Planet Money - Banque Worms

Episode Date: July 24, 2021

Last year, one of the biggest banks accidentally paid off a client's loan to its lenders — a $900 million mistake. Some of the recipients wouldn't give the money back. And then a surprising court ruling affirmed their no give-back. | Subscribe to our weekly newsletter here.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

This is Planet Money from NPR. Last summer, one of the biggest banks in the universe made one of the biggest mistakes in the universe. And it all starts with this one guy in Delaware. This guy in Delaware works at Citibank. On any given day, he and a team oversee millions and millions and millions of dollars moving through the bank's pipes. Because sometimes banks loan money to people or businesses, but other times they basically just babysit other people's loans. So sometimes when lenders have lent money to a company, they'll pay Citibank to just administer the loan, to oversee it. Like when a company makes interest payments to its lenders,

Citibank helps move that money. So that's this guy's job. Check the right boxes, approve the payments, off it goes. Money trundling along from borrower to lender or lender to borrower. And on August 11th, they're supposed to send out a payment on behalf of Revlon, the makeup company. Revlon borrowed money in 2016 and has to make periodic interest payments on that loan until 2023. So every few months, Citibank sends a couple million dollars from Revlon to the lenders, the people that lent Revlon money.

Our guy in Delaware is but two eyes in what Citibank calls its six eyes approval process. First, a contractor in India manually enters the payment information. Then another guy, also in India, checks his work. And then our guy in Delaware approves it. Three people, six eyes. Today's payment is not a normal one. It's a complicated, multi-step transaction. And Citibank's software is really janky. So basically, the only way to complete the wonky transaction is to sort of

momentarily trick the software into thinking that Revlon has repaid the entire loan. So the first set of eyes, the guy in India, carefully checks the special box to fake pay off that whole loan to real send the payment. So just to be clear, he is checking boxes to sort of pretend to send $900 million, but he's actually sending just a few million dollars. So the second guy checks it. Delaware guy checks it. And he says, looks good. The contractor in India clicks.

He gets a little automated warning on his computer screen that says funds will be sent out of the bank. Do you want to continue? He clicks yes. There go the payments. All done. And then the next morning at 9 a.m., the contractor in India is looking over the bank's transactions from the day before, as usual, when suddenly he's like, oh, oh, no. He emails the guy in Delaware. The guy in Delaware chats his supervisor and he's like, the $900 million that we had to fake pay off yesterday?

Bad news. It was maybe real paid off. The entire $900 million had been sent to the lenders. Every lender had gotten repaid their share. So the full balance of the loan repaid, by mistake, three years early. The six eyes had missed checking two little boxes. They had made a tiny, huge mistake. And this isn't Revlon's money.

Revlon doesn't have $900 million sitting in cash at Citibank. This is Citibank's money. And if there's one thing a bank should do, if banks have one existential imperative, it is to keep money, to not accidentally give it away. Hello and welcome to Planet Money. I'm Mary Childs and today I am joined by Catherine Doherty from Bloomberg News who reported the bejesus out of this story. Hi, Catherine Doherty. Hi, Mary. So today on the show, what happens when one of the biggest banks in the entire world accidentally sends $900 million

to the exact wrong people and tries to get it back? What started as a catty fight between lender and borrower and became the most ridiculous and notorious story on Wall Street actually tells us a lot about who has power in finance right now. In finance, mistaken payments happen actually all the time. Not on this scale, maybe, but of course they happen. The Delaware guy at Citibank is one of millions of people pushing millions of buttons every day. Sometimes they're bound to push the wrong one. And it's sort of understood the thing to do is send it back because all these players, the banks, the lenders and the companies, they're all doing business with each other all the time. And it's like,

today it's this guy in Delaware's bad day, but tomorrow it could be yours. So everyone thought they knew what would happen. My reaction was similar to pretty much everyone out there in the financial markets. Elizabeth DeFontenay is a professor at Duke University's law school, and she used to be a corporate lawyer. I thought, that's amazing. That's a huge oops. Someone had a very, very bad day. But it will get fixed.

Right. And when this happens between banks and regular people, it definitely gets fixed. When payments are made, for example, from banks to individuals, like all of us, in error, we have to give it back. And in fact, if we don't give it back, the banks actually will come after you. They will sue you, and sometimes they will bring criminal cases against you. So the next day after the mistaken

payment, around 2.30 p.m., Citibank sends a notice to the lenders who've gotten the money. Please return the principal portion of the payment you received as soon as possible. And one by one, the lenders do start sending the mistaken payment back. A couple million here, 10 million there. And at 6 p.m., Citibank sends another notice. You were overpaid. Please return the amount listed below as soon as possible. And again, a few more payments come in, but it's slow, like alarmingly slow. Citi starts calling the lenders. They send out another notice and then another to say, actually, that was our money. You have to send it back, like legally. But some of the hedge funds seem to be digging in. They're not returning the money, and some of them

aren't even returning Citi's calls. One fund tells Citi they're thinking about it. One fund says they will circle back, and Citi Bank never hears from them again. One of them says they weren't sure the money was sent in error, and one of them tells the bank to please stop harassing us. And the reason these lenders are acting so cagey and weird is because this is part of a longer-running saga. For them, getting this money is actually kind of a karmic miracle. Back when the lenders first lent Revlon the money in 2016, things at Revlon were fine. Revlon was in the middle of buying another beauty brand. In the press release about the acquisition, they used words like iconic and Christina Aguilera.

