Problems, Problems, Problems, and this time from the one area that we thought had been relatively immune from the financial chaos, namely custody. Let me be clear; our relationship with our custodian has been good. Their ability to provide standardised reporting and ancillary services is fine, and the matter-of-fact and unpretentious style suits us well. However, when they pretend to be asset managers and AAA becomes All Alpha Atrophied then we have as we say in Holland “een groot probleem”.

And so they arrive at our offices to explain. “Pieter, we are here to talk about the cash balances residing in our cash funds.”

“Yes, it seems the funds weren’t as AAA as we had been led to expect,” I suggest. The custodian continues: “As you can see from the prospectus we are able to have exposure to high quality banking institutions which we believed were AA rated. “Or very close to AA,” interjected one of the junior members of the team unhelpfully. “So you have lost me money?” I ask.

“Yes, performance of the fund is very disappointing.”

“When did you make investments in these banking entities and were you at any time tempted to sell in advance of the chaos engulfing the industry?” 

“This is the problem; we did not act fast enough.”

“But you, of all people, are aware of counterparty risk, and so why hold paper that has the prospect of becoming worthless?”

“Ah, that is because our analysts did not get their views to us in time.”

“You need analysts to help you read the newspapers?” I ask.

“But our process stipulates that the views of the analysts are taken into account.” The junior adds: “We take great pride in the rigour our processes.”

“Presumably if we still had our money with you on a call account, which is what we had two years ago before we alerted you to the benefits of your competitor’s AAA funds, then we would have missed out on this exposure.” The junior interjects again: “Ah, well, actually the way we manage our own book is different, and we had no exposure to this type of commercial paper.”

“But why not? If it is good for the goose, why not for the gander?”

“Because we took a negative view.”

“And this is without your analysts being able to walk down a corridor to tell you what is happening?”

“Yes”.

“So, gentlemen, you have clients who have not been affected by this exposure, and you have others, like us, who have been. And despite the knowledge being present in your organisation to protect all clients. We also have an AAA rated fund that chases yield in a sector that is imploding and contrary to the guidelines set in the prospectus. Can it get worse?”

“Well yes, there is something else we need to discuss.”

“What?”

“The securities lending programme.”

I sense their downbeat mood so I am careful. “We instructed you to stop that programme and for us to have our stock back”.

“Yes but it has gone.”

“What has gone?”

“The stock we lent out to an institution of very high repute then did lend it on, and it seems it was then lent on again”.

“And again,” adds the junior. “We lost track.”

I ignore him. “But we have the collateral don’t we?”

 “Well, we have a problem with the collateral. It is not worth as much as it should be.” 

“Gentlemen, you are not supposed to lose us money. You are supposed to keep it for us and know where it is.”

“We accept that, and if we are to go one step further with your analogy, I suppose our goose has been cooked”. “Actually I think you should be thinking of turkeys, and it will soon be Christmas”. 

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