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Wall Street strikes again

You might want to sit down for this one. The US Justice Department is alleging that more than a dozen Wall Street firms were involved in a conspiracy to pay below-market interest rates to cities and states on certain investments. In other words, they colluded to shortchange the taxpayers.

The companies named in court documents filed this week include Bank of America, Bear Stearns, GE, Lehman Brothers and a former unit of Citigroup. More from Bloomberg:

The government's case centers on investments known as guaranteed investment contracts that cities, states and school districts buy with the money they receive through municipal bond sales. Some $400 billion of municipal bonds are issued each year, and localities use the contracts to earn a return on some of the money until they need it for construction or other projects.

The Internal Revenue Service sometimes collects earnings on those investments and requires that they be awarded by competitive bidding to ensure that governments receive a fair return. The government charges that CDR ran sham auctions that allowed the banks to pay below-market interest rates to local governments.

None of the companies have been charged with anything... yet:

The court records mark the first time these companies have been identified as co-conspirators. They provide the broadest look yet at alleged collusion in the $2.8 trillion municipal securities market that the government says delivered profits to Wall Street at taxpayers' expense.

"If the government is saying they are co-conspirators, the government believes they have sufficient evidence that they can show they were part of the conspiracy," said Richard Donovan, a partner at New York-based law firm Kelley Drye & Warren LLP and co-chair of its antitrust practice.

Cities and states are also pursuing the Wall Street firms in civil court.

May justice be done.

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Like with guns the gun does not cause the injury the management personal making the decisions are pulling the triggers. As long as there are not personal fines or time they could care less. In fact it may get them a bigger bonus.
I remember a telecommunications company where the company plead guilty and all but one of the executives ended up moving up in the company and the one executive that was truthful never held a real management job again.
The biggest problem with just fines is if the fine is to big the personal at the bottom are laid off because of the hit on profits.

Unless uppermanagement at the conspiring corporations are punished with severe prison terms (like Madoff) then such illegal practices will continue.

The legal fiction of corporations as legal persons usually means that government only brings civil charges against corporations not criminal charges against upper management. The result is that when a corporation is fined the costs are borne by innocent shareholders, employees and customers. Management continues on it's merry way paying themselves preposterous compensation unaccountable to anyone. Since some of these firms are still receiving bailouts of one sort or another any materially significant fine will be born by taxpayers!

Today Pfizer was fined $142 million for rackaterring (that's triple damages) but management doesn not pay that, shareholders and others do.

Like with guns the gun does not cause the injury the management personal making the decisions are pulling the triggers. As long as there are not personal fines or time they could care less. In fact it may get them a bigger bonus.
I remember a telecommunications company where the company plead guilty and all but one of the executives ended up moving up in the company and the one executive that was truthful never held a real management job again.
The biggest problem with just fines is if the fine is to big the personal at the bottom are laid off because of the hit on profits.

They need to open up the municipal bond markets to individual investors again. Individuals used to be able to bid on small lots, like say $5,000 or $10,000, of municipal bonds. Now only really big investment firms and very rich people can get into these auctions.

A similar situation occured in the Reinsurance Broker market a few years ago involving Marsh & Associates and various other co-conspirators in the reinsurance industry. In the broker market, a reinsurance contract is awarded to a reinsurer via a competitive bidding process in order to ensure that the primary insurance company (and presumably the insureds) will pay the lowest possible premiums for their coverage. What Marsh did was they set up "mock-auctions" where reinsurers would bid on a contract, but knowing in advance who was going to win. They would pass around the various contracts to all of the participants so that everyone can get in on the action without having to sacrifice premium profits. -- They were caught and this prompted some serious reforms in the Broker market. (Elliot Spitzer was the attorney general that uncovered this plot - how the mighty have fallen!)

My point is that this is nothing new, and doesn't surprise me in the least. They probably figured that since municipalities are run by underpaid accountants that rarely speak to other municipal accountants, that it would be pretty easy to get away with this. Now that the muni bond market is in freefall, regulators can now see the crap on the bottom of the pool. - Sounds familiar?

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