But Revlon's business started to struggle. It missed a bunch of trends like TikTok, makeup tutorials, and all of beauty YouTube. It was losing relevance, not iconic. People started speculating it may have to file for bankruptcy eventually, like it wasn't going to be able to pay back all of its loans. But if you're a struggling company, there are things you can do with your loans that help you fail more slowly. So that's what Revlon started doing,

like stripping out the collateral from some loans, pitting lenders against each other. It gets really complicated, but that's kind of the point. All of this loan stuff gets shady. The super complicated multi-step transaction that Citibank had to do where they made this mistake in the first place, that was because of all of these loan shenanigans. So the lenders are watching Revlon pull all these shenanigans,

watching Citibank help them do it, and they're not happy. To them, Revlon is breaking promises and stealing from them. They're still getting these little interest payments, but those are nothing compared to the whole loan. It's seemingly less and less likely that these lenders are ever going to get paid back anything close to the full amount. So they start organizing as a group and hire some lawyers and get ready to fight. And then, August 11th, 2020, the money magically appears. So the way they tell it, they're like, oh, well, great. Problem solved. Maybe someone gave Revlon new money and they just repaid this loan. Thank you so much. So when they get that first notice from

Citibank saying it was a terrible mistake, they're like, wait, what? They call their lawyers. My name's Bob Loigman, and I'm a partner at Quinn Emanuel. And my name's Ben Finestone. I'm also a partner at Quinn Emanuel. The lenders themselves declined our interview request, but they gave us Bob and Ben. Quinn Emanuel, the law firm, is litigation only, which means they only do fights. Bob and Ben are basically brawlers. Putting aside the fact that Bob and I have already told you that we're the best in the business at litigating, clients, they don't want to hire us to litigate necessarily. The first thing we do is try

to convince the other side not to do what they're threatening to do. But sometimes you gotta fight. So Bob and Ben find this case from 30 years earlier in New York State, an argument for why their clients, the lenders, can totally keep the money. A case called Bank Worms. It's a European bank, and the founder of that bank was someone named Hippolyte Worms. So it's called Bank Worms. This French bank, named after Hippolyte Worms, I don't know, had lent money out and accidentally gotten paid back. And they wanted to keep the money. And the New York court said, yeah, it's your money.

You can keep it. Because you had no reason to believe that this was a mistake. The law presumes the recipient of the money to say, I know why I got this money. It's on account of the debt that I'm owed. It's not just money falling out of the sky. It's money that was paid to me because I lent this same exact money to somebody. Bob and Ben's clients, the lenders who got the mistaken payment and kept it, they're like, oh yeah, that's exactly what happened to us. The money expressly says, this is payment for your Revlon debt. The payment matches the Revlon debt to the penny.

So when they receive a chunk of money in the exact amount that they were owed, it's like, why would they ever just assume that Citibank accidentally sent them exactly what they were owed? And Bob and Ben say, you can't just go around go around double checking every single repayment you get. If suddenly that's what we have to do, the whole financial system will basically grind to a halt. One of the premises that this law is based on is ensuring that every time people receive money, that you don't have to shut things down and start investigating whether or not the bank that sent you the money might have made a mistake when there's no reason to think that a mistake occurred. In the financial world,

people are still like, OK, Bob and Ben found a pretty compelling argument, but surely a $1 billion mistake can get fixed, right? Right? Especially if it's a big, giant bank. They'll have to give the money back. After the break? But will they? So Citi really wants their money back. But more than that, they're worried about the ripple effects. Because $900 million is bad, but if they can't get the money back this time, they might not be able to get the money back next time there's a mistake.

This could get way more expensive very fast. And meanwhile, the lenders are like, thanks so much for giving me my money back. I will be keeping it. So Citibank and Bob and Ben, they all go to court to lay out their version of what happened. In December, the six eyes tell the court their side of the story. The lenders tell theirs. And in February, Judge Jesse Furman of the Southern District of New York rules in favor of Bob and Ben and their bankworms precedent. Their clients can keep the money. It was kind of shocking, especially to Neil Katyal. I was reading the newspaper and I read about this case and I was like, wait a minute, this can't possibly be America.

