Big, Bold, Bad

In 2002 a UBS banker wanted to win a competitive muni bond deal with a Rhode Island municipality. Instead of offering the lowest rate, he called his competitor and offered to split his commission if the other guy would back off. The competitor agreed, UBS won the deal, and no one was the wiser.

Until now. The Justice Department is in the middle of a significant fraud investigation that is likely to implicate every major municipal finance player before it’s finished. We’ve already seen admissions of guilt from bankers at JP Morgan, Bank of America, GE, and UBS. Can Goldman and Wells be far behind?

The muni market offers a fertile field for fraud: multi-million dollar deals, poorly paid public employees, complex derivatives, and aggressive Wall Street bankers. I’m not shocked that the fraud happened–although I am a little surprised that it took nine years to come to light this time. But we can expect more soon.

But on another level I’m disgusted at the unethical saprophytic cupidity of these bankers. At the same time they were engineering CDOs with toxic mortgages, the big banks were concocting bid-rigging schemes with embedded derivatives designed to hide their ill-gotten gains. When they earned commissions by selling investors toxic waste, they fully expected to retire before it blew up; when they defrauded small towns and counties, they thought we were too stupid to figure out the scam.

Well it didn’t work out that way. The wheels of justice may grind slowly, but they grind exceedingly fine.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

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