Banks in hot water over muni meddling

A Wall Street sign

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KAI RYSSDAL: You can go right ahead and put another item on the list of things that Wall Street banks are going to have to defend themselves against. You know the municipal bond market? That $2.8 trillion place where cities and states go to borrow money for stuff like bridges and schools?

Well, the Justice Department is looking into some possible wrongdoing in munis. Put another way, there may be more to the economic troubles that some cities and states are having than just a recession. Specifically, whether Wall Street conspired to pay those local governments below-market interest rates on their investments.

Marketplace's Jeremy Hobson has more from New York.


Jeremy Hobson: When a city borrows to build a road, it might issue a bond for, let's say a million dollars. But maybe it doesn't have to pay the whole million to the road builders right away. So it might invest some of that money, hoping to get a good rate of return. But what if banks collude with each other and the city gets less than what a free market would offer?

Marilyn Cohen: I don't know about you, but I'm getting kind of full up to my limit on outrage. I don't know what happens after you have that final straw.

Marilyn Cohen is a bond expert at Envision Capital Management. She says municipalities got a raw deal, because they just weren't as clever as the Wall Street guys on the other side of these trades.

Cohen: Whenever issuers in the municipal bond market need something extra other than plain old vanilla bonds, they've got to know Wall Street has the upper hand and they're not going to get the deal that they think they're getting.

Robert Lamb at NYU's Stern School of Business has written books on municipal bonds. He says any effect on cities and states may seem like a rounding error on the budget. But...

Robert Lamb: All of this is brutal in terms of things that have to be cut when they've already gone to the bone.

And worse yet, he says, this is one area of the market that was thought to be open and transparent. Several people from the company that allegedly made all this possible have pled guilty. They were charged with taking kickbacks for helping banks collude with each other on what to bid for municipal investments. The banks -- including Bank Of America, Citigroup and JPMorgan -- have not been charged, only listed as co-conspirators.

Bill Walsh is president of the asset management firm Hennion and Walsh. He says even if the rates the banks paid were lower than they might have been, they were still likely higher than alternative investments.

Bill Walsh: If that municipality is left to now just put money in a money market fund, what do money market funds pay? They're not paying anything. I don't know what these guaranteed interest contracts paid them or didn't pay them, but I wouldn't just assume that they were just ripped off.

Either way, the end result appears to be, yet again -- Banks: 1. Taxpayers: 0.

In New York, I'm Jeremy Hobson for Marketplace.

About the author

Jeremy Hobson is host of Marketplace Morning Report, where he looks at business news from a global perspective to prepare listeners for the day ahead.

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