This newly created Currency department was where I flourished. It reminded me of a carnival, with lots of different rides spinning fast and bobbing up and down. You had to be quick, grabbing a ticket, jumping on a ride, then jumping off, cashing in, and catching another. There was a lot of attention to detail. We had ten different counter-party banks that we traded with, and for each bank we had to set up credit facilities and trading lines for about a hundred corporate customer accounts. And we had to have every major currency in the world on hand: French francs, Deutsche marks, Italian lira, Spanish pesetas, British pounds sterling, Dutch guilders, and so on. And then we quickly expanded into the emerging market currencies: Indian rupiahs, Korean won, Thai baht, Philippine pesos, etc. We had to have every bank’s specific delivery and receiving instructions for all these currencies at our subcustodian banking network, being instantly ready to buy or sell foreign securities of just about every nation on earth.
Prior to the Currency department being set up, all our account managers had been executing their own currency trades. Now it was consolidated, with one group doing all the market research, buys, sells, and settlements. Instead of five different managers buying French francs at different times and for different values, we did it all in one shot, aggregating all of the firm’s activity and placing trades out for competitive bidding. Then we worked with the IT department to set up an advanced computer system and made sure everything was automated, a sophisticated check-and-balance system. The effort dramatically streamlined the process and yielded savings for our clients as well as the bank, through reduced transaction costs, reduced failed deliveries, and improved executions.
Every day I was working with international money managers, and within a year I was handling spot and forward currency trading on ninety institutional accounts with more than $30 billion in assets. I thrived on the adrenaline rush and made good trades, while pulling down about $40K a year for myself. Back in the late 1980s, especially after the crash of 1987, that was fine money, but not quite enough. So, harkening back to my VCR business at Norwich, I started looking around for an extra buck.
I lived in a condo complex out in Weymouth, Massachusetts, three nice buildings, twelve stories high. Each condo had these towering picture windows overlooking the bay and the Boston skyline, and one Saturday I was out in the hallway picking up my morning newspaper when the nice elderly lady next door popped her head out.
“Good morning, young man!”
“Top of the morning to you, Mrs. Swanwick.”
“Could you do me a great favor, Bradley? You are so tall, after all.”
“And handsome?” I winked at her.
“Yes, of course.” She blushed and fanned herself with a handkerchief.
Mrs. Swanwick’s picture window was filthy and there was no way she could clean the top of it. So I went back to my place for a pail, a sponge mop, and a squeegee, and spent about half an hour making her window spotless. When I was done she reached up, pinched my cheek, and handed me fifty bucks!
Next thing you know, I had flyers slipped under all the condo doors, advertising my new window- and carpet-cleaning business. Every Saturday thereafter, I’d rent a steam cleaner at the local U-Haul store, haul my mop and pail around, and spend five hours cleaning, at one hundred bucks an hour! And then I started painting and installing outdoor carpet on balconies and made even more money. My side business never cramped my weekend style, because I partied so hard during the week after work.
Business at State Street Global Advisors was good, and getting even better as we swung into the 1990s. The bank’s reputation and coffers grew, and Nick Lopardo was at the top of his game. It made us all proud when we heard he’d made an appearance before the Teamsters union in Boston, about the toughest crowd around. Lopardo basically told them they were pussies who didn’t know how to handle their money, and they turned over their pension fund management to State Street. He got a big kick out of that coup and called it the “Jimmy Hoffa” fund.
My manager at SSgA, Joe Foster, was a stand-up guy and I really liked working for him. A Boston University MBA grad with a CFA distinction, he was fifteen years older than I, very bright, classy, and professional. Nothing escaped his detail-oriented eyes, everything was done on the up-and-up, and I learned from him that the smallest mistake could have massive repercussions. We never left work at the end of the day without double-checking every transaction, and only then could the beer flow freely as we bantered about sports.
