Wall Street’s City Bid-Rigging Racket: Who Ran It? How Many Billions Are Missing? Where’s the Investigation?

Richard Eskow

A recent court case proves what many of us have long suspected: Big banks have been ripping off this nation’s towns and cities for years in an old-fashioned racketeering scam. We ran some numbers to see how much this criminality might have cost the American people.The answer? Billions.

That’s billions that might have been used to educate our children, pave our roads, and protect us from crime, disease, and fire. Will somebody take this investigation as high in these organizations as it needs to go, pursuing the truth wherever it may lead?

The Unindicted

You might call that a delicate subject in some circles. The convicted felons worked for GE Capital, which was allowed to retroactively declare itself a bank so it could be rescued by taxpayers. GE’s CEO, Jeffrey Immelt, was tapped to head the President’s Jobs Commission.

JPMorgan Chase was also implicated in this bid-rigging case. Its CEO, Jamie Dimon is frequently described as “America’s favorite banker” – most often by himself or his publicists – and politicians of both parties flatter and kowtow to him. Yet another was Bank of America, whose CEO Brian Moynihan is often characterized as … well, this is a family publication. But Bank of America was probably the worst of the corporate felons in the mortgage fraud scandal.

The crimes in this case were committed between 1999 and 2006, well into the period when both Dimon and Immelt were leading their respective organizations. We’d like to know if prosecutors in this case use the tactics that have worked so well against the Mob, by pressing these low-level employees to turn state’s evidence and testify against the higher-ups. And each of these CEOs was required by Sarbanes-Oxley to certify that he has personally reviewed the anti-fraud measures in his own company and found them adequate.

The question we need answered is a time-honored one: What did these CEOs know, and when did they know it?

The Crime

Matt Taibbi has a new piece in Rolling Stone called “The Scam Wall Street Learned From the Mafia,” by which he means bid-rigging on municipal contracts. Taibbi points out that the wiseguys have fixing things like a city’s paving bids, and anybody who didn’t play along might wind up under the pavement instead of pouring it.

Convictions in a recent case called The United States of America v. Carollo, Goldberg and Grimm illustrate the banks’ municipal bid-rigging racket. A town or city would hire a firm – in this case, a GE Capital subsidiary – when it wanted to issue a municipal bond. These bonds are often issued for projects which take a number of years to complete. Since cities don’t spend all the money right away, part of the “competition” part of the process involves seeing who can offer the best interest rates while the money’s waiting to be spent.

That’s where the rigging comes in. The defendants made sure that the interest rates quoted were all higher than the municipalities would have received under true competition so the difference could be skimmed off.

Officials in the Justice Department, along with a host of bank-friendly journalists, keep saying it’s too hard to get convictions in for bank fraud. This verdict proves that they’re wrong. The mechanisms for fraud may be complicated, but the crimes themselves are often easy to characterize. Here’s a one-sentence description of this case:

Cities and towns thought they were received competitive bids for the best available rates, but the bid process was rigged so that crooked bankers could skim money off the top.

That wasn’t hard, was it?

The Trial

Taibbi has some authorial fun drawing on the colorful, old-school nature of what sounds a lot like an old-fashioned racketeering trial. They even played audio recordings of the defendants plotting their crimes. Audio! How retro can you get? He writes:

In the manner of old mob trials, Wall Street’s secret machinations were revealed during the Carollo trial through crackling wiretap recordings and the lurid testimony of cooperating witnesses, who came into court with bowed heads, pointing fingers at their accomplices … on tape after tape these Wall Street crooks coughed up phrases like “pull a nickel out” or “get to the right level” or “you’re hanging out there” – all code words used to manipulate the interest rates on municipal bonds …

How much might have been stolen this way? Taibbi again:

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 … (C)onsider this: Four banks that took part in the scam (UBS, Bank of America, Chase and Wells Fargo) paid $673 million in restitution after agreeing to cooperate in the government’s case. (Bank of America even entered the SEC’s leniency program, which is tantamount to admitting that it committed felonies.)

A number of other firms were implicated in the case, too, including Goldmans Sachs and AIG. Writes Taibbi:

(S)ince settlements in Wall Street cases tend to represent only a tiny fraction of the actual damages (Chase paid just $75 million for its role in the bribe-and-payola scandal that saddled Jefferson County, Alabama, with more than $3 billion in sewer debt), it’s safe to assume that Wall Street skimmed untold billions in the bid-rigging scam.

Billions? I thought I’d pull some publicly available municipal bond data to see if that could possibly be true.

The Big Haul

Municipal bonds are a $3 trillion-plus market, and Taibbi’s right when he says it’s a complicated one. But the basic structure isn’t. There are three types of municipal bonds: competitively bid bonds, like the ones in this case; negotiated bonds, and private placements. Based on past experience, it’s safe to assume that the banks have cheated in all three categories. But even if we limit our universe of bank cheating to competitively bid bonds, we’re still talking about a market of roughly $1 trillion (in bonds that were issued between 1996 and 2011).

We used some data from a trade organization called the Securities Industry and Financial Markets Association, or SIFMA, and looked at the average length of the bonds from issuance to maturity (along with some other details that would bore most people) to get a rough sense of how much could have been stolen over the last fifteen years or so.

Here’s what we found: If interest rates were artificially lowered on all of these bonds by ten basis points, as was done in one of the bids in this case, that would have cheated America’s towns and cities out of $82 billion dollars in the years between 1996 and 2011.The “nickel” skimmed in another case would have cost our cities $41 billion.

