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* Last week, Attorney General Lisa Madigan trumpeted a national settlement with JP Morgan Chase and 23 other states over bid-rigging. The national settlement totaled $92 million. Illinois received $2.2 million. Bank of America and UBS previously settled with the states for $67 million and $90.8 million, respectively, so this was obviously a very widespread practice. From Madigan’s press release…

[The] agreement centered on allegations that from 2001 to 2005, JPMC conspired with financial institutions and brokers to rig bid prices for municipal derivatives, circumventing the competitive bidding process. In some instances, JPMC and other financial institutions communicated directly with each other, and not through brokers, to fix prices or to fix rates or key terms of these transactions. Brokers also frequently offered JPMC and other financial entities the unfair advantage of reviewing other bids, thus rigging who would win the deal.

Municipalities, schools and other organizations typically issue municipal bonds to fund capital projects. Once bonds are issued, the money is typically placed into accounts to spend as the local entity incurs expenses for the project. Because the money from the bonds does not need to be spent immediately, the entity that issued the bonds typically seeks to invest the money and may also use strategies to manage or transfer the bond’s interest rate risk. These investment accounts and risk management products – which are collectively called “municipal bond derivatives” – are offered by large financial institutions.

* Some are unimpressed, to say the least. The attorneys general settled with JP Morgan Chase at about the same time as the Securities and Exchange Commission hit the company with a $228 million fine. That fine was passed off as a mere slap on the wrist by Matt Taibbi, a vicious critic of the financial services industry…

This is one of the best examples we’ve had yet of the profound difference in the style of criminal justice enforcement for the very rich and connected, versus the style of justice for everyone else. This scam that Chase, Bank of America and UBS were involved with was no different in any way, really, from old-school mafia-style bid-rigging scams.

What these banks did is they got together and carved up territory between them, arranging things so that they wouldn’t be bidding against each other in municipal debt auctions. That means the 18 different states involved in these 93-odd deals all got screwed out of the best prices, leaving the taxpayers in those places severely overcharged for their public borrowing.

This is absolutely no different from what mafia groups in New York used to (and probably still do) do for public contracts – the proverbial five families would get together, divide up the boroughs and neighborhoods between them, and each family would individually buy or intimidate their way into the bidding process, corrupting the game so that the public had to overpay for their garbage collection or their construction labor or whatever. The only difference here is that we’re talking about debt, not garbage. But the concept is exactly the same; it’s the same crime.

If Khuzami’s defendants had been a bunch of Italians from Howard Beach, they would be facing RICO charges and would be looking at years in prison, plus seizure of all their ill-gotten gains, in addition to civil suits and penalties.

As it is, as my friend Eric points out, the endgame for banks like Chase is, “Admit nothing, pay two hours of revenue and all good!”

* And Bill Singer at Forbes wants to see far more serious penalties against these corporations, instead of relatively minor fines…

[The] DOJ and SEC continue to slam the individual employees, frequently with industry bars, but the member firms/banks always seem to be able to obtain an exemption from the Bad Boy provisions. The UBS and BOA cases are perfect examples. At what point does the gestalt result in the simple syllogism that if an organization’s employees are being indicted and administratively pursued, that it’s no longer solely an issue about “our former employees” and becomes an issue about the company itself? If the SEC won’t shut down a UBS or BOA for, say five days, after hundreds of millions in muni fraud, then how about refusing to give the No-Action Letter relief for 3 months, or 6 months, or even a year?

* In other news…

Andrew Davis, executive director of the state agency running the beleaguered College Illinois prepaid tuition program, is out.

Gov. Pat Quinn’s newly installed Illinois Student Assistance Commission on Friday removed him from day-to-day responsibilities and put him on paid administrative leave.

Appointed in his place is an interim executive director, John Sinsheimer, chief financial officer of ISAC from 2007 to 2009. More recently, Mr. Sinsheimer has been director of capital markets for the state of Illinois, responsible for managing state debt issuance.

Mr. Davis will continue collecting his $198,000 annual salary for an indeterminate period. The previous commission gave Mr. Davis a 10% raise in February and extended his employment contract until the end of 2012. He’s due a significant severance if he’s let go unless he’s fired for cause. The exact amount couldn’t be learned immediately.

