The story I'm about to tell you happened about two years ago, just as the first rumblings of the housing crisis were beginning to be heard. I distinctly remember listening to a story about the problem, then largely speculative, on Marketplace. One line from that show still echoes in my mind: the host, Kai Ryssdal, asked his guest, "So how bad is it really?" The guest responded, "No one knows." Later that day I called my broker and had him sell a bunch of stock. But I digress.
About that time I was on the receiving end of a wire transfer of a pretty substantial sum, well into six figures. I was having the money wired into a brokerage account, which is more complicated than wiring money into a checking or savings account. To wire money into a brokerage account, the money is wired into a bank account owned by the brokerage firm with a notation that the money should then be credited to a particular client. It's called an FBO (For Benefit Of) transaction.
The bank from which the money was being sent shall remain nameless, but it was (and still is) one of the biggest banks in the country, with a universally recognized brand. This bank had a reputation for being conservative. Some banks will accept wire instructions via phone or email, but this one required that the client present themselves in person so they can fill out and sign a form. I had provided the person sending me the money with a copy of the wire instructions that were provided to me by my broker.
Wire transfers are supposed to be same-day transactions, but by close of business the money still had not arrived in my account. I was told that this happens some times and not to worry. Two days later, the money was still MIA. Forensics revealed that the wire form had been filled out incorrectly. Instead of being filled out as an FBO transaction, it had instead been filled out as if it were a regular wire transfer using an intermediary bank. Moreover, it was immediately obvious that this was the case because an essentially random number had been filled in as the intermediary bank's ABA routing number. It didn't even have the right number of digits. Nonetheless, the wire transfer proceeded. The money left the sender's account and went... somewhere. Where it was, no one could say.
Yes, I know it is hard to believe, but it's true. The money was missing for two weeks, during which time no one at the sending bank knew where it was, or even, apparently, had any way of finding out. The only reason that the money was found was that I got a call from a befuddled accountant from the bank where my brokerage firm held its accounts saying that they suddenly had a few hundred thousand dollars in one of their accounts that they didn't know where it came from. The money had apparently been wired to the correct institution somehow, but to a completely random account. Even after the mess got straightened out no one could figure out how the money ended up where it did. Or if they did, they wouldn't tell me.
The shocking thing about this to me at the time was how fragile the system was, and how difficult it was to recover from errors. I thought then that this was surely a six-sigma event, but now I'm not so sure. If the person who received the money had not been so diligent in tracking down its source I'm not sure it would ever have been found. And after reading about how the banks are playing fast and loose with foreclosures and mostly not getting called out on it I can't help but wonder if money doesn't get lost on a regular basis and we just don't hear about it. I used to think that there was someone minding the store, and that the system had checks and balances in it to make sure that this kind of thing couldn't happen. I'm not so sure any more.
Since then I've been trying to get more information about how our financial system really works in terms of the mechanics of moving money around between financial institutions but it turns out to be incredibly difficult to find anyone who really understands it. Bankers in particular don't seem to have a clue. I've spoken to CEOs and CTOs of banks and they have no idea how the system works. I know it sounds crazy, but it's true. Maybe the bigger banks have their own IT departments, but the smaller banks get their software from third-party providers, and the people procuring and operating it have no idea how it works under the hood. Or if they do, they won't tell me.