• 18 May 2010 at 11:58 AM

Behind the Massive Conspiracy to Rig the Muni Bond Market

If you thought the SEC’s charges against Goldman Sachs poured fuel on an already-raging populace fire, Wall Street’s involvement in a massive bid rigging scandal in the $2.8 trillion municipal bond market will fan the flames even more.

Earlier this month, we heard about an SEC investigation of conflicts of interest at big banks that bought credit default swaps on muni bonds they sold to state and local governments. But Bloomberg is out with a big investigative piece today about a massive bid-rigging scandal in the muni market that, if true, bilked 160 state agencies, local governments and non-profits out of hundreds of millions of dollars.

The alleged conspiracy centered around so-called guaranteed investment contracts, or GICs, which acted like certificates of deposit for the cash raised from muni bond offerings. The interest rates on GICs aren’t published so governments were mandated to put the contracts out for competitive bidding. They hired small advisory firms to run the auctions to get the highest interest rates.

But that process appears to have been rigged, according to indictments against one of the advisory firms, CDR Financial Products of Beverly Hills, which is cited in the Bloomberg story. The FBI has also raided several of CDR’s competitors including Investment Management Advisory Group, known as Image, and Sound Capital Management, but haven’t yet charged them.

The charges against CDR claim the firm told over a dozen big banks that sell GICs including JPMorgan, UBS, Lehman Brothers, Wachovia, Bank of America and Citigroup, how to lowball their bids to win business from the state and local governments. The banks, in turn, paid kickbacks to CDR.

“The whole investment process was rigged across the board,” said Charlie Anderson, who retired in 2007 as head of field operations for the Internal Revenue Service’s tax-exempt bond division. “It was so commonplace that people talked about it on the phones of their employers and ignored the fact that they were being recorded.”

Three former CDR employees have pleaded guilty to wire fraud and conspiracy to rig bids and more guilty pleas are in the works. A former unnamed BofA banker, who has been cooperating since 2007, is the government’s key man in the investigation. In exchange for its cooperation, BofA has received amnesty from any future prosecution.

To offer amnesty to a bank these days indicates the government is working on a major investigation that could do some major damage to Wall Street’s already shaky reputation.

The banker who has been cooperating with the Justice Department said he overheard his colleagues change Bank of America’s bids after coaching from brokers or other banks bidding on the same deal, according to information that the firm provided to plaintiffs in the civil case filed by seven municipalities.

At least five former bankers with New York-based JPMorgan, the second-biggest U.S. bank by assets, conspired with CDR to rig bidding on investment deals sold to local governments, according to the Justice Department list now under seal.

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.

13 comments (hidden to protect delicate sensibilities)
Show all comments ↓

Comments (13)

  1. Posted by Anonymous | May 18, 2010 at 12:10 PM

    Know thy readership, Kouwe.

    This is like suggesting Gold is in a bubble on Zero Edge.

  2. Posted by Anonymous | May 18, 2010 at 12:19 PM

    Yea, Zero Hedge too.

  3. Posted by Anonymous | May 18, 2010 at 12:22 PM

    @2. “Zero Edge” is a decent way to mock them, though.

  4. Posted by Anonymous | May 18, 2010 at 12:22 PM

    is Goldie involved?

  5. Posted by Anonymous | May 18, 2010 at 12:25 PM

    Does banker rhyme with wanker?

  6. Posted by Anonymous | May 18, 2010 at 12:25 PM

    Bloomberg is now the only financial TV worth watching.It’s fair and truthful.It seems none of their reporters is puppet of these big bank.I’ve yet to hear anyone pumping and giving blow job to GS and others unlike Cramer of CNBC.Perhaps some reporters at Bloomberg are married or in relations with bankers or traders or former employees themselves but still ethical.

  7. Posted by american bandersnatch | May 18, 2010 at 12:40 PM

    populace fire?

    Judas Priest, don’t make any effort to produce a decent work product.

  8. Posted by Frank | May 18, 2010 at 12:53 PM

    What?

    No one told me this on CNBC.

  9. Posted by Skippy | May 18, 2010 at 9:30 PM

    Jesus Christ Kouwe! next thing your gonna tell is that the stock market is bullshit. Hey @1, gold isn’t in a bubble anymore than your head is full of hot air, but don’t let that stop me from letting you from having a chuckle at your own peril.

  10. Posted by Bernard | May 19, 2010 at 12:21 AM

    Good article. This is the first I have heard of this, but I was away today so I guess that is possible that it was not THE biggest of news. Why are people bashing on Zero Hedge? It reveals the hurtful truth to the public. I see Germany is trying to close the case on Naked Short Selling on their own exchanges. I can imagine how sky high some small cap stocks would run if there was a call on naked shorting in our small cap domestic sector. microcapreports has had some good picks, but you can’t trust what sort of manipulation the market makers will have on them day to day

  11. Posted by Hamada | May 5, 2012 at 3:06 PM

    There is more and more halal slaughtering going on and this meat goes dilrctey into the market place, bought up and never labelled.Also, served to people without telling them in the public sector. The thought of me eating any of this type of disgusting voodoo crap makes me want to throw up. This type of slaughter and religious praying must not be allowed to be part of any slaughter house. Meat slaughtered with this process must be labelled as such, and legislation must be made through agriculture and food inspection to state this. To date, there is none, only legislation that protects the islamics so that anyone who labels halal meat that isn’t will be prosecuted because these crackpots start to normalize if they eat so called ‘unclean’ meat.Three things make it halal1. Must be bled to death slowly2. Must be prayed over3. Must only be handled by islamicsFunny Peta never touches this. In Alberta 20% of the beef is now slaughtered this way, and I guess it makes 100s of millions in exports….Whoever is responsible for this decision is likely also in on the huge revenues given the oil corporations that had been responsible for Alberta now being over 1 billion in debt. Decision makers with IQ.s in the developmentally incapable range

  12. Posted by nlmibryv | May 6, 2012 at 8:09 PM

    3tVuE6 hqcvdoaerzin

  13. Posted by behveutzlr | May 8, 2012 at 10:44 AM

    AHxi1B phhcmnyqlvgp