* Semi-related…

* As unemployment rises, Chicagoans protest

* Illinoisans Fed Up As Job Creation Stalls, Unemployment Rises

posted by Rich Miller
Monday, Jul 11, 11 @ 7:42 am

Comments

The Muni market is not a transparent marketplace - never has been. EMMA (see Electronic Municipal Market Access; http://emma.msrb.org/) is a good start, but it’s still an opaque marketplace.

Stuff like this will keep happening until we create an open marketplace for Muni financing instruments. As an example, if you hold a listed stock, you can probably get as many as 10,000 points of finding out current information (including pricing) on the specific stock. Try accomplishing that same thing on Municipal financing instruments.

We need an open and transparent marketplace for Municipal financing instruments, otherwise is 4-5 years it’s going to be “rinse and repeat” all over again.

And yes, the “Banksters” got away with a sweet deal from IL AG Lisa Madigan. It’s understandable, as this would be a “heavy lifting” case, and that does not seem to be the Attorney General’s style.

Comment by Judgment Day Monday, Jul 11, 11 @ 8:31 am
I don’t know whether “heavy lifting” is or is not the AGs style, but I’m pretty sure any further or more aggressive action on this would involve some number of fed regulators (CFTC, etc.) which adds a significant time premium to the equation. So maybe money was left on the table but you’ve got to ask: How much would it have cost to collect it?

Comment by Indeedy Monday, Jul 11, 11 @ 9:19 am
I worry when it comes to Lisa Madigan and Big Finance.

They are running rings around her here, they ran rings around her back when she was seeking a settlement for Big Finance when they misinvesting Illinois taxpayer funds in Bright Start?

You can do better than “If you are caught stealing a case of beer, you must return 4 cans”, Lisa.

Comment by Anonymous Monday, Jul 11, 11 @ 10:43 am
Andy Davis was brought in to do some major restructuring at ISAC, including selling off its student loan portfolio. Investing (and losing money) with friends was not part of the job description as far as I know.

I hope the Governor appoints someone to lead ISAC who is a financial wizard but who also maintains some ethics and a prudent, cautious and transparent investment policy. A lot of kids are counting on MAP, and a new leader might be able to make the case that investing in tomorrow’s workforce is as important or more than investing in keeping companies in Illinois.

Comment by 47th Ward Monday, Jul 11, 11 @ 11:25 am
I truly thought this post would generate a ton of comments.

Comment by Rich Miller Monday, Jul 11, 11 @ 11:49 am
There’s a lot of chum in the water today Rich, and this post has math in it. Plus, it’s Monday.

Why were expecting more comments? That’s curious in itself.

Comment by 47th Ward Monday, Jul 11, 11 @ 12:10 pm
I figured that allegations of going light on the evil banksters would provoke some folks. Guess not.

Comment by Rich Miller Monday, Jul 11, 11 @ 12:12 pm
I think less than half of us are liberals who care about the banks ripping us off again. The conservatives here don’t see any problem to begin with, so they’re not likely to complain or comment.

More to the point, evil banksters getting off easy is the dog bites man story of the new millenium. It’s only news when someone holds the banks accountable, and this isn’t even close to accountability.

Comment by 47th Ward Monday, Jul 11, 11 @ 12:19 pm
Points well taken.

Comment by Rich Miller Monday, Jul 11, 11 @ 12:21 pm
The Bright Start agreement called for $77 million returned to Illinois families. Did you know that the AG’s office originally wanted to settle for $20 million? In most cases the AG’s office has total control over each case (as they will arrogantly remind anyone who will listen, repeatedly) but in that particular case because of the legal framework of how Bright Start was set up they needed the Treasurer’s Office sign off as well. After much teeth gnashing the AG’s office was forced to go back to Oppenheimer and push further. That they settled with the Banksters for so little doesn’t surprise me at all.

Comment by The Captain Monday, Jul 11, 11 @ 12:37 pm
- I truly thought this post would generate a ton of comments. -

It would be nice to hear from the anti-regulation crowd, but I guess they just ignore stuff like this.

