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Monday, July 08, 2013

What does it mean that a bank is a “custodian”?

Not much, according to the bank’s testimony in a case arising out of the Madoff scandal. Highlights from the NYT article:

When asked about how the bank maintained accurate records, Richard T. Cummings Jr., the former bank president, simply replied: “I can’t answer that question.”

What due diligence did the bank do to be sure that customers’ assets existed, and were safe? “I don’t know,” said Mr. Cummings, a 36-year veteran of the banking business with a finance degree from Georgetown….

Some of the most damning evidence may come from the testimony given by Dennis Clark, the bank’s former vice president and manager of custody services. Mr. Clark said that he would at times receive three or four “very thick envelopes” from Madoff stuffed with trade confirmations in a single week.

Mr. Clark, who testified in a video deposition before he died last year, said that he sometimes looked at those confirmations out of “curiosity” as to what Madoff might be buying or selling. Other than that, though, he did not review the documents and would simply “put them in a file cabinet.”

Mr. Clark said he did make an effort to look up stock prices listed on monthly statements for the Madoff accounts to verify how big the “pot” would be. (Fees for the bank were based on assets under management — real or imagined.)

But he added that he never verified prices on the puts and calls. Indeed, he did not even understand how those securities were priced, he said. He verified the stock prices because they were “names I recognized,” like United Technologies.

Italics and underlining added. The important job for the bank was to make sure they got their custodial fees – for what? They didn’t hold the assets. They didn’t provide financial advice (see article for details on that). They didn’t verify anything.

The bank’s excuse for failing to be a true fiduciary seems to be that it was small, and what can you expect from a small bank?  But if they were too small to offer that service, they need not have offered it (or could have offered it through another financial service, much as many small brokerages had Donaldson, Lufkin and Jenrette handle all their backroom operations).  They weren’t too small to collect their fees.

 

What does a custodian usually do?

Courtesy of NYTimes commenter Jonathan, I have this description:

This does not make a heck of a lot of sense.
Normally, a bank custodian is in charge of the securities that the customer owns directly, providing securities safekeeping and dividend collection service. The secretary of each company has the shares registered to the real owner, and sends the dividends to the bank where the owner has parked the shares.
Now the customers of the astute Mr. Madoff did not own securities directly. The securities they alleged held were held in street name at Madoff's brokerage, which did its own clearing. That was clearly necessary if Madoff was to trade the securities freely.
So what did this bank really have custody of? Nothing. They just provided a bookkeeping and check forwarding service, the same as a hired accountant would.