A nice new boring wall street scam that nobody will notice

Long article but worth reading, basically the DOJ exposed that the "GIC" market, one that I don't think anybody even barely knew existed before, has basically been permeated for an entire decade to defraud municiplaities out of billions.

In brief, state and local governments, when they store their (our) money prior to spending it, keep it in the form of GIC's, a Guaranteed Investment Contract, which basically operates as a CD. So the way the process works is that the municipality goes to a broker who is supposed to solicit offers from investment banks who offer competing rates on the GIC's, obviously the highest bid is supposed to win.

That's not what happened however, apparently the brokers, mostly a firm called CDR, placing the GICs were colluding with the banks (the usual suspects, BOA, Lehman, Citi, JPMorgan, UBS, Bear etc) - in exchange for a kickback, the brokers rigged the bids, which resulted in the banks paying far lower rates than they would have otherwised paid - basically resulting in money being taken from taxpayers and lining the pockets of the scammers.

And now, with state and local gov finances in shambles, a few extra billion would have probably come in handy.


http://preview.bloomberg.com/news/2...finance-converged-with-mortgage-meltdown.html

 

I don't really think anybody here was particularly smart or ambitious (in fact I'd guess they ranked towards the bottom of the I-bank food chain), and the details weren't particularly complicated - it was just pure thievery in an obscure market that nobody was paying any attention to.

The sums involved in each transaction were small by wall street standards (five-six figures or so) but theere were so many of them it added up to billions.

 

The IRS was the ones who turned them over to DOJ and that's how they've been indicted. A number of employees already pleaded guilty.

 

Finance is especially prone to information asymmetries, and rewards people who recognize them, including both ones that are artificially created by smart people whor recognize perverse incentives, like mortgage bonds and CDO's and the derivative instruments, or by obscure people in small markets that nobody pays attention to, like the GIC scam mentioned here.

Though, in both of the above examples, I'd say collusion is probably a better metaphor here.

Unless, of course, you're Goldman Sachs, in which case you're a mere "market maker" who just matches buyers and sellers, no questions asked - no different than craigslist.