Bloomberg has a detailed story up on its website about a pending Department of Justice suit that charges that municipalities were not simply played for fools by big financial firms and sold down the river by their supposed advisers. Sadly, that is all too common. What is noteworthy here is that the advisers engaged in widespread, open bid rigging to lower the income government entities received on their investments, and took kickbacks from the banks who were the beneficiaries of this process.
Understand further: the payments that were allegedly paid in these cases were significantly large as to require some level of management approval. There is no way management did not know this was afoot.
How this situation came about is that government-related bodies, just like big corporations, will sell bonds to raise money for long term projects. Typically, they don’t need all the dough at once. For instance, if you are building a school, the project expenses might extend over a period of three years. So you want to park your unused proceeds in an instrument that pays more than a bank account. A popular route was guaranteed investment contracts. Municipalities would organize a bidding process to see where to park their dough to receive the best return.
But this is where the process went off the rails. The “advisers” to the municipalities were peculiarly hired by the municipality, but ultimately paid by the bank that wins a piece of business. That of course is a terrible set of incentives if you want someone to work on your behalf. The advisers were were colluding with the banks to keep the bids low and being paid additional undisclosed fees for their assistance. And the banks involved are major names: Bank of America (which has admitted guilt and is turning state’s evidence), JP Morgan (this when its CEO gives sanctimonious speeches about doing the right thing), Citigroup, Lehman, plus eleven others.
Now municipal finance is admittedly a cesspool; in some places, such as Jefferson County, Alabama, the “adviser” was a crony of a corrupt local official and featherbedding was part of the job description. But there is every reason to think that for most part, the fleeced government bodies were chumps rather than complicit.
What struck me was that this story was on Bloomberg this morning and I did not see it until this evening, thanks to a message from reader Francois T. No blog in my RSS reader deemed this worthy of attention. Is corruption by the banking classes now such a normal state of affairs that no one bothers to take note unless the perps are called before Congress and made to squirm?
Some tidbits from the article, which I encourage you to read:
In the bid-rigging deals, CDR [a municipal adviser} gave false information to municipalities and fed information to bankers allowing them to win with lower interest rates than they were otherwise willing to pay, the indictment says. Banks took their illegal gains from the additional returns and paid CDR kickbacks, according to the indictment….
During more than three years of investigation, federal prosecutors amassed nearly 700,000 tape recordings and 125 million pages of documents and e-mails regarding public finance deals….
Bid rigging not only cheated cities and towns, it also illegally denied the IRS required taxes from GIC income, [retired IRS investigator Charlie] Anderson said. The evidence is clear in telephone recordings made on GIC desks, he said. “We could hear people talking about how everyone knew who was going to win the bid. You could tell it was just everyday business.”