Business as Usual: Banks Caught Ripping Off Municipalities

May 19, 2010 (LPAC)—Even as Wall Street has flooded Washington, DC, with lobbyists in a desperate attempt to head off the effort to re-impose Glass-Steagall, more and more crimes come to light to show why the return to Glass-Steagall is absolutely necessary. The latest example to surface publicly is widespread fraud against municipalities and state agencies, in which banks and financial advisors colluded to rig bids in the market for guaranteed investment contracts (GICs).

In March, the Justice Department filed a sealed indictment against CDR Financial Products and several of its employees. CDR helps municipalities arrange investment deals, but instead of trying to get the best deals possible for its clients, the firm colluded with banks to pay lower interest rates on the GICs sold to the municipalities, in exchange for kickbacks to CDR. The result was a "nationwide conspiracy" in which financial advisors to municipalities colluded with Bank of America, Citigroup, JP Morgan Chase, Lehman Brothers, Wachovia, and 11 other banks, according to an investigation by Bloomberg. The investigation found that the conspiracy included more than 200 deals involving some 160 state agencies, local governments, and non-profits. "The whole investment process was rigged across the board," former IRS operative Charlie Anderson told Bloomberg. "They were gouging the municipalities," he said.

In a related crime, Bloomberg also reports that "CDR signed off on interest-rate swaps to municipalities, as banks took hidden fees sometimes 10 times as much as they charged on fixed-rate bond deals, according to data compiled by Bloomberg. For the public, the swaps were fraught with risks."

With the banks screaming that re-regulation—and Glass-Steagall in particular—would "hurt the recovery," it is worth remembering that this sort of sleazy corruption is how they actually make their money, and that their "recovery" comes at the expense of the rest of us. If we are to have a genuine recovery, it is precisely this sort of criminality which must be rooted out, and ruthlessly suppressed by effective financial regulation. If a bank is honest, it has nothing to fear from regulation, and if it is not, it has no business holding a license. If the crooks aren't screaming, we're doing something wrong.