Muni sweeps: ‘How-to’ primer for bid-rigging

May 5, 2011

UBS finally comes to the table

In November, 2009 the Wall Street Journal reported that Swiss bank UBS was in talks to settle with the SEC on their role into the three year investigation in municipal bid rigging.

After two years they’ve finally reached agreement to pay $160 million in restitution and fines.

From the SEC announcement:

“Our complaint against UBS reads like a ‘how-to’ primer for bid-rigging and securities fraud,” said Elaine C. Greenberg, Chief of the SEC’s Municipal Securities and Public Pensions Unit.

“They [UBS] used secret arrangements and multiple roles to win business and defraud municipalities through the repeated use of illegal courtesy bids, last looks for favored bidders, and money to bidding agents disguised as swap payments.”

This muni bid-rigging story is far from over. Stay tuned.

More reporting on this story:

Reuters: UBS settles with U.S. in muni bond case

Bloomberg: SEC Sues UBS Financial Services Over Securities

SEC’s Walter singing the disclosure song

Unless you are a muniland professional with expensive subscriptions to data services it is very hard to get information about the municipal market.

This lack of transparency comes partly from federal rules and laws that govern the market.

The most important is a 1975 law called the “Tower amendment.”

Tower generally prohibits the federal government from requiring specific disclosure to investors prior to offering municipal debt securities for sale.

The SEC has developed some creative tricks to work around this restriction by requiring the bond underwriter (Wall Street firm) to provide disclosure to investors before they sell a bond.

Regulatory magic tricks!

SEC Commissioner Elisse Walter has been working hard for several years to learn more about the condition of muniland and how to improve protection of investors.

From the Wall Street Journal:

Securities and Exchange Commissioner Elisse Walter repeated her call for increased transparency in the $2.9 trillion municipal-bond market at an industry conference in Charleston on Wednesday.

Buyers of municipal bonds don’t receive the same kind of timely and complete information as do investors in some other financial markets, Walter said.

“That is not a satisfactory state of affairs,” she said. “Investors in municipal securities should not be treated as second-class citizens.”

I think Commissioner Walter meant to say “second class investor.” I agree with the song she is singing. Municipal markets and investors need transparency now more than ever. Disclosure is the best way to move more information into markets.

A rebuttal to greatly exaggerated claims

This is one of the best explanations of short term versus long term fiscal issues for the states. Take time to read it. It will help dispel some of the panic created by predictions of imminent, massive muniland defaults.

From the Center on Budget and Policy Priorities:

A spate of recent articles regarding the fiscal situation of states and localities have lumped together their current fiscal problems, stemming largely from the recession, with longer-term issues relating to debt, pension obligations, and retiree health costs, to create the mistaken impression that drastic and immediate measures are needed to avoid an imminent fiscal meltdown.

Regulating complex industries

I wrote a piece yesterday about the how the SEC and CFTC are being starved for funds to regulate the financial services business.

My premise is that the budget of the Nuclear Regulatory Commission is about 3% of that industry’s revenues.

In contrast the total of the SEC’s and CFTC’s budget is about 0.21% of the financial services industry’s revenues.

This is a shocking contrast given how complex Wall Street has become.

It would be interesting to hear the Congressional rationale for this discrepancy.

Mini sweeps

knowledgemosiac: Dodd-Frank Rulemaking Tracker

Washington Post: House panel’s Republicans vote to delay action on overhaul rule US ICI Data Show Muni Fund Redemptions Continue,Albeit Slower

Wall Street Journal: A Lack of Supply Feeds Rise in Munis

courrielche: Meredith Whitney still firm on muni market prediction

Times Record: Feds OK Medicaid Reform In Arkansas

Appeal Democrat: $95 million Measure J bond slashed to $35 million

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