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The Scam Wall Street learned from the mob.
http://www.reddit.com/r/politics/comments/vdtld/the_scam_wall_street_learned_from_the_mafia/"The defendants in the case – Dominick Carollo, Steven Goldberg and Peter Grimm – worked for GE Capital, the finance arm of General Electric. Along with virtually every major bank and finance company on Wall Street – not just GE, but J.P. Morgan Chase, Bank of America, UBS, Lehman Brothers, Bear Stearns, Wachovia and more – these three Wall Street wiseguys spent the past decade taking part in a breathtakingly broad scheme to skim billions of dollars from the coffers of cities and small towns across America. The banks achieved this gigantic rip-off by secretly colluding to rig the public bids on municipal bonds, a business worth $3.7 trillion. By conspiring to lower the interest rates that towns earn on these investments, the banks systematically stole from schools, hospitals, libraries and nursing homes – from "virtually every state, district and territory in the United States," according to one settlement. And they did it so cleverly that the victims never even knew they were being cheated. No thumbs were broken, and nobody ended up in a landfill in New Jersey, but money disappeared, lots and lots of it, and its manner of disappearance had a familiar name: organized crime."
Read more: http://www.rollingstone.com/politics/news/the-scam-wall-street-learned-from-the-mafia-20120620#ixzz1ySRgxlgU
12 replies
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= new reply since forum marked as read
In most cases, towns and cities, called issuers, are legally required to submit their bonds to a competitive auction of at least three banks, called providers. The scam Wall Street cooked up to beat this fair-market system was to devise phony auctions. Instead of submitting competitive bids and letting the highest rate win, providers like Chase, Bank of America and GE secretly divvied up the business of all the different cities and towns that came to Wall Street to borrow money. One company would be allowed to "win" the bid on an elementary school, the second would be handed a hospital, the third a hockey rink, and so on.
How did they rig the auctions? Simple: By bribing the auctioneers, those middlemen brokers hired to ensure the town got the best possible interest rate the market could offer. Instead of holding honest auctions in which none of the parties knew the size of one another's bids, the broker would tell the prearranged "winner" what the other two bids were, allowing the bank to lower its offer and come in with an interest rate just high enough to "beat" its supposed competitors. This simple but effective cheat – telling the winner what its rivals had bid – was called giving them a "last look." The winning bank would then reward the broker by providing it with kickbacks disguised as "fees" for swap deals that the brokers weren't even involved in.
The end result of this (at least) decade-long conspiracy was that towns and cities systematically lost, while banks and brokers won big. 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. Lowering a bid by just one-100th of a percent, called a basis point, could cheat a town out of tens of thousands of dollars it would otherwise have earned on its bond deposits.
That doesn't sound like much. But when added to the other fractions of a percent stolen from basically every other town in America on every other bond issued by Wall Street in the past 10 to 15 years, it starts to turn into an enormous sum of money. In short, this was like the scam in Office Space, multiplied by a factor of about 10 gazillion: Banks stole pennies at a time from towns all over America, only they did it a few hundred bazillion times.
Given the complexities of bond investments, it's impossible to know exactly how much the total take was. But consider 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.) Since that settlement involves only four of the firms implicated in the scam (a list that includes Goldman, Transamerica and AIG, as well as banks in Scotland, France, Germany and the Netherlands), and since 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. The UBS settlement alone, for instance, involved 100 different bond deals, worth a total of $16 billion, over four years.
Contracting corruption has been around since the construction of the Appian Way. The difference here is the almost unimaginable scope of the crime – and the fact that it's mobsters from Wall Street who are getting in on the action. Until recently, such activity has traditionally been the almostexclusive domain of the Mafia. "When I think of bid rigging, I think of the convergence of organized crime and the government," says Eliot Spitzer, who prosecuted two bid-rigging cases in his career as a New York prosecutor, one involving garbage collection, the other a Garment District case involving the Gambino family. The Mafia moved into bid rigging, he says, because it observed over time that monopolizing public contracts offers a far more lucrative business model than legbreaking. "Organized crime learned their lessons from John D. Rockefeller," Spitzer explains. "It's much more efficient to control a market and boost the price 10 percent than it is to run a loan-sharking business on the street, where you actually have to use a baseball bat and collect every week."
What Spitzer saw was gangsters moving in the direction of big business. When I ask him if he is surprised by the current bid-rigging case, which looks more like big business moving in the direction of gangsters, he laughs. "The urge to become a monopolist," he says, "is as old as capitalism."
How did they rig the auctions? Simple: By bribing the auctioneers, those middlemen brokers hired to ensure the town got the best possible interest rate the market could offer. Instead of holding honest auctions in which none of the parties knew the size of one another's bids, the broker would tell the prearranged "winner" what the other two bids were, allowing the bank to lower its offer and come in with an interest rate just high enough to "beat" its supposed competitors. This simple but effective cheat – telling the winner what its rivals had bid – was called giving them a "last look." The winning bank would then reward the broker by providing it with kickbacks disguised as "fees" for swap deals that the brokers weren't even involved in.
The end result of this (at least) decade-long conspiracy was that towns and cities systematically lost, while banks and brokers won big. 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. Lowering a bid by just one-100th of a percent, called a basis point, could cheat a town out of tens of thousands of dollars it would otherwise have earned on its bond deposits.
That doesn't sound like much. But when added to the other fractions of a percent stolen from basically every other town in America on every other bond issued by Wall Street in the past 10 to 15 years, it starts to turn into an enormous sum of money. In short, this was like the scam in Office Space, multiplied by a factor of about 10 gazillion: Banks stole pennies at a time from towns all over America, only they did it a few hundred bazillion times.
Given the complexities of bond investments, it's impossible to know exactly how much the total take was. But consider 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.) Since that settlement involves only four of the firms implicated in the scam (a list that includes Goldman, Transamerica and AIG, as well as banks in Scotland, France, Germany and the Netherlands), and since 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. The UBS settlement alone, for instance, involved 100 different bond deals, worth a total of $16 billion, over four years.
Contracting corruption has been around since the construction of the Appian Way. The difference here is the almost unimaginable scope of the crime – and the fact that it's mobsters from Wall Street who are getting in on the action. Until recently, such activity has traditionally been the almostexclusive domain of the Mafia. "When I think of bid rigging, I think of the convergence of organized crime and the government," says Eliot Spitzer, who prosecuted two bid-rigging cases in his career as a New York prosecutor, one involving garbage collection, the other a Garment District case involving the Gambino family. The Mafia moved into bid rigging, he says, because it observed over time that monopolizing public contracts offers a far more lucrative business model than legbreaking. "Organized crime learned their lessons from John D. Rockefeller," Spitzer explains. "It's much more efficient to control a market and boost the price 10 percent than it is to run a loan-sharking business on the street, where you actually have to use a baseball bat and collect every week."
What Spitzer saw was gangsters moving in the direction of big business. When I ask him if he is surprised by the current bid-rigging case, which looks more like big business moving in the direction of gangsters, he laughs. "The urge to become a monopolist," he says, "is as old as capitalism."
Same Piece as OP.
