Sunday, June 24, 2012

Wall Street bid-rigging trial

Matt Taibbi reports on the financial corruption case against Carollo et al. I guess we're no longer surprised by this kind of huge corruption. Nor should we be that those guilty felt they could commit such crimes with impunity. I saw exactly this kind of activity when I worked in the insurance industry and was one reason I decided to retire early from its corrupt business practices. See for example the infamous insurance bid-rigging case Elliot Spitzer prosecuted back in '05, and why I left one agency representing the insurance carrier involved in that scam. This exact behavior is continuously ongoing in the industry to this day.

A few excerpts from the article:

The banks achieved this gigantic rip-off by secretly colluding to rig the public bids on municipal bonds, a business worth $3.7 trillion. By conspiring to lower the interest rates that towns earn on these investments, 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.

In most cases, towns and cities, called issuers, are legally required to submit their bonds to a competitive auction of at least three banks, called providers. The scam Wall Street cooked up to beat this fair-market system was to devise phony auctions. Instead of submitting competitive bids and letting the highest rate win, providers like Chase, Bank of America and GE secretly divvied up the business of all the different cities and towns that came to Wall Street to borrow money. One company would be allowed to 'win' the bid on an elementary school, the second would be handed a hospital, the third a hockey rink, and so on.

How did they rig the auctions? Simple: By bribing the auctioneers, those middlemen brokers hired to ensure the town got the best possible interest rate the market could offer. Instead of holding honest auctions in which none of the parties knew the size of one another's bids, the broker would tell the pre­arranged 'winner' what the other two bids were, allowing the bank to lower its offer and come in with an interest rate just high enough to 'beat' its supposed competitors. This simple but effective cheat – telling the winner what its rivals had bid – was called giving them a 'last look.' The winning bank would then reward the broker by providing it with kickbacks disguised as 'fees' for swap deals that the brokers weren't even involved in.

The end result of this (at least) decade-long conspiracy was that towns and cities systematically lost, while banks and brokers won big. By shaving tiny fractions of a percent off their winning bids, the banks pocketed fantastic sums over the life of these multimillion-dollar bond deals. Lowering a bid by just one-100th of a percent, called a basis point, could cheat a town out of tens of thousands of dollars it would otherwise have earned on its bond deposits.

How did the government manage to make a case against so many Wall Street scam artists? Hubris... Even though they knew they were being recorded by their own company, the trio of defendants in Carollo wantonly fixed bond auctions despite the fact that their own firm was taping the conversations....because the bid rigging was so incredibly common the defendants simply forgot to be ashamed of it.... 'It became the predominant mode of transacting business.'

When we allow Wall Street to continually raid the public cookie jar, we're not just enriching a bunch of petty executives...we're effectively creating an alternate government, one in which money lifted from the taxpayer's pocket through mob-style schemes turns into a kind of permanent shadow tax, used to maintain the corruption and keep the thieves in place. And that cuts right to the heart of what this case is all about. Wall Street is tired of making money by competing for business and weathering the vagaries of the market. What it wants instead is something more like the deal the government has – regularly collecting guaranteed taxes. What's crazy is that in order to justify that dream of regular, monopolistic tribute, they've begun to see themselves as a type of shadow government, watching out for the rest of us. Amazingly enough, this even became a defense at trial.

"The men and women who run these corrupt banks and brokerages genuinely believe that their relentless lying and cheating, and even their anti-competitive cartel­style scheming, are all legitimate market processes that lead to legitimate price discovery. In this lunatic worldview, the bid­rigging scheme was a system that created fair returns for everyone.... This incredible defense, which the attorneys for all three defendants led with, perfectly expresses the awesome arrogance of the modern-day aristocrats who run our financial services sector. Corrupt or not, they built this financial infrastructure, and it's producing the prices they genuinely think are fair for us – and for them. And fair to them is the customer getting the absolute bare minimum, while they get instant millions for work they didn't do. Moreover – and this is the most important part – they believe they should get permanent protection from the ravages of the market, i.e., from one another's competition.... That, ultimately, is what this case was about. Capitalism is a system for determining objective value. What these Wall Street criminals have created is an opposite system of value by fiat. Prices are not objectively determined by collisions of price information from all over the market, but instead are collectively negotiated in secret, then dictated from above.”

This activity shows that free market capitalism based on fair competition is NOT what these big businesses are interested in, despite their bullshit spin designed to fool their victims. It's greed and corruption, plain and simple. And criminal, if we'd only have the fortitude to continue such trials and convictions with real consequences. As Taibbi points out though, even when we get the convictions the penalties are slaps on the wrist and the practices continue unabated, mainly because these biggest of criminals now have the money to buy elections and legislators that decriminalize such activities. Or at least pay off penalties that come out of petty cash when they're caught red-handed.

1 comment:

  1. Health insurance and medical malpractice companies (I worked for the latter) are exempt from the same kind of anti-trust laws noted above via the McCarran-Ferguson Act. Several times legislation has been proposed to remove these exemptions and several times insurance company lobbyists have stormed DC to overturn it. Another Bill has recently been proposed*, which no doubt will again lose out given the bought-and-paid for Republicans that rule Congress.



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