Banks: Brother Turns Against Brother (C)(WB)

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Banks are supposed to be one another’s friends. The all have the same problems now. They are all lobbying for the same relief. They often share customers. When they compete, the Marguess of Queensbury rules are always observed.

But, money is money, especially when one firm loses a lot. Citigroup (C) is being sued by Wachovia (WB) and Fifth Third Bank due to hedge fund losses. According to The Wall Street Journal "The problems stem from Citigroup’s Falcon Strategies hedge fund, a fixed-income vehicle whose value has plunged more than 75%."

The smaller banks say that they were told that the Falcon fund was relatively safe. Some firms bought shares in the fund for the insurance programs for their own bank employees.

The suit may look good but its merits miss the critical point that when a bank sells another bank a financial instrument, all parties should be sophisticated enough to know what is going on. Reading the fine print.

The current banking turmoil has cause a number of suits, but almost all of them turn on one issue. How can a firm be duped by a peer? Banks are responsible for their own due diligence for their employees, their customers, and their shareholders. If they don’t bother to examine what they are buying, who is ultimately at fault?

Douglas A. McIntyre