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JP Morgan, Lehman, UBS Alleged as Conspring to Cheat Municipalities on Investments

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Now it is getting closer to being official. This Bloomberg story reports that not only do Wall Street firms screw their clients (hardly a novel revelation these days) but a large group of firms allegedly conspired to price-fix on guarantee investment contracts, a product used by government issuers to park cash raised via bond issues before they deploy it.

From Bloomberg:

JPMorgan Chase & Co., Lehman Brothers Holdings Inc. and UBS AG were among more than a dozen Wall Street firms involved in a conspiracy to pay below-market interest rates to U.S. state and local governments on investment…

A government list of previously unidentified “co- conspirators” contains more than two dozen bankers at firms also including Bank of America Corp., Bear Stearns Cos., Societe Generale, two of General Electric Co.’s financial businesses and Salomon Smith Barney, the former unit of Citigroup Inc., according to documents filed in U.S. District Court in Manhattan on March 24. The papers were filed by attorneys for a former employee of CDR Financial Products Inc., an advisory firm indicted in October. The attorneys, as part of their legal filing, identified the roster as being provided by the government. The document is labeled “list of co-conspirators.”

None of the firms or individuals named on the list has been charged with wrongdoing. The court records mark the first time these companies have been identified as co-conspirators. They provide the broadest look yet at alleged collusion in the $2.8 trillion municipal securities market that the government says delivered profits to Wall Street at taxpayers’ expense.

Yves here. Note this revelation was made by mistake:

In a court filing yesterday, defense lawyers said they “inadvertently” included the names of individual and company co-conspirators in a motion asking the court to compel the government to provide more specific evidence of the alleged misconduct. They asked the court to strike the entire exhibit in which the list appears. U.S. District Judge Victor Marrero granted the request.

The government’s probe became public in 2006 when federal investigators raided CDR and two competitors and issued subpoenas to more than a dozen firms…

The indictments released in October didn’t identify any of the sellers of the investment contracts involved in the alleged conspiracy. They were identified only as Provider A and Provider B. They paid kickbacks to CDR after winning investment deals brokered by the firm, according to the indictments.

‘Sufficient Evidence’

“If the government is saying they are co-conspirators, the government believes they have sufficient evidence that they can show they were part of the conspiracy,” said Richard Donovan, a partner at New York-based law firm Kelley Drye & Warren LLP and co-chair of its antitrust practice. Donovan isn’t involved in the case.

The government’s case centers on investments known as guaranteed investment contracts that cities, states and school districts buy with the money they receive through municipal bond sales. Some $400 billion of municipal bonds are issued each year, and localities use the contracts to earn a return on some of the money until they need it for construction or other projects.

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34 comments

  1. ndk

    I’m shocked, shocked that the U.S. Government would prosecute its stagehands.

    Oh, wait, this is a probe older than 2006. Before corporatism really took hold. Paulson wasn’t even at Treasury yet, was he? Geithner was at the NY Fed.

    The most interesting thing about the list, for me, is that it’s quite cosmopolitan. I didn’t think we could get that much cohesion from that many banks in that many provinces. Bravo, both to the banks and to the conspiracy theorists who were right, for once.

    1. Bob Falfa

      Bravo, both to the banks and to the conspiracy theorists who were right, for once.

      In the words of the great Dr. Johnny Fever:

      When everybody’s out to get you, paranoia is just good thinking.

  2. maniam

    Re- “another wall street bonus”-wsj 25/3/2010.

    Build America bonds.

    Briefly on article.

    Bonds with 7%
    -4.5% paid by issuing city(people pay)&
    -2.5% paid by fed.(also people pay-through taxes/tariff/land sale/privatization-very clever bankers.)

    Us cities,states and the feds have issuued more than 2.5t in ’08 and 2t in 2010.

    Last April,New Jersey turnpike authority sold 1.3b but needed only 250m because great demand.(not because require by project!)
    (like geese stuffed to create foie gras.they did this to 3rd world countries/banana republics,etc.)

    Wall street pocketed 1b in fees in less than a year.

    Goldman has taken out advertisement urging congress to make program bigger and permanent!

    …no one mentions the downside:Build America bonds will add hundreds of billions of dollars of new liabilities to the balance sheets of cities,states and uncle Sam.

    Let see how bankers carried out the looting.
    Looted
    (i)directly 4.5% from issuing city gov.
    (ii)indirectly 2.5% through feds(privately owned)-multiple earning steams.
    Feds turn paper/debts to money.
    loan money to treasury in exchange for bonds.
    (bonds pay interest to feds/bankers.)

    the REAL FALL-
    feds use bonds as reserve and create 10 times through fractional reserve banking.
    (loan some to local gov,cities,states,
    some to companies,
    some to mortgages,
    some to speculators-stocks/commodities/currency,
    some to proprietary trading,
    some to cronies to take over companies,
    some to attack targeted countries’ currency/markets.)

