It is a basic principle of Good Government 101 that when a government issues a contract, it should be subject to competitive bidding rather than being doled out to a crony of some bureaucrat. Yet eighty percent of bond underwriting contracts that are issued by state and local governments to Wall Street banks are not done by competitive bidding. Instead “local governments just hand the bid over to the bank that tosses enough combined hard and soft money at the right politicians,” according to Matt Taibbi (“How Banks Cheat Taxpayers”).
Taibbi makes this point: As offensive as it may be that Halliburton and Blackwater get “sole-source” defense contracts, in those cases there is at least an argument that only a few firms are competent to do the work (e.g., manufacturing armor-plated Humvee doors) and the government has already identified the best match up. But bond underwriting services are generic, almost like a commodity ? lots of banks do the same work and the only difference between them is price ? perfect for competitive bidding.
The prevailing system is simply corrupt and it costs taxpayers billions of dollars every year, and it is even more corrupt and costly in the derivatives market, writes Taibbi, because contracts like interest rate swaps are complex and not exchange traded; therefore, there is no transparency in pricing. Taibbi compares it to NFL gambling with no published point spreads ? how would you know how many points to give the underdog (if you even knew which team was the underdog)? The casinos (like the banks) know the answer, because they clear all the bets.
“In the same vein, exactly how accurately do you think some local county treasurer might be able to guess the cost of an interest rate swap for his local school system? Answer: he’d probably do about as well as you or I would, guessing the odds on a Croatian soccer match.”
The reality, of course, is that the banks pay the local government official not to ask questions. Then the banks can cheat just as much as they dare.
And here is another curious thing: All of this is well-known to the players ? the government, the banks, the regulators ? and the financial press, but apparently not to the rank and file taxpayers who ultimately pay the price. Taibbi points out that there have been many investigations and lawsuits all over the country involving this kind of bribing and cheating ? Erie, Pennsylvania and Jefferson County, Alabama to name two.
In the Erie scam, Taibbi writes, the bank (Chase) recommended that the government hire a certain financial advisor but did not disclose that it had paid a fee to that advisor. In the Jefferson County scam, Chase reportedly gouged the taxpayers out of $100 million more than it should have charged in a swap deal.
Hopefully taxpayers will wake up and revolt as they have done in the past. Maybe this is one of the things those Occupy Wall Street protestors were talking about when they protested greed and corruption on Wall Street.
Page Perry is an Atlanta-based law firm with over 170 years collective experience protecting investor rights and fighting Wall Street greed.