Comment by Small Town Liberal Monday, Jul 11, 11 @ 1:05 pm
“It would be nice to hear from the anti-regulation crowd, but I guess they just ignore stuff like this”

Regulated like Bright Start and College Illinois Pre Paid Tuition programs?

Perhaps you should wait for the “Illusion of Regulation” crowd.

Comment by Anonymous Monday, Jul 11, 11 @ 1:33 pm
Let’s see if a ban on State business is forthcoming in the wake of these dramatic and serious violations.

Don’t hold your breath.

Who was over there at JP before he left to go where was it? some government job? AA’s memory ain’t what it used to be. Help me out.

As far as Andrew Davis, why weren’t the red flags up when he ran his own trading firm in to the ground when the market was strong? There was a lot of heat (Blago-style) behind that guy and having state pensions use the Chicago Stock Exchange, invest pension dough with Illinois investment companies (and not JP Morgan), and other sound good but shady schemes that went away as fast as Davis’ business failed.

In fact, old AA does remember hearing a speech touting all of this at an event Davis mostly sponsored with a rousing keynote speech/endorsement delivered by then/Congressman…Rahm Emanuel.

It’s a small world here in Illinois.

Comment by Arthur Andersen Monday, Jul 11, 11 @ 3:29 pm
Most of us in the People’s Republic of Oak Park are without power — maybe we can gin up more outrage once the lights (and the intertubes) come back on.

Comment by soccermom Monday, Jul 11, 11 @ 3:30 pm
“It would be nice to hear from the anti-regulation crowd, but I guess they just ignore stuff like this.”

We’ve already got tons & tons of regulations. It’s ENFORCEMENT that is missing. Every time we add more regs, we just give smart lawyers more opportunities to play their games - and the Banksters hire smart lawyers by the trainload. They can certainly hire more then the IL AG can.

Again, the regs are already there, enforcement is what is required.

If we can make the process transparent from where it is today, at least some of these ongoing, re-occurring problems will go away.

Comment by Judgment Day Monday, Jul 11, 11 @ 3:32 pm
- Regulated like Bright Start and College Illinois Pre Paid Tuition programs? -

You’re saying these types of funds are what nearly crashed our economy? I’ll stick with my illusions as long as they don’t start moving toward delusions like yours.

Comment by Small Town Liberal Monday, Jul 11, 11 @ 4:13 pm
They still charge $5 for a non-Chase ATM transaction. Why should they treat a muni any differently?

Comment by JBilla Monday, Jul 11, 11 @ 4:14 pm
With penalties like that, what’s the disincentive for bid-rigging? It’s just a minor cost of doing business.

Comment by wordslinger Monday, Jul 11, 11 @ 4:50 pm
“With penalties like that, what’s the disincentive for bid-rigging? It’s just a minor cost of doing business.”

Pretty much correct, except it’s not really “bid rigging” (that’s how the newsies describe it to make it understandable for all us peons).

Because it’s all happening in the derivatives market, we really can’t tell if it’s ‘rigged’ or not.

States need to ban players who collude on derivatives (and I mean for months, if necessary), and what we really need is a way to establish clearly what is happening in the derivatives marketplace all the time, and in real time. In other words, you make any type of activity in the derivatives market, it’s got to be fully reported in an open exchange within 24 hours - NO EXCEPTIONS.

Then you have a hammer…..

Banksters - Don’t even try and spin that it’s not possible or it’s too expensive…..

Comment by Judgment Day Monday, Jul 11, 11 @ 5:11 pm
Too bad Mr. Spitzer liked the expensive escorts. He was far ahead of the curve on the massive fraud in the financial services industry as NY AG.

Comment by Precinct Captain Monday, Jul 11, 11 @ 5:21 pm
Two good points, JD and PC.

Rich, maybe a hot Monday is also keeping comments down…

Comment by Arthur Andersen Monday, Jul 11, 11 @ 5:52 pm
Rich, has the REAL Arthur Andersen come back?

Comment by Anonymous Tuesday, Jul 12, 11 @ 12:53 am
Sorry, that was me. Lost my handle.

Comment by The REAL Anonymous fka Anonymous Tuesday, Jul 12, 11 @ 12:53 am