    The looting and plunder start all over again.

    And when no one believe/trust them,they go to church and said they are doing god’s work.

  3. Evelyn Sinclair

    This blog is so totally awesome.

    (Just when my ‘normal’ friends have me partially lulled into thinking — I’m Some Kind of Conspiracy Nut — and — Things Will Be Just Fine…. (Nothing to see here, move along move along. ))

    Yves really doesn’t sleep, yes? I mean, I know I have insomnia. I’m up way past when I’d like to be. Yves is not just coherent, she’s brilliant. And keeps on doing it!

    1. AuBricker

      I’m not lawyer, but I’m guessing the defense gave the list to the prosecution by accident during discovery, and are now insisting that it is a privileged document that the government should return intact. Perhaps a true lawyer can offer a better explanation.

  4. Francois T

    Note this revelation was made by mistake:

    In a court filing yesterday, defense lawyers said they “inadvertently” included the names of individual and company co-conspirators in a motion asking the court to compel the government to provide more specific evidence of the alleged misconduct. They asked the court to strike the entire exhibit in which the list appears. U.S. District Judge Victor Marrero granted the request.

    OK! I’ll admit it; I’m no legal, nor weasel eagle. So, I’m totally confused here.

    Are the banksters getting sued as co-conspirators or not? If not, why?
    And why would the judge grant a request to strike the exhibit with the list of co-conspirators names?

    1. AuBricker

      I’m not lawyer, but I’m guessing the defense gave the list to the prosecution by accident during discovery, and are now insisting that it is a privileged document that the government should return intact. Perhaps a true lawyer can offer a better explanation.

  5. NS

    From another Bloomberg article regarding Munis:

    “The SEC, Justice Department and Internal Revenue Service are looking into the possible manipulation of bids by brokers that allowed banks to pay municipalities below-market interest rates on the investment of proceeds of bond issues. The commission has informed companies including JPMorgan Chase, Bank of America, UBS AG,Wachovia Corp. and General Electric Capital Corp.’s Trinity Funding unit that it determined sufficient wrongdoing occurred to warrant civil charges.”

    ….

    Core Group

    “When you look at the market participants in terms of the underwriting firms, the investment-banking firms, it’s really a core group that’s involved in the majority of these transactions,” said Greenberg, who declined to be more specific.

    The SEC is also enforcing a rule barring securities-firm executives from making political donations to win municipal business.

    It said March 18 that the so-called pay-to-play ban applies to corporate officers after it found an unidentified JPMorgan Chase vice chairman had raised funds for former California Treasurer Phil Angelides in 2002, less than two years before the bank’s securities unit underwrote $15.8 billion of state bonds. JPMorgan consented to the inquiry’s conclusions without admitting or denying wrongdoing, the agency said.

    NS: Isn’t Phil Angelides the FCIC chair investigating the financial crisis?

    The entire article is here:

    http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aoAXtf..biHI

    1. jdmckay

      BofA got caught doing this same thing in late 90′s in Ca., when headquartered in SF (before merger). As it turned out, their record keeping on these things, sold all over the state (mostly municipalities), was in long broken down old Cobal databases. Eg. they were just guessing at yields.

      Similar fraud in Alaska in early 2000′s as I recall, don’t remember details on that one.

      This stuff is as old as the sun, happened many times in many forms last century.

      It is still “trickling down” into state’s balance sheets from various derivatives (mostly, when traced up their “derivative tree” end up at mortgage bonds)… many had no clue when they bought ‘em (incompetance, bribery and cronyism at state level) and, from the sales end, were high powered reps of same WS bigs that did the other big damage.

  6. i on the ball patriot

    Great post! I can just repeat my comment from yesterday’s Michael Lewis thread and it fits nicely …

    “This was not just a happenstance gang rape by a bunch of lusty wall street perverts that can be explained away as; “all had a hand in it”.

    At a minimum there is a conspiracy of class here in all of this in that none of these offensive subhuman ass wipes were members of the ever growing homeless class in scamerica. They were all well heeled, and well educated, human flops emanating from the far to obnoxiously revered over class.

    A greater conspiracy of class, that needs far more discussion, is to be found in; the ties that bind the wealthy ruling global elite, the ties to their global central bankers, and, their ties to the neo-con ideologues who have captured their fancy with their planned ruler and ruled world that is now being incrementally implemented.

    Deception is the strongest political force on the planet.”

