Banking: delivering money (or pizza) with a bite on the way

I go to my bank of twelve years in New Haven to request a wire transfer. What are the charges, I ask. No charge. It is an international wire transfer. They check the rules for my type of account again and tell me that there is no charge. Next day, I get an email from the recipient telling me the amount credited to his account is $35 short. I call my bank and learn that while they did not charge anything, their correspondent bank in New York might have, and that they have no knowledge of, or control over, the correspondent bank's charges. Perhaps they just send the money to the New York bank, and everyone in their supply chain is free to take a helping at the trough.

My request to speak to the bank manager revealed that he knew the correspondent bank charge to be $20, and thus inferred that the bank of the destination account must have charged the other $15 of the shortfall. He offered to send another wire transfer for $35 to make up the difference. The transaction not only required an initial visit to the bank branch to authorize the transfer, but also three follow up phone calls of more than 15 minutes to sort this out.

What is going on in banking? If I owe someone $1,000, and write them a check for that amount, how much will be delivered to their account? How much will be delivered to their account in a no-fee wire transfer promised by the bank? If one orders a pizza, how many of the slices should be expected reach the customer. Should one assume that the delivery-man and the door-man have the right to take bites on the way?

What about efficient execution of commerce. If the check-writer or the originator of a wire transfer cannot know how much of the amount sent will actually be credited to the account of the recipient, what amount should the originator send to satisfy his obligation to the receiving party? Should this be a matter of guess work, or multiple successive transfers each being subject to the same uncertainty? Is it unreasonable for the customers to assume that the wire transfer service being sold by the bank (in exchange for its fee) is to deliver the specified amount of remittance all the way to the recipient's account? Can banks be relied on to use plain English (and the Commercial Code) meaning of words, or should we let them wrap their practices in euphemisms and opaque correspondent relationships?

It used to be that banks could be relied on the keep their word on even large amounts. Has banking changed, or am I nostalgic about a nonexistent past? I hope someone who knows more about banking will come forth and illuminate the matter.

Wall Street in Corn Fields

Derivatives in corn fields are nothing new. Futures contracts in agricultural commodities helped farmers protect themselves from variations in market prices. In March 2010, I visited Iowa State University to speak at the 25^th Anniversary celebration of its management school. A faculty friend at the university told me this story.

She was a shareholder of a biodiesel firm. It had reported a one million dollar loss on its derivative positions. She was unhappy and attended the shareholders' meeting to ask how the firm incurred the loss. She was told that the firm had hedged its inventory of biodiesel using derivatives. She asked for a more detailed explanation and accepted the offer to meet the firm's risk manager after the formal meeting ended. The twenty-something risk manager took a few shots at explaining the hedge by trying a few times, and failing, to illustrate the hedge by drawing a freehand chart on paper. Unable to explain the derivative positions the company had taken as an exercise to protect it from the risk of variations in price of biodiesel, the risk manager threw up his hands and blurted out: to tell you the truth, the guy from Goldman told me to do this. A director of the company who was kibitzing on this conversation turned to my friend and asked: are you in hedge funds?

I had thought the boiler room and bucket shop operations were made illegal and closed long ago. Deliberately chosen complexity, beyond the comprehension of their targeted customers, seems to be a common theme between those old-style scams and the new-fangled ones. ProPublica report on Magnetar, issued a week before the Securities and Exchange Commission charged Goldman Sachs with fraud, was an eye-opener for me (read or listen at http://www.propublica.org/feature/all-the-magnetar-trade-how-one-hedge-fund-helped-keep-the-housing-bubble). Are we teaching the skill, and granting degrees for it?