The Justice Department has indicted some major players in the municipal finance business. I’d call that looking for snow at the North Pole.
The Muni bond market totals $2.4 trillion, and covers everything from AAA bonds from the State of Maryland to speculative debt from housing projects in New York. Allegedly some major players paid kickbacks to an advisory firm in order to rig bids on billions of dollars in deals. The corruption was so commonplace that people discussed it openly on phone lines that they knew were being recorded. Now conspirators are being rolled and cutting deals to name names.
It stems from the ubiquity of municipal finance, the low pay-grade of municipal employees, and its tax-exempt status. Issuers often borrow money in large chunks and then invest it tax-free until it’s needed. They can earn a spread on the difference, but if the rules aren’t followed, all kinds of penalties apply. But since the IRS doesn’t have inspectors to audit every deal, lots of folks game the system. According to Justice, several bankers paid consultants kickbacks for setting up the scam.
In a former role, I bid on municipal borrowings and deposits myself for a mid-sized bank. Sometimes we guessed that other bidders might be cheating, but we didn’t really know anything. All we could do was provide honest advice about what the law required.
Any cheaters exploited the municipalities and stole money from taxpayers across the country. Good for Justice for indicting these creeps. And good for us all if it helps clean up a dirty backwater in the financial markets.
Douglas R. Tengdin, CFA
Chief Investment Officer
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