Between and betwixt all of the market volatility, there was an under-reported litigation development on Thursday — which can both explain some of the volatility in the financial stocks AND can explain BNY/Mellon's decision to impose a fee on parking cash. This development could be a game-changer for the capital markets. (Bigger than Spitzer going after AIG for example.) During the week, the New York Attorney General sued BONY/Mellon for breach of fiduciary duty as trustees/custodians! (I suspect almost nobody noticed this.) They are the largest custodian in the USA.He's seeking penalties and restitution.

The issue at hand relates to their role in the 8+ Billion settlement with BAC (which was on the rocks already). HOWEVER, that the AG would sue a trustee/custodian (at all) and under these legal principle is a game changer — that could have repercussions for the way the entire capital markets function — and the costs of being a custodian/trustee. Being a trustee/custodian has always been a sleepy business — where you collect a couple of basis points — and fill out forms. To the extent that trustees/custodians now have billions of dollars of liability changes the landscape forever.

Jim Lackey writes:

Someone posted a chart Friday of Preferred stock index or ETF. It was down near 2% and the posted yields on some of these things are near 7%…. like ISEE after the '09 bank lows. There was one other hick up in April 2010. It was calm seas until Thursday. Friday am looks like get me out now orders. 

There are only a handful of global custodians — and when the stock market is gyrating, it's different to discern the chaff from the wheat. However, I believe that the AG's interfering in private litigation under these legal principles is just as shocking as BNY/Mellon's charging a fee for holding cash. The timing of both announcement, I believe is not a coincidence. IMHO this litigation was by far the most bearish development of the week.


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