That’s a lot of money. Our money.

The Rackets

Not all bids were necessarily rigged, of course, and some may have been rigged for less (as some of the bids in this case were).Others may have been rigged for more than that. But when you’re looking at these numbers, remember: The rackets are much bigger than this one scam.

There are many other forms of financial fraud, and some of them may have been arrayed against these towns and cities when they were issuing non-competitive bonds as well. States also issued bonds. In one well-reported example, Goldman Sachs took a fat fee for issuing a California bond, while at the same time secretly robbing it of value by encouraging its clients to bet against California’s bond. That drove the value of the bond down and most likely cost the state tens of millions of dollars.

Then there’s JPMorgan Chase’s sewer bid-rigging cost Montgomery County, Alabama up to $3 trillion. It’s worth noting that this case did not involve competitive bidding, which shows how broad the scope of bank bid-rigging fraud could have become. And then there are the various forms of investor fraud perpetrated during the housing bubble, which affected government investors as well as private ones.

All in all, state and local governments undoubtedly lost billions of dollars, and perhaps tens of billions, as a result of bid-rigging and other fraud by major financial institutions. That’s billions of dollars for hospitals. Billions of dollars for schools. Billions of dollars for roads, buildings, important public services.

And billions of dollars for jobs.

It’s clear from the behavior of the defendants that they never expected to be punished for behavior that they considered common in their own workplace. Why should they? Each of their institutions had been operating like a criminal syndicate for years.


There isn’t room enough to go into all the misdeeds committed by these serial corporate offenders, so we’ll just offer a few examples:

GE Capital: What an outfit! Committed investor fraud and bank fraud in which senior individuals in the Accounting Department were identified as the perpetrators, but were (not so) mysteriously never indicted. Paid a fine for, in the SEC’s words, “knowing or reckless fraudulent activities resulting in numerous materially false and misleading statements or omissions … conducted (which) involved fraud, deceit, or deliberate or reckless disregard of regulatory requirements, and resulted in substantial loss, or significant risk of substantial loss, to other persons.”

Other GE priors include misdeeds such as: Illegally concealed payments to its former CEO. Paid $23.4 million in fines for illegal kickbacks to Iraqi officials under the Oil For Food program. Purchased a subprime lender which, according to published reports and analyses, had already engaged in highly suspect and probably fraudulent activities, then intimidated or demoted whistleblowers so that the fraud could continue.

Here’s another piece of Mob-like color, from Michael Hudson’s fine reporting on the GE/subprime story:

“What GE got … was a place where erstwhile shoe salesmen, ex-strippers and even a former porn actress could sign on as sales reps and make big money pushing home loans … earn(in) a million dollars a year or more and lived fast, swigging $1,000 bottles of Cristal and wheeling around in $100,000 Ferraris and Bentleys.”

JPMorgan Chase’s
rap sheet is lengthy, too: Bid-rigging in Alabama. Investor fraud in Florida. Other offenses such as mortgage and foreclosure fraud (tax evasion, perjury, forgery) through the use of “Burger King kids” to mass-produce false documents. It’s SEC investigation for fraudulently understating the impact of its multi-billion-dollar London losses, which Dimon first called “a tempest in a teapot.”

Bank of America: Essentially admitted it had committed fraud in municipal bond bid-rigging once before, back in 2010, and paid $137.3 million in fines. Violated bankruptcy law by illegally seizing the deposits of Lehman Brothers. It was fined for investor fraud in illegally concealing $6 billion in payouts to employees, and fined again for deceiving investors by hiding losses in its Merrill Lynch subsidiary.

Now comes this latest conviction, which directly implicates these three institutions along with a host of others. When can we expect the investigations of the big boys behind these organized rackets?

The Fix

The answer? Not soon, unless people demand it. The statute of limitations on many of these crimes has run out already, or is running out in the near future. The bank’s CEOs are politically connected, and they’re more politically powerful than ever in this post-Citizens United world.

These convictions are not enough. This case has provided concrete evidence that these low-level bankers were colluding with executives at other major banks. How high up the reporting chain did the criminality go? Did CEOs tell the truth in their annual reports?

The Administration’s indifference to prosecuting bankers seemed to change with the claim that it was ramping up of the Mortgage Fraud Task Force, but even that relatively narrow inquiry seems to have foundered in fingerpointing and apathy. Unless it shows results soon, another avenue for justice will apparently have closed.

What’s more, there appears to have been some sort of immunity granted to institutions, and possibly to executives, in the pursuit of the Carollo case.

Taibbi deserves a lot of credit for being the only reporter to give this story in-depth coverage, and Rolling Stone deserves equal praise for publishing it. But the low-level coverage given by most other outlets shows us how little our journalists, much less the public at large, understands what’s going on. And without coverage, people won’t demand investigations.

Note that we said “investigations,” not “indictments.” We can’t know whether or not any individual executives should be indicted unil there’s an investigation. The leaders of our major banks may not be dishonest. They may just be incompetent executives who lack the managerial skills needed to end the rampant lawbreaking in their own organizations.

If so, they deserve the opportunity to clear their names.

Meanwhile, the Carollo conviction was something of a fluke in our current system. The big fish are slipping away and even the little fish are, for the most part, still swimming through the net. That’s tragic. Unless citizens hammer their leaders in both parties, demanding an immediate and thorough investigation of bank criminality, the kingpins will have learned the real lesson of this story:

Crime does pay, and it pays big.