Bro Code
July 2021
In my salad days I came across some pretty hot messes. One day after lunch, I went back to work in my usual sunny mood, put my hot chocolate and my bag on my desk and unlocked my computer screen. I did that while still standing, as was my habit back then, and scanned the inbox for urgent emails. I caught sight of a subject that read “overdraft” and opened that one. The first thing that caught my post-lunch limbo was the number— it was a neat round sum but I had to count the number of digits, more specifically the number of “0”s that came after the “1”. I counted once and then twice (just to be sure); and let out an inelegant word piercing the silence. The whole floor looked up. I had to sit myself down to digest the 100 million overdraft.
I re-read the whole notice; which was to warn me of the “failed FX settlement.” By now I had a fair idea which department effed up. But I had authorised no FX transaction this size. So this must have been someone else’s client’s cool 100 million deal. So I had to first make sure this 100M was converted into another currency and credited into my client’s account and ensure the overdraft didn’t make a dent in the client's Forbes ranking. I frantically called currency desk and asked them to reverse the transaction. If you think FX Guy who made the mistake was remotely apologetic you must be out of your mind. He insisted it wasn’t a problem at all, given he booked the “correct” pair of transactions into the wrong account at no loss to any client and more importantly at no loss to his desk or the bank. Having mansplained the desk priorities to me, he promptly ordered me to reverse the transactions.
Before you think this was a wild Wild West movie, I didn’t reverse the transactions because I couldn’t. There was no way a front office person could debit a cool 100 million from a client’s account on a whim, without proper client instructions. FX Guy was not totally deluded, it was after all not a Profit / Loss matter, but FX Guy failed to appreciate how the client might react when he received the transaction advice slips and the month end statements. The mere thought of it gave me a splitting headache. The client was in his 60s and one of the nicest gentlemen I have had the privilege to meet. He was always softspoken and mild mannered but what struck me was how frail he seemed to me (in hindsight I was very much mistaken about his health as he is still going strong 20 years later). I was genuinely worried the standalone 100 million overdraft might give him a heart attack. Luckily, the client’s wife and son are joint account holders so I had the option of informing the son first.
I had to come up with a complete plan before broaching the news. I mentally walked through each step of the post-deal reporting and figured how many transaction advice slips would be generated as a result of the mistaken transactions (and more importantly what each one would look like); how soon they would be issued; and did the same for the reversion transactions and the month end statements. I feared any one of the 2 rounds of advice slips spanning debit, uplift, conversion, deposit and credit could potentially shock my client as they wouldn’t present a holistic picture unless they all arrived and were opened at the very same time. The transaction summary at the end of the monthly statement, on the other hand, would present a complete and true picture. So I had my boss approve withholding the transaction advice slips and liaised with middle- and back-office. Then I called the client’s son with the news, our remedy and transaction advice withholding arrangement. 20 years on I still remember vividly how he was stunned into a dead air of disbelief and repeated the overdraft amount in ultra slow motion as if he heard me wrong. The client’s son is smart and well-educated and had worked in investment banking before returning to the family business. In spite of their Forbes ranking, the family did not have an idle 100M lying around waiting to see if someone could make it vanish into thin air. When I explained that I wanted to report the mistake to him to avoid shocking his father, he was grateful and appreciated the consideration. I pointed out that the mistaken and corrective transactions would all show up in the monthly statements and transaction summary and suggested he retained those as a record. By now I had learnt that you simply couldn’t trust anyone but yourself so I told the client’s son about the request to hold his transaction advice but in case some of them were sent out which would not amount to a correct picture, the statements would be the “real deal”. I logged the conversation in a memo and circulated to management, compliance and back office.
That was to be the beginning of an eventful week for me; the same mistake happened 2 more times, albeit in smaller amounts, with 1.xx million and 260G overdrafts. By the 3rd time that week I honestly told a colleague that I had really had it. You can’t keep calling clients with news of millions apparating and disapparating and pretend it’s No Big Deal.