    1. NS

      It would be a mistake to politicize the shenanigans as this will only muddy the waters in finding the truth. Clearly old boy politics, regulatory capture enabled this fine mess. The two parties are equally complicit; only the rhetoric is different.

      We can see this beyond our borders too, the rulers of the world aren’t elected, serve no country or people, just themselves. The living species, human and otherwise, are merely fodder for profit and that is all. People and their lives are merely commodities to those rewarded so richly in doing those good works in the name of Gawd.

  7. Siggy

    The eagle photos were far more interesting than the essence of this thread.

    The alleged conspiracy was accomplished by default as oppossed to willful action. The defense of the allegations will be made by comparing the interest rates received by the communities and the yield curve at the time of placement of the funds.

    Then the inquiry will go to who is it that influences the short end of the curve? TaDa!!!! The Fed holds sway over the level of the short end of the yield curve. Now: Who’s screwing who? Is it the federal Government; or, is it the Federally Chartered Cartel we call the Federal Reserve, or is it the individual Federal Reserve Member Banks? Could it be the individual Traders? Just who is responsible for the short rates at the short end of the yield curve?

    I just love it when the lawyers run amok, it makes for such intriguing theater. Do you recall Orange County and that fellow Citron? Do you recall how several Minions of Merrill convinced that fellow that he was a serious day-trader of municipal monies.

    The capacity of people for foible, folly and chicanery never ceases to amaze me.

    At the core of all this hoopla is a cadre of fools chasing a few bps in order to get a nice bonus. Oh Dear, Dear Al Capp, would that you could return from the gone. We desperately need a new comic strip. You could call it MoneyPatch.

    The increasing socialization of our Republic causes me to believe that we are in desperate need of banana trees. Would some of the good souls who follow this blog like to join me in creating a company that sells banana tree seedlings?

    No? Perhaps we could all sing Kumbaya.

    1. jdmckay

      Then the inquiry will go to who is it that influences the short end of the curve? TaDa!!!! The Fed holds sway over the level of the short end of the yield curve. Now: Who’s screwing who? Is it the federal Government; or, is it the Federally Chartered Cartel we call the Federal Reserve, or is it the individual Federal Reserve Member Banks? Could it be the individual Traders? Just who is responsible for the short rates at the short end of the yield curve?

      My guess is all of above… price we pay perfecting beta runs on financial innovation.

      Don’t worry about it though, nothing than a little Renminbi reval won’t fix. :)

  8. Mickey Marzick in Akron, Ohio

    Fraudulent Usurious Corrupt Kleptocracy. Back then…

    The FUCK Cheer…

    Gimme an ‘F’

    Gimme a ‘U’

    Gimme a ‘C’

    Gimme a ‘K’

    What’s that spell? What’s that spell? FUCK! FUCK!

    C’mon all you big strong men [women] Uncle Sam’s got himself in a jam again way down yonder in BANKSCAM…

    And it’s one, two, three, four, don’t ask me what we’re in debt for! Don’t give a damn, next stop is BANKSCAM. Five, six, seven, open up the pearly gates, ain’t no time to wonder why whoopee we’re all gonna die…

    Well c’mon Wall Street don’t be slow
    why this is muni debt a-go-go
    there’s plenty good money to be made
    by supplin’ them munis with the tools of the trade
    just hope and pray that if we steal their ass
    they debit it to the middle class…

    And it’s one, two, three, four, don’t ask me what we’re in debt for! Don’t give a damn, next stop is BANKSCAM. Five, six, seven, open up the pearly gates, ain’t no time to wonder why whoopee we’re all gonna die…

    What’s that spell? What’s that spell?

    The FUCK Cheer now…

    Funny how things seem to come full circle, if you live long enough!

  9. walter_map

    Like I’ve said, the lobbying for deregulation, the sub-prime loans, the toxic tranches, the evasions of responsibility, the cover-ups of duplicity – these could not have been accidental and could only have been the result of malice aforethought in the service of greed. Even the casual evidence is overwhelming.

    What is needed at this point is overwhelming political pressure to get up some real investigations and start handing down indictments. Loud calls for people to step forward to organize that pressure need to be made. There’s a lot of anger out there just waiting to be mobilized.

    1. velobabe

      jesse i just wanted to say i adore you. love your writing style, content and humor. like the articles on the left side bar a lot. thanks for your global enlightenment, sir.

      1. Bob Visser

        I say AMEN to that. Only pity: Jesse, Le Patron, cannot be found at Rue Mont Blanc in Geneve. I would love to meet Madame le Moderateur, after having feasted on his Onglet de Boeuf (blue). Nevertheless I think his blog is tops. BV

  10. Doc Holiday

    All these stories and talk about collusion and conspiracy is just wasted effort. America is a fascist coup run by an organization crime syndicate named wall street — and all the legal agencies like FBI and DOJ are on the take, and those goons work for Treasury and then the elected mafia named congress. Give it up…. America is the land of the crooks.

