Matt Taibbi and the muniland mafia

June 25, 2012

Matt Taibbi, a contributing editor at Rolling Stone, talks to radio personality Don Imus about municipal bid-rigging.

Cheers to Matt Taibbi for “The Scam Wall Street Learned from the Mafia,” his detailed Rolling Stone article about a municipal bid-rigging scandal that has already resulted in fines totaling nearly $700 million as well as 15 convictions for antitrust violations and wire fraud. A muniland bombshell that first became public over five years ago, the scheme reached its culmination in May when three former executives at GE Capital, General Electric’s finance arm, were convicted on charges of colluding to rig the public bids on muni bonds.

Taibbi laid out the larger picture of the scandal with his characteristic flair:

By conspiring to lower the interest rates that towns earn on these investments [guaranteed investment contracts], the banks systematically stole from schools, hospitals, libraries and nursing homes – from “virtually every state, district and territory in the United States,” according to one settlement. And they did it so cleverly that the victims never even knew they were being ­cheated. No thumbs were broken, and nobody ended up in a landfill in New Jersey, but money disappeared, lots and lots of it, and its manner of disappearance had a familiar name: organized crime.

Taibbi’s story has gone viral and has helped broaden public understanding of this sorry scheme, which has defrauded municipal entities. But are his assertions that there is organized crime and mafia-like activities in muniland anything other than hyperbole?

Joe Mysak of Bloomberg, a top municipal bond commentator, wrote in May that the bid-rigging trial “caps the biggest scandal in the market’s history”:

The essence of the story is that the public’s trust was violated. A group of bankers took advantage of public officials, because they could, because nobody was looking. As in so much of the public finance business, officials trusted professionals to do the right thing. And they got scammed.

To date, the government has collected 15 guilty pleas or verdicts and almost $700 million in penalties from some of the biggest names in the business, including Bank of America Corp., JPMorgan Chase & Co., UBS AG and Wells Fargo & Co. and there’s no telling when it will stop.

This ought to be a moment of profound introspection for everyone. Instead, nobody wants to talk about it. Last year at the Government Finance Officers Association’s annual conference, there was a panel discussion on the new Dodd-Frank rules and their impact on public finance, and guaranteed investment contracts and swaps came up. I fired in one question from the floor, to the expert Washington lawyers collected on the stage: how bad was it? What happened to inspire all these new rules and proposed new rules? Everyone passed.

The response to Mysak’s query says a lot about the omertà that permeates muniland. It wouldn’t surprise me if some of the expert Washington lawyers that he questioned drew up the documents for many of the muni bid-rigging deals, or at least were aware of the cases the Justice Department was building. It suggests to me that the industry is unwilling or unable to police its own actions and set reasonable professional standards. Mysak goes on (emphasis mine):

The larger question the market has to answer, it seems to me, is whether the system is so shot through with conflicts of interest and gaps in sophistication and information that conventional morality is impossible.

Can this thing we call the municipal market resist corruption? It’s time for the good guys, and I know you’re out there, to use this trauma as a teachable moment.

That Mysak, who has been reporting on the municipal bond market for more than 30 years, shares Taibbi’s dismay over the amount of bad-faith dealing in the market is telling. Dodd-Frank’s new muniland provisions should help strengthen regulatory oversight, but in the end it’s up to market participants to be upright enough not to defraud municipal entities and clients.

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