In those days, everyone was in the same office and requests like mine would be met with empathy and kind assistance. I can’t imagine doing that now with most banks moving compliance to a different location and back office to Singapore then India and eventually online or robo . You can’t possibly have a shared sense of urgency in 3 different locations even if you manage to (miraculously) get hold of people on the phone.
Banking and by extension the capital markets are essentially an ecosystem built on trust. Clients trust banks to act as custodian for portfolios; process coupon payments; pay interest on our deposits and execute all sorts of transactions. Banks trust other banks to repay interbank deposit and honour over-the-counter transactions. This system of firing instructions over the phone (for example to buy a bond in the secondary market) is supported by the knowledge (not merely expectation) that the transaction will indeed be carried out as promised; which would entail the bank’s honouring prices they quote to counterparties; ensuring they have adequate inventory; ensuring they can complete transfer of securities on the conventional settlement date and that the offer price quoted is for the right one from among the issuer’s many outstanding debt instruments. Any combination of those things can potentially go wrong and anyone worth his (or her) salt will have to take it in a stride.
We are all humans and (surprise surprise!) we all make mistakes. Repeated mistakes. Luckily, our stupidity is surpassed only by our determination to survive; and our determination to anticipate, identify and resolve repeated offences (and perhaps repeated offenders while we are at it). Since we are too stupid to solve our own problems, we count on other people’s level headed calm, common sense and willingness to compromise, aka old boys network.
Blind faith that others would indeed act in good faith.
It works on 3 conditions: (1) people within the ecosystem want to survive (2) people within the ecosystem want others within the ecosystem to survive (3) people within the ecosystem want the ecosystem itself to survive. Simple enough, until one or more person(s) develop(s) a morbid interest in (a) suicide (b) cannibalism (c) annihilation of the species - the big red button.
Legal redress is what we count on should the ecosystem fails us. At this point we practically admit all is lost / the implosion will wipe us all out. Going to court implies our personal charisma is lost on other market participants (sob sob). Shared practice (convention) is no longer binding or persuasive. Offenders consciously choose to have their names dragged in the mud when they forego the opportunity to do the right thing; so we can infer that (good) reputation is cheap. More importantly, it means we can no longer depend on the Bro Code and all hell breaks loose.
Hell certainly broke loose when Citibank took some asset managers to court this year. Citi’s back office people had mistakenly wired USD 900 million (way more than the loan interest they were supposed to transfer) to the $1.8 billion Revlon syndicated loan members; some recipients decided the windfall was God’s gift and too good to return. Bro Code dictates that the transferring bank should reverse the transaction - request the entire sum (not the difference) back and resend the correct amount. Bro Code further dictates that the receiving banks (of recipients’ accounts) to notify the account holders before returning the bounty. Well, Bro Code dictates until it doesn’t. In Citibank NA v Brigade Capital Management , 20-cv-6539 US District Court, Southern District of New York (Manhattan), Court decided against Citibank but issued Temporary Restraining Order on the mistaken sum.
So, the august court of the Southern District of New York decided the Bro Code of the international banking / finance community was no good in the capital markets capital of this planet. But they did issue a restraining order. Perhaps they realised it made the court (or New York? Or the banking industry?) look like Gangsters Paradise. After all, what finders keepers loose change would tally close to the billion mark?! The Judge apparently noted that few industry rules and procedures governed mistaken payment (are you kidding me?). Had they wired the money out from London, English law would be an appropriate governing jurisdiction, no one would have gone to court. It is simply theft to refuse to return mistaken transfer. Must say that’s pretty neat. Another tool for the fool is imposing a trust in mistaken transfer situations to ensure banking and business transactions enjoy legal certainty. When some moron aspires to the Machiavellian prince rather than Bro Code, the Bro Coders need a safety net. Maybe Brexit isn’t exactly death for London as a finance hub.