  11. Not a piña colado

    Take it easy on the bankers, already! They are the victims of a Washington smear campaign. A convenient, but innocent and blameless, piñata for incompetent Washington officials trying to divert the search lights of justice.

    Here is Carlyle’s head honcho take on the present situation:

    David Rubenstein: “I worry about the demonization of the financial-service industry. The financial-service industry has been one of the great industries in the United States. We dominate the global-financial-services world. We dominate the private-equity world in the United States.
    And yet, now, we’re here in a situation where, if you make too much money in the financial-service industry, you are feeling like you should be penalized, and you will be penalized. And I think it’s a very sad state of affairs where people in Washington now feel that the financial-service industry is more or less a piñata they can beat up on. That’s going to discourage bright people from wanting to go in the financial-service industry.

    It’s going to drive some people out of the financial-service industry who just don’t want to be beat up everyday or have their bonuses in the newspaper or have people criticize them for the amount of money they may have made or something. I hope that we can get past this period of time relatively soon, so people in the financial-service industry can once again be proud to be in it and it can once again provide the services that are so useful to our economy and the global economy.”

    Hmm, file in the delusional, parallel universe, trash talk folder along with the “honorable service” ramblings of that AIG guy. The impressive thing about this statement is that Dave is actually able to pull it off without laughing his ass off afterwards (see here at 1:01:00: https://www.mckinseyquarterly.com/Financial_Services/Banking/The_future_of_capitalism_Credit_lending_and_leverage_2555)

    If you have an hour to waste you can watch this “distinguished panel of CEOs and business leaders debate the current state of credit, lending, and leverage” and get absolutely nowhere.

    Here is the conversation I’d like to see taking place real soon:

    Banker: Soon I’m gonna be sucking down piña coladas in a hot tub with six girls named Amber and Tiffany.

    Prosecuter: No, it’s more like in the shower with two guys named Jamal and Jesus… and here’s the bad news; that thing you’re sucking on? It’s not a piña colada!

    Yves, love and need this blog, please keep up the excellent work.

    1. walter_map

      These guys are experts at making reassuring excuses. They’re just going to keep at it until they’re either imprisoned or there’s nothing left to steal.

      Guess which one is more likely.

    2. jdmckay

      Here is Carlyle’s head honcho take on the present situation:

      David Rubenstein: “I worry about the demonization of the financial-service industry.(…)”

      (sheesh…) Dave, take some Xanax.

    3. i on the ball patriot

      David Rubenstein: “I worry about the demonization of the financial-gang rape industry. The financial-gang rape industry has been one of the great industries in the United States. We dominate the global-financial-gang rape world. We dominate the private-equity world in the United States.
      And yet, now, we’re here in a situation where, if you make too much money in the financial-gang rape industry, you are feeling like you should be penalized, and you will be penalized. And I think it’s a very sad state of affairs where people in Washington now feel that the financial-gang rape industry is more or less a piñata they can beat up on. That’s going to discourage bright people from wanting to go in the financial-gang rape industry.

      It’s going to drive some people out of the financial-gang rape industry who just don’t want to be beat up everyday or have their bonuses in the newspaper or have people criticize them for the amount of money they may have made or something. I hope that we can get past this period of time relatively soon, so people in the financial-gang rape industry can once again be proud to be in it and it can once again provide the gang rapes that are so useful to our economy and the global economy.”

      Dave is laughing his ass off. This is a ‘doing god’s work’, laugh your ass off, mocking taunt.

      Deception is the strongest political force on the planet.

  12. Tom Maguire

    Re the notion that the investment banks were screwing their clients by paying a below-market rate of interest – not really.

    What drives these deals is the Federal interest arbitrage rules that say a municipality cannot borrow at a tax-exempt rate (say, 70% of Treasury rate), reinvest the funds at a money market rate (say, LIBOR), and pocket the difference. In fact, the rules oblige the borrower to remit to the government 100% of any excess interest income above their borrowing cost.

    SO the muni borrowers really don’t care that one firm is offering a GIC at 6 and another is at 6.25 if their cost of funds is 5% – they won’t be seeing the money anyway. Consequently, the banks go through contortions to offer a GIC at (as if by Eerie Coincidence) 5%, and make up the value in other ways, generally to other people – hence the kickbacks described in the article.

    We the People got screwed out of some tax receipts in exchange for a lesson in the efficacy of 100% tax rates – if municipal issuers were allowed to keep, say, 10% of their arbitrage interest they might fight harder for a market-based yield. (Later, they would go Orange County…)

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