train wreck, the former circus bank was purchased by PNC Bank, a controversial merger at the time, PNC used TARP funds to finance the merger, just weeks after National City was denied those funds.

Describing how the $700 billion bailout was distributed to the banks, former director of the Office of Thrift Supervision Tim Ryan admitted it was “a four-ring circus.”

Sunday, June 15, 2014

The Sinking of the Germania Bank

Illustration shows an old and haggard "Justice" sitting in a chair on a rock in the East River, cobwebs have grown over her sword, scales, and an "Indictment"; in the background, the steamship General Slocum is engulfed in flames (it burned on June 15th 1904 with a loss of over 1,000 lives). from LOC.gov
Illustration is from Puck, a magazine founded by German immigrants, and shows an old, haggard "Justice" sitting in a chair on a rock in the East River, cobwebs have grown over her sword, scales, and an "Indictment"; in the background, the steamship General Slocum is engulfed in flames (it burned on June 15th 1904 with a loss of over 1,000 lives). From LOC.gov

On a sunny, June 15th Wednesday in 1904, a steamboat called the General Slocum carrying parishioners from St. Marks German Lutheran Church to its annual picnic erupted into flames and sank in the East River. Almost all of the 1,021 killed were women and their children.

The Pastor, who survived, described the scene. "Women were shrieking and clasping their children in their arms. Some mothers had as many as three or four with them. Death by fire was to be escaped only by death by water."

Passengers who chose water were horrified to realize that the boat's "life preservers" (which hadn't been replaced since 1895) were filled with ground cork instead of solid. Since most Americans could not swim at the time, many, including the Pastor's wife and daughter, drowned. In the preceding trials, the captain and crew escaped punishment for their part in the greatest loss of life in New York's history (until 9/11/2001).

In the days that followed, the avenues and byways of Little Germany that had for generations been famous for outdoor gaiety were silent. Mourning crepe hung on every door. The windows wept.

"We all knew each other and now--all dead," a grief-stricken resident told the New York Times.

Many attributed the Slocum tragedy to the eventual death of Little Germany itself. But the transition from Kleindeutschland to what we now know as the East Village was certainly hastened by a wave of anti-German sentiment. German bier gartens were the bete noir of the Prohibition Movement, and the onset of World War I brought hatred of Germans to a frothy peak.

The New York Times ran letters defending German-Americans. "Of all the peoples of nations that have come to our shores there are none who have made better or more patriotic citizens," John Crimmins wrote in 1914. "Steady, industrious, sober, [German immigrants] have given to the United States great merchants, manufacturers, and bankers."

Including the bankers of Little Germany's own Germania Bank. Successful since its founding in1869, it drowned in 1918 under the weight of anti-German feeling. When it was apparent that there was no place in America for a bank with German in its name, the well-capitalized and deposit-rich concern changed it.

On April 15th a small corner of the New York Times made the announcement: "Beginning today the Germania Bank will be known as the Commonwealth Bank."

Post Script: The Germania Bank Building survives to this day. Described by New York Magazine as a "72-room Bohemian dream house," the former bank is now the home of photographer Jay Maisel who purchased it in 1966 for $102,000. He still lives there with his wife and daughter, though from the outside it looks vacant. The inside, however, a-mazing. Check it out here.

Flannery O'Connor

You shall know the truth and the truth shall make you odd.