I also had lots of friends at the bank, but Rick James was my best. Rick had a business degree and a CFA distinction, but never waved it around. He was a genius with numbers and could interpret a stock ticker like a heart surgeon reading an EKG. While I was tall, lanky, and loud, gesticulating a lot with my simian arms, Rick was shorter, compressed, darkly handsome, and quiet. He had a sweet, steady girlfriend, and it was clear she was going to someday be Mrs. James, and they’d wind up with a brood of kids and a Volvo. I was on the speed-dating gravy train, and though we kidded each other about our lifestyle choices, we never cramped one another’s style. It was a yin–yang thing that works to this day.
But as for the bank, about three years into my tenure, the State Street fairytale slowly began to turn grim. As the business of asset management and global custodianship grew exponentially, more people were being hired and our tight-knit family was encroached upon by “in-laws” we didn’t know, or frankly did not trust. In the Currency department, my boss, Joe, an experienced trader, and I handled all the trading and back-office operations to perfection, but senior management decided to hire a pair of cowboys from New York and place them both above Joe. I wasn’t shy about questioning the wisdom of “It ain’t broke, so let’s fix it.”
“Why the hell do we need these guys?” I asked a glum-faced Joe.
“Well, management says they’re going to expand Currency,” he mumbled. “They want to offer it as a stand-alone product, sell it as an investment strategy.”
That didn’t pass the smell test, but I rolled my eyes and soldiered on.
So, to give it a subtle, descriptive flourish, these two cowboys from New York City were arrogant assholes. Real jackasses. And they started doing unorthodox things with trading. Up until then our currency activities had been limited to trading currencies to settle foreign bond and stock transactions, and to carefully managing exposures for clients seeking protection from the volatile foreign exchange prices. But the new kids on the block wanted to more aggressively manage currency exposure for our clients. Rather than follow the firm’s valuation models to identify over- and undervalued currencies, they began shooting from the hip, taking aggressive positions, sometimes shifting these within a single trading day, across client portfolios. Such activity was contrary to our conservative long-term buy-and-hold investment philosophy, which was what our clients expected of us and we had a contractual obligation to live up to.
So, as losses began to pile up from these trades, the international portfolio managers who had the direct relationships with the clients were hung out to dry, left to defend actions they didn’t condone or support, but were helpless to stop. The two amigos upstairs were treating our clients’ portfolios as bottomless funding pits for their seat-of-the-pants views. These guys wanted instant profits and the bonuses to go along with them: bing-bang-boom. They thought they were in a fucking Las Vegas casino!
Those two clowns didn’t care much for our equity portfolio managers, because the New York stiffs knew little about nothing, while the State Street veterans were very experienced and knowledgeable. Bullies always hate the smart kids. I, on the other hand, had gone through four years of military college. And while I hadn’t pursued that career, I still had that culture in my bones: team player, support your troops, never leave a man behind. The equity portfolio managers liked me because I always made sure their currency trades settled on time and for good value while communicating market information to them in a timely manner, so in turn they could get the most bang for the buck
when purchasing securities for pension fund clients. So, there I was, stuck between these new, green, know-it-all assholes and my battle-hardened buddies.
The first red flag whipped up the flagpole when the Manhattan morons brought in this new kid for the Currency desk, “Fresh out of Harvard, Dan.” I tried to train him up the old SSgA way, but he’d just smirk at me over his bow tie. He made all kinds of mistakes, which I patiently corrected, but then one Friday something big went down behind our backs. Dan confirmed a major purchase order for Japanese yen, but instead of waiting to make absolutely certain that his counterpart in New York agreed with and confirmed the buy, he went home early to diddle with his girlfriend. The purchase went through.
Two months later, when the settlement date approached, my boss Joe’s phone rang. Our New York counterpart was on the other end. Joe put it on speaker and I nearly shit an ostrich egg.
“Um, we’ve got a little problem here, Joe.”
“What’s the problem, Larry?”
“That purchase order for yen? Your guy Dan reversed it.”
“Reversed it?” Joe was loosening his tie now, starting to sweat.
“That’s right. He mistakenly confirmed it as a buy, not a sell. And we’ve got a loss here.”