Neil is a lawyer, kind of a celebrity lawyer. He is the former U.S. acting solicitor general, and he has argued 44 cases before the Supreme Court, which is a lot. He sees that Citibank lost this case, and he's like, oh, I have got to get involved. I hadn't really worked with Citi before, but I called up the general counsel and said, really worked with Citi before, but I called up the general counsel and said, you know, to the extent you want any additional legal help, this is one I really care about. You know, I'm doing it for free if you want, because it's so ridiculous. Wait, you called Citi and you were like, put me in, coach? That's almost literally it, actually, because, you know, I basically, I called him up and I said, you know, I'd love to help.

And then they slotted me in. To be clear, Neil is not actually doing this pro bono. Citibank was more than happy to pay for his help. So Citi slots him in and they appeal this court decision. And Neil is like, I'll do respect. The judge's decision was wrong. He completely missed the point. Because under the bankworm's ruling, the recipient has to truly believe that the payment was on purpose and not a mistake.

And Neil says in Revlon's case, the lenders had plenty of reasons to suspect to know that this was a mistake. Like the money wasn't due for another three years. I think the most fundamental point is if money arrives like this in anyone's bank account, they would ask the simple question, hey, what is this money doing here? So you're kind of saying gently in a lawyer way that they're being a little squirrely and reaching for like any precedent that might let them keep the money. Beautiful. Yes, that's the technical legal term, squirrely. Our fundamental theme in this case is exactly that. Our fundamental theme in this case is exactly that. You know, mistakes happen in any area, whether it's, you know, financial or government or the bench or whatever.

And our legal system is never such that says, oh, you make a mistake, everyone's stuck with it. Of course not. The question then is, what do you do about the mistake? Neil's argument is that taking bankworms seriously obscures a fundamental and like intuitive truth. When someone gives you money by accident, it isn't your money. Like the normal thing is like if, you know, I miswired a billion dollars to you, you would give it back, right? I mean, you know, that's... Would I? Yeah, I think you would. I'm going to go out on a limb. Okay. By the way, if someone accidentally wired me a billion dollars, you would never hear from me again. Especially if that was my own money that I had lent out to that someone.

Which is why Bob and Ben say that comparison isn't right. Why should I have to investigate whether they actually meant to pay me the money they owed me? The court is supposed to hear Citibank's oral arguments for the appeal sometime in the next few months. Bob and Ben will continue to argue why the ruling was correct. Elizabeth, the law professor, wrote a brief for the court in support of Citibank's argument. But she also thinks all this back and forth is not helpful.

We can't just keep having the Hunger Games out there with these totally vicious attacks and counterattacks and then completely unexpected results when we end up in court. Elizabeth says this whole case is emblematic of a larger shift that's been happening in finance. I think this is really momentous in the sense that it really epitomizes the kind of war of all against all that we're starting to see in the debt markets. Even in the financial markets, there have always been some pretty strong norms of behavior. But it feels like, especially in the last, let's say, five years, those few remaining norms have all gone out the window.

She says finance is stabbier than ever, stabbier than in the financial crisis, stabbier than in the greed is good era of the 1980s. Just look at what happened to the lenders who gave the money back to Citibank when they sent those emails asking so nicely. The people who were cooperative and who were trying to do the right thing, ultimately they get punished because this massive amount of money went out the door to the lenders who were jerks and held on to the cash, and the ones who did the right thing, they don't get anything. At the same time, it's not really about doing the right thing.

Because even the lenders who gave that money back, they were acting out of self-interest too. They got to preserve their relationship with Citibank. And Citi is already threatening to lock the lenders who kept the money out of future deals. Citi's trying to throw its weight around, which makes sense, because for a long time banking worked kind of like a country club. There were just a few powerful banks, and if you offended them, they'd freeze you out. So sometimes you'd let mistakes go because in the long run, you'd make more money. But in the past couple decades, the whole financial system has gotten way more

fractured. A smaller percentage of money is flowing through those old big-time banks now. There are other people doing banky things under all kinds of names, hedge funds, private equity, money managers, which means that relationships with each individual bank are less important. Banks are still huge and powerful, but they have less power than they used to.

And if you're in a world where you're going to have to deal with the same small groups of banks or companies or people forever, it's not in your self-interest to screw them over and take the money now because they'll never work with you again and you'll lose in the long run. But the bigger the world gets and the more people and companies there are, the more appealing it becomes to say, screw you. I don't care if we never work together again. I'm keeping the money. Did you accidentally upend the gentleman's agreement that underpinned the financial world? Call us planetmoney at npr.org. We are on all the social media platforms at Planet Money. This episode was produced by Darius Raphael,

mastered by Gilly Moon and edited by Sarah Saracen and Liza Yeager. Alex Goldmark is our supervising producer. I'm Katherine Doherty. And I'm Mary Childs. This is NPR. Thanks for listening. And a special thanks to our funder, the Alfred P. Sloan Foundation, for helping to support this podcast.