Don’t put your valuables in the bank

MATT LEVINE

Banks are places to store your money, but not really. Not literally. It’s not like you hand your money to the teller and they put it in a special envelope with your name on it, to be opened when you make a withdrawal. No, you give the bank money in exchange for a special sort of payable-on-demand debt obligation, and the bank mingles the money with other peoples’ money to fund loans, and of course really the loans create the deposits, etc. etc. etc., you know all this.

On the other hand if you have valuable stuff you can leave it with the bank, and the bank will keep it in a box for you, but that is sort of an accident. It is not a core banking function, not really a banking function at all except for historical reasons. And sometimes they’ll drill open the box and throw your stuff out!

In the days after Mr. Poniz found his box empty, he began piecing together what had happened: Wells Fargo had apparently tried to evict another customer for not keeping up with payments, and bank employees had mistakenly removed his box instead. After drilling No. 105 open, the bank shipped its contents to a storage facility in North Carolina. After Mr. Poniz discovered the loss, Wells Fargo sent back everything it had in storage, but some items had vanished.

That’s from this amazing New York Times story about safe deposit boxes, centered around the story of Wells Fargo & Co. losing millions of dollars’ worth of rare watches that Philip Poniz kept in a safe deposit box. I guess safe deposit boxes do resemble core banking functions in that Wells Fargo messes them up in scandalous yet whimsical ways:

Oddly, the bank returned to him five watches that weren’t his. “They were the wrong color, the wrong size — totally different than what I had,” Mr. Poniz said. “I had no idea where they came from.”

But they are unlike core banking functions in most other ways. They are not really covered by banking regulation, for one thing:

The Office of the Comptroller of the Currency, the banking industry’s main federal overseer, said it had no grounds to get involved. “No provision of federal banking law expressly regulates safe deposit boxes,” said Bryan Hubbard, an agency spokesman.

And they are not particularly profitable:

Banks increasingly regard safe deposit boxes as more of a headache than they’re worth. They’re expensive to build, complicated to maintain and not very lucrative.

They are not very lucrative, to be clear, because you’re just paying rent by the cubic foot. If you put $10 million worth of watches into a little box, it’s not like the bank can rehypothecate the watches. The bank is not using your assets to fund loans. The watches just sit there. The core business of banking is to use the stuff that you leave at the bank, which makes safe deposit boxes very non-core.

“All of the major national banks would prefer to be out of the safe-deposit-box business,” said Jerry Pluard, the president of Safe Deposit Box Insurance Coverage, a small Chicago firm that insures boxes. “They view it as a legacy service that’s not strategic to anything they do, and they’ve stopped putting any real focus or resources into it.” He estimates that about half of the safe deposit boxes in the country are empty.

And since they’re so non-core, they’re not particularly safe. In fact banks can explicitly disclaim any responsibility for keeping safe deposit boxes safe, though that disclaimer is usually in a smaller font than, I don’t know, the words “safe deposit box.” Here’s what happened in another lost-safe-deposit-box-contents case:

Bank of America sought to have the case dismissed, citing language in its lease agreement stating that the renter “assumes all risks” of leaving property in the box. But in 2017, after a monthlong trial, a jury awarded Ms. Saribekyan $2.5 million for her lost items and an additional $2 million in punitive damages. Bank of America then challenged the verdict, arguing that any recovery should be restricted by the terms detailed in its rental contract: “The bank’s liability for any loss in connection with the box for whatever reason shall not exceed ten (10) times the annual rent charged for the box.”

Judge Rita Miller agreed. She reduced the compensation for lost items to $2,460 and cut the punitive damages to $150,000.

“We were shocked, furious and in disbelief that such a thing could happen,” Mr. Halajyan said. “The attorneys were throwing stupid counterarguments at us, asking, ‘Why would you put so many valuables in the safe deposit box?’ We were like, where else do you want us to put it? The word ‘safe’ is supposed to mean ‘safe.’”

