Courtesy of my good friend Eric Salzman comes this latest outrage – SEC Enforcement Director and former Deustche Bank general counsel Robert Khuzami boasting about the latest slap on the wrist directed at a major bank, this time a $228 million fine of JP Morgan Chase for a bid-rigging scheme involving municipal bonds. The Chase ruling is the latest to come down in a series of fines involving a number of banks, including Bank of America and UBS.
This is one of the best examples we’ve had yet of the profound difference in the style of criminal justice enforcement for the very rich and connected, versus the style of justice for everyone else. This scam that Chase, Bank of America and UBS were involved with was no different in any way, really, from old-school mafia-style bid-rigging scams.
What these banks did is they got together and carved up territory between them, arranging things so that they wouldn’t be bidding against each other in municipal debt auctions. That means the 18 different states involved in these 93-odd deals all got screwed out of the best prices, leaving the taxpayers in those places severely overcharged for their public borrowing.
This is absolutely no different from what mafia groups in New York used to (and probably still do) do for public contracts – the proverbial five families would get together, divide up the boroughs and neighborhoods between them, and each family would individually buy or intimidate their way into the bidding process, corrupting the game so that the public had to overpay for their garbage collection or their construction labor or whatever. The only difference here is that we’re talking about debt, not garbage. But the concept is exactly the same; it’s the same crime.
If Khuzami’s defendants had been a bunch of Italians from Howard Beach, they would be facing RICO charges and would be looking at years in prison, plus seizure of all their ill-gotten gains, in addition to civil suits and penalties.
As it is, as my friend Eric points out, the endgame for banks like Chase is, “Admit nothing, pay two hours of revenue and all good!”
You don’t have to take my word for it. Go back for yourselves and look through bid-rigging cases in the past. If you see a bunch of Italian names in the list of defendants (see here for instance), you can pretty much guarantee that there’s a RICO prosecution involved.
But if the defendants are a bunch of Ivy-League educated bankers from Wall Street, what we end up getting is a negligible fine (officials will brag about this $228 million, but it’s a drop in the bucket compared to what the banks make scamming communities and governments) and, as always, no admission of guilt. This is how the SEC’s own press release reads:
Without admitting or denying the allegations in the SEC’s complaint, JPMS has consented to the entry of a final judgment enjoining it from future violations of Section 15(c)(1)(A) of the Securities Exchange Act of 1934 …
That the settlement includes language like this is another gift to the banks. Allowing Chase to settle without admitting guilt leaves the conned states and localities facing an uphill climb in any attempt to recoup more money through litigation.
The Chase/UBS/BofA case is a close relative of cases like the Jefferson County, Alabama business, in the sense that the game here involves corrupt local officials selling out to banks, with both parties making the taxpayer the mark in a scheme to overcharge him for debt he never voted to incur. It is a classic modern Wall Street scam, in that people in these states were victimized without ever even knowing that they were robbed.
How would the California resident have any way of quantifying how much money he personally loses when Chase cheats his state out of true bids in municipal bond auctions? When his taxes get raised five years from now to pay off this artificially inflated debt, will he have any clue what’s behind the increases? By the time anyone figures it out, in the very rare case that anyone does, it's five or ten years after the banks have paid out the bonuses to the guilty parties.
Moreover, this particular scheme also targets the federal government, which normally taxes the proceeds of investment earnings from tax-exempt bonds. Now, they collect less in taxes. You can bet, when the Tea Party starts calling for NPR and food stamps to be sacrificed to reduce the deficit, that nobody will be bringing up the tax revenue Chase, UBS and BofA swindled the Treasury out of in these bid-rigging schemes.
This kind of thing goes on all the time and it’s only in the most extreme cases, like for instance when people in Alabama end up paying 500 percent of their normal sewer bill to pay off some dirty financing deal, that we ever find out about it. It’s not going to stop until people start doing hard time for these crimes, and it looks like we’re still a very long way from that.