“A loss.” (long pause) “How much?”
“Seven hundred and eighty thousand dollars.”
Holy shit!
And that’s when the snowball rolled off the summit and there was no way to stop it. Joe, of course, had to report this fiasco to the New York City cowboys upstairs. There was no way to bury a three-quarter-million-dollar loss, and to me it seemed the only way to make it up to the client was by SSgA writing a check. But those two slicks had another idea. Somebody upstairs called New York (Chemical Bank) and said something like this:
“Listen, we’ll make that trade up to you guys. Going forward, for however long it takes, on future trades with us … just up the price a little bit, until you’ve made back from us what we lost for you.”
What? When I heard that I nearly lost my mind! What those two clowns were saying was that if we, State Street, needed to purchase French francs for one of our clients—like Amoco, for example—Chemical Bank could sell the currency to us at an undisclosed mark-up and keep the difference! That practice was called “padding,” and so illegal it would’ve made Tony Soprano blush. These clowns were basically telling Chemical, “You can still have our business, boys, as long as you shut up and play ball.”
From there the snowball picked up more cow dung in its inexorable roll downhill. As I previously mentioned, our department had consolidated all the foreign currency purchases of portfolio managers throughout the bank. If there were ten portfolio managers who all needed Italian lira to buy Italian securities, we’d buy it all during a single business day to ensure a mean value across the board. However, if you were buying 100 million lira, you’d have to buy it in available tranches, and that might mean ten different buys from opening to closing bell. All those values would be slightly different; some better deals, some less so, and the fair thing to do was to spread the upsides and downsides evenly for all the managers.
Well, guess what? Those New York cowboys had their “favorites” at the bank. They liked some PMs (the ones who kissed their asses), and some not so much. So they ordered that all currency trade results be held until the end of the trading day, at which time they’d look them over and give the best deals to their favorites. That really pissed me off.
“Have you seen the shit that’s going down with the client trade allocations?” I asked Rick one night over a couple of beers. I’d split him off from the regular herd and taken him down to a bar near Faneuil Hall, just the two of us alone.
“Yeah,” he sighed into his mug of Sam Adams. “I’ve been wondering when you were going to bring it up.”
“It’s fucking unbelievable,” I spat. “Like, if that ass-wipe Jack Tremont has a million bucks to buy Japanese yen, and Joe Foster has the same nut for the same thing, Joe winds up with 10,000 less yen! It’s slimy as hell.”
“And probably illegal,” said Rick.
I leaned closer to him and whispered, “I’m gonna start keeping records on those fuckers upstairs.”
“I figured you would.” Rick clinked his mug to mine. “You’re all balls, few brains.”
So, for a long time thereafter, I kept my mouth shut and my eyes wide open. Whenever I spotted some squirrelly transaction, I made a copy and added it to the burgeoning pile back at my condo. But keeping quiet stuck in my craw. The hucksters upstairs got bolder and bolder, issuing false profit reports to pension fund clients to make themselves look good, while concealing losses so no one would know they’d screwed up. Then a very senior executive started strong-arming our managers, forcing them to donate big portions of their Christmas bonuses to the reelection campaigns of “friendly” state treasurers across the country. Lo and behold, those treasurers then signed contracts with State Street to manage their multibillion-dollar state pension funds. I was hardly surprised when I learned that a flat-out bribe was slipped to a senior Emirates officer, Dr. Bin Kharbash, and we got a $2 billion management contract for the Abu Dhabi Investment Authority. Apparently the SSgA team wasn’t familiar with the Foreign Corrupt Practices Act.
By 1994, the firm was breaking more and more laws on the books. I’d been at State Street for five years, and while I’d never expected to stay there forever, my conscience was starting to nag me.