It is strange. If you put money in the bank in the traditional way—you deposit it with a teller or an ATM—your money is, in a sense, gone immediately. They don’t put it in a box for you; they intermingle it with the rest of their assets and use it to make loans and to do weird derivative trades and whatever. And yet it is almost completely safe; the core business of the modern banking system—and the associated regulation, deposit insurance, etc.—is to keep it safe, to make sure that if you deposit money with a bank you get it back.

If you put stuff in the bank’s safe deposit box, on the other hand, they visibly keep it really safe and separate. It goes in a box, the box is exclusively yours, there’s a whole rigamarole with vaults and keys:

A foot-thick steel door sheltered cabinets filled with hundreds of stacked metal boxes, each protected by two keys. The bank kept one; the customer held the other. Both were required to open a box.

But this is all show. They don’t mean it. They disclaim all responsibility, you assume all risk, sometimes they open the box without your supposedly necessary key and your stuff gets lost. The invisible intangible electronic systems work well to guard your money; the steel doors and dual-key systems look great but don’t especially work.

What are the dermatologists up to?

You know, in the Middle Ages, surgery was something that barbers did on the side. Like, they had razors already, which meant they were better qualified to perform surgery than anyone who didn’t have razors. Why not let them cut you open? Mortality rates were high. In the intervening centuries medicine and surgery have become more specialized, and now if you need heart surgery you not only wouldn’t think to hire a barber to do it, you wouldn’t even think to hire a brain surgeon. This specialization has come along with great advances in technique and results. It turns out that, statistically, heart surgeons are better at heart surgery than barbers are.

What about dermatologists, are they better at sourcing and identifying private-equity and venture-capital investments than private-equity professionals are?

Dr. Keith Wright, a dermatologist in Atlanta, is part of a group of lawyers and businesspeople in the city who have been pooling their money for about six years in search of the outsize returns of private equity legend.

“It came from the boredom everyone felt with mutual funds,” Dr. Wright said. “When we started off, all we were looking for was a home run.”

That is from a whole article about how “D.I.Y. Private Equity Is Luring Small Investors.” I wrote last year that the basic principle of U.S. securities law is that regular individuals can only invest in public companies with regulated, extensive and standardized disclosure, but “dentists can invest in any dumb thing someone can dream up to sell them.” “I mean, not literally just dentists,” I added, “radiologists too.” Also dermatologists though! Really every medical specialty seems to have a subspecialty in risky illiquid investments, and I suppose it is worth wondering why. Money is one reason; dermatology pays well, and you have to put that money somewhere. Another reason might be that medical training inculcates a sense of infallibility and superiority that is easily transferrable to thinking you’re good at investing. Success at investing has a similar effect, come to think of it, which is why so many hedge fund managers think that they are public policy experts, and probably a few of them are secretly confident they could do heart surgery.

It is worth emphasizing though that there are at least two requirements to succeed in private investing. One part is, when you see a private investment opportunity, you need to be good at deciding whether or not to invest in it, and at structuring and negotiating that investment, etc. These are skills, and perhaps you can learn them in your spare time. But the other part is, what private investment opportunities do you see? If you are a professional at a brand-name venture capital firm, startups come to your door asking you to invest; if you are a professional at a brand-name buyout firm, investment banks constantly pitch companies to you. If you are a club of dermatologists and lawyers, I dunno man, I dunno:

In this sense, individuals focused on private equity are at a disadvantage. Their groups are not going to see the best deals, but even if they did, they would not have the capital to invest at that level.

Mr. Prophete, the corporate lawyer, said the eight members in his group each put in $125,000 a year. With $1 million on hand, the group has access to a lot of deals, he said. The group has been active for about seven years.

The members relies on their contacts to find opportunities. “We have never not had a pipeline of deals,” he said. These deals are small, though, the type that large private equity funds would not consider.

We have talked before about this aspect of the private markets, which I think is generally underappreciated: The dentists and the professionals compete on more or less equal terms in making public-market investments, even if the professionals have more time and training to devote to their investment decisions, but in private markets the dentists and the professionals see entirely different sets of deals. It would be surprising if the deals did not differ systematically in quality.