One of this weekend's long reads for me was Matt Taibbi's piecd in Rolling Stone, The Scam Wall Street Learned From the Mafia How America's biggest banks took part in a nationwide bid-rigging conspiracy - until they were caught on tape. This is not only long, it's also dry. And in the end, after wanting with all your imagination to see some real justice done to at least a couple of high-profile figures, it concludes anti-climactically with a few slaps on the wrist for a handful of mid-level crooks that got caught. I mention this from the start in order to let anyone know in advance not to get their hopes up as they slog through the mess. At the same time, I urge anybody who has the time to read it completely. In about seven and a half thousand words. Taibbi does as well as anyone to make a muddy picture as understandable as possible.
The subject, simply said, is bid-rigging. And the bids have nothing to do with actual work or productivity. They are concerned instead with accounting and investments. There is an old scam from banking called salami slicing It's such an obvious and old scheme that banks long ago took measures making it obsolete. But in the early days of banking it worked like this...
An example of salami slicing, also known as penny shaving, is the fraudulent practice of stealing money repeatedly in extremely small quantities, usually by taking advantage of rounding to the nearest cent (or other monetary unit) in financial transactions. It would be done by always rounding down, and putting the fractions of a cent into another account. The idea is to make the change small enough that any single transaction will go undetected.
A bank employee with a dummy account simply diverts all the uneven cents into that account to which that person has access. As you read, just remember that is the basic model of the scam.
The "simple fraud" Waszmer described centered around public borrowing. Say your town wants to build a new elementary school. So it goes to Wall Street, which issues a bond in your town's name to raise $100 million, attracting cash from investors all over the globe. Once Wall Street raises all that money, it dumps it in a tax-exempt account, which your town then uses to pay builders, plumbers, the chalkboard company and whoever else winds up working on the project.
But here's the catch: Most towns, when they raise all that money, don't spend it all at once. Often it takes years to complete a construction project, and the last contractor isn't paid until long after the original bond is issued. While that unspent money is sitting in the town's account, local officials go looking for a financial company on Wall Street to invest it for them.
To do that, officials hire a middleman firm known as a broker to set up a public auction and invite banks to compete for the town's business. For the $100 million you borrowed on your elementary school bond, Bank A might offer you 5 percent interest. Bank B goes further and offers 5.25 percent. But Bank C, the winner of the auction, offers 5.5 percent.
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 pre-arranged "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.
The is the basic scam. The drama of Tabbi's article is the result of an actual trial that took place in which real characters were identified and brought to trial and judged by a jury.
To grasp the full insanity of these revelations, one must step back and consider all this information together: the bribes, yes, but also the industrywide, anti-competitive bid-rigging scheme. It turns into a kind of unbroken Möbius strip of corruption - the banks pay middlemen to rig auctions, the middlemen bribe politicians to win business, then the politicians choose the middlemen to run the auctions, leading right back to the banks bribing the middlemen to rig the bids.
Yes, all the characters were real. This is not fiction.
That should be enough to whet the appetite for anyone who has the time and curiosity to read the whole piece.
I recommend it highly.