Then came the final nail in my coffin. The trading floor had purchased a used Dictaphone system and we were supposed to record all our telephone transactions. Well, that’s all fine, as long as you advise the guy on the other end. “Mr. Jones, for your protection and ours, this transaction is being recorded.” But our bosses didn’t want our clients to know they were being taped, so they could cherry-pick tapes if they needed them later, while pretending the rest didn’t exist. That’s called wiretapping and it’s illegal as hell. When it comes to recording conversations, Massachusetts was, and still is, a two-party state. That is, both parties to the conversation must consent to being recorded. Without all parties consenting to the recording, it becomes a criminal act.
“We can’t do this shit, Joe!” I had stormed into my manager’s office and was stomping around like a wild horse. “If the regulators find out about this, we’re all fucked in banking forever!”
“I know, Brad, I know.” He tried to calm me down. “But that’s the way they want it.”
“Fuck it. I’m going higher.”
And I did, and it caused a shit storm, and Legal got involved and they all argued and sputtered and fussed. I, of course, was the bad boy with the big mouth. Managers started doing the “hair flip” whenever they saw me. But the results? The firm’s legal beagles boldly issued a directive, in writing, that while this practice was technically outside the norm, we were to continue recording our one-sided taps. “I suggest we do something illegal,” the memo seemed to say. “My view is we wouldn’t be slapped too hard even if someone figured out what we are doing is illegal.”
Well, I refused to use the Dictaphone. So they put me on probation. I still refused. And that’s when two company security officers showed up on the trading floor, informed me that I was resigning from the bank, and asked me to pack up my “good-bye box” and get a move-on. I smiled at them, got right up on top of my chair, threw my arms out, and made an announcement to my coworkers, who all stared at me like stunned sheep.
“Ladies and gentlemen, my good compatriots, I would like to inform you that I am not voluntarily resigning from this institution!”
The company cops took my ID and escorted me out. Was I pissed off? That doesn’t begin to describe how I felt. I hadn’t done one damn thing wrong, and the bank was sticking it to me long, hard, and without any lube. They wanted my resignation so they wouldn’t have to pay me a dime in severance. Not happening.
The next day Rick James, risking his own career at the bank, snuck me back in by swiping his own
ID twice at the elevator lobby. I plopped right back down on the seat at my desk. The company cops showed up again.
“What the hell are you doing here, Birkenfeld? You resigned yesterday!”
“I did not resign,” I said. “I work here.”
Then the big dogs showed up. “All right, wise guy. You’re fired.”
“Works for me,” I said. I made my proper good-byes to all my buddies, who mumbled and cursed the powers upstairs, and I walked.
But in case you’re wondering, I did not go gently into that good night. State Street offered me one year’s salary as severance, as long as I’d sign a gag order. I told them to stuff it and hired a lawyer. We assembled a full dossier on all the dirty doings at the bank, and sent it to the chairman of the board, Marshall N. Carter. My lawyer’s cover letter suggested that “Mr. Birkenfeld would consider a settlement of $500,000, since State Street has ruined his career.” But Marshall N. Carter figured he could outsmart a pissant young banker and blew us off.
But I wasn’t done yet with State Street. They’d broken my sword and branded me persona non grata, but I still had great friends at the bank, all pissed off that I’d been fired, and they were slipping me intel under the table. The bank was about to hold its annual shareholders’ meeting, a five-star gala in the grand auditorium at State Street headquarters. I was still a bona fide stockholder, so I decided to exercise my shareholder rights.
It was a lovely affair, with more than 250 shareholders present and a host of local media. Marshall N. Carter was there on the dais. Nick Lopardo and the rest of their stuffed-shirt gurus were all in attendance. I sat there for an hour, letting them brag about the wonders of State Street’s courage and coups, and then I stood up with a question.
“Mr. Chairman, I’m a shareholder and a former employee of SSgA. My lawyer recently submitted a detailed accounting of wide-ranging misconduct committed by officers of SSgA, much of it illegal. Could you tell us what you’ve done to rectify the situation and reprimand those responsible? And I’d like to know why the board has refused to respond to my myriad allegations concerning the bank’s highly illegal practices and breaking of US laws.”
Lucifer's Banker Page 4