Gangster Banks Keep Winning Public Business. Why?

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A man walks in front of the JP Morgan Chase building in New York.

A friend of mine sent this article from Bloomberg, along with the simple comment: "Perfect." What's perfect? That the banks that have been caught repeatedly ripping off communities and munipalities -- banks that have paid hefty settlements for rigging bids, bribery and other sordid misdeeds -- keep winning the most public business. Apparently, our public officials aren't concerned about whom they hire to serve as the people's investment bankers.

From the piece, entitled "JPMorgan Claims No. 1 for Government Debt After Jefferson County":

JPMorgan, which emerged from the worst financial crisis since the 1930s as the most profitable U.S. bank, has parlayed crisis-era loans to cities and states and a willingness to outbid other firms in local government bond auctions into becoming the top underwriter of municipal debt last year, according to data compiled by Bloomberg. It was the first time the firm held that rank.

The turnaround was a milestone for JPMorgan’s municipal- bond department, which has been marred by its involvement in two of the biggest scandals in the history of U.S. public finance: a so-called pay-to-play scheme in Jefferson County, Alabama, that contributed to the biggest-ever U.S. municipal bankruptcy, and a federal probe that uncovered bid rigging of municipal-bond investment products.

This story dovetails with the larger story I have out in the magazine now about Bank of America, another Too-Big-To-Fail behemoth that placed a very close second in the area of municipal bond business, according to the Bloomberg survey. Chase managed $35.7 billion in long-term bond sales, while BOA/Merrill Lynch came in at about $200 million less.

Why does this matter? Because both banks, Chase and Bank of America, have been repeatedly tied to scandals involving the issuance of public debt. Bank of America paid a $137 million settlement for rigging the bids of bond issues in numerous communities (including places as far away as Guam), while Chase also paid a big settlement of $211 million last year for more or less exactly similar offenses involving localities in 25 different states.

Chase also entered into a $722 million settlement with the government over its behavior in Jefferson County, Alabama, where the bank essentially bribed local officials to take on onerous swap deals that left the county in debt until the next millenium.

Bid-rigging is an old-school crime of machine pols and gangsters. In the old days, it was parceling out garbage collection or construction contracts to each of the proverbial five mafia families, who would patiently pantomime real bids for government contracts. They would take turns "winning" the state's business with artificially low bids, guided by a corrupted insider who usually took a bribe to rig the auction.

In modern times, it's the same thing, except that it's banks now doing the pantomiming. Here a circle of organized crooks (read: banks) gets together, parcels out territories so that each party gets to "win" business in certain areas, and then they all get together and agree to a rigged bid system.

Typically, a subcontracted-out private broker/bidding agent takes all the bids for a municipal bond issue, and then quietly tells the "winner" whether he needs to jack up or reduce his bid. The broker might tell the bank, for instance, that its bid was too "aggressive," i.e. too high -- allowing the bank to come in with a lower bid that would still win.

If you read through these bid-rigging lawsuits/settlements, you'll find a striking commonality in the evidence collected by these states and municipalities. All across the country, the same banks use the same code words with the same bidding agents to win business with artificially lowered bids.

In one action involving California communities and a number of banks, authorities claimed the language was extremely overt. Some examples of "code" phrases agents would use:

“This one needs to go to JP Morgan.”

“JP Morgan understands that they just won a big transaction and that this one needs to go to Bank of America.”

Municipal bonds are boring. In fact, if you’ve even made it this far down this blog entry, you’re probably fighting the urge to doze off. But the bottom line with municipal bid-rigging is that it costs all taxpayers (particularly those who pay property taxes) enormous damage in lost services and increased taxes.

If your town gets cheated out of $3million it would have received in an honest auction of its bond business, that’s money that’s not going to schools or firemen or cops. And it’s money those towns will take out of your pocket to compensate, usually by raising taxes.

The settlements out there with banks like Chase, Bank of America, Wells Fargo and UBS cover hundreds of localities in virtually every state in the union. The sheer number of cases suggests that this activity is epidemic and systematic – in other words, that it’s simply the way to do business in America.

I wouldn't be surprised if ultimately we're talking about tens of billions in lost revenue for states and towns. It might be more. If recent history is any guide, if a bank pays a $150 million settlement to the federal government for this sort of activity, one can guess that the bank probably made ten times that amount in profit, at least. And there are at least a dozen major banks that have been accused of this sort of activity in recent years.

The news about Chase and Bank of America continuing to dominate a market they’ve already admitted to feloniously rigging says a lot about the state of modern finance. Bloomberg offered a telling quote from a state official justifying the decision to continue to do business with these criminal banks:

“I haven’t found an investment bank that hasn’t had some problem in the last three years,” California Treasurer Bill Lockyer said in a telephone interview. “We do business with them all. I think they provide good service. I think they’ve been highly ethical with us.”

This is coming from an official whose state, California, has seen multiple bid-rigging cases in recent years, from Riverside to San Mateo to Sacramento to Los Angeles to Santa Barbara, for starters. So a quote like that is pretty sad. It tells you that the system works fine for state officials and banks -- and no one is representing the people who actually lose out.

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