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Muni Payoffs or, Once Again, Wall Street Screws Main Street

Posted by Larry Doyle on March 26, 2010 3:13 PM |

If you think there was fraud involved in the underwriting of mortgages, then you ain’t seen nothing yet. If there is one sector of Wall Street that has notoriously been connected with fraudulent activities it is the municipal bond sector. Why is that?

Very simply, when you have individuals who are earning municipal salaries (high 5-figures to low 6-figures) awarding bond deals which generates millions in fees for Wall Street underwriters, then it is not hard to understand that those municipal employees are going to have their hands out looking to get ‘greased.’ Who really pays for that grease? You and me.

Bloomberg highlights developments into an investigation of a potential Wall Street conspiracy in the municipal sector in writing, JP Morgan, Lehman, UBS Named in Bid-Rigging Conspiracy:

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 investments, according to documents filed in a U.S. Justice Department criminal antitrust case.

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.

“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.

Why do municipal bid-rigging and kickback activities perpetuate? Two reasons:

1. The penalties have never fit the crimes.
2. A lack of proper regulation. What else is new?

White collar crime is rotting our society at its very core.

LD

  • Patriot

    These payoffs have been going for decades …if not longer than that. Price of doing business? I agree that not only the regulators and bankers are on the take but do not exclude those in the court systems as well.

  • Mike

    Conspiracy to pay out ‘below market’ interest rates?

    So the banks took these municipalities’ money, and turned it into significantly more money than they promised to pay out keeping the rest for themselves?

    I bet this happens with regular people all the time. Imagine your hedge fund pays you out 22% this year knowing they probably made like 139% out of it.

    Larry, this is right on track with the evidence of a Wall St. oligopoly.

    • LD

      Mike,

      The key point here is that Wall Street acted in a collusive fashion. This collusion (and bid-rigging) has actually been going on for a lot longer than just the last few years. The fact is, though, the collusion is now much more easily implemented because there are even fewer banks that need to